By Douglas Porter

August 28, 2026

A wise Wall Street economist/strategist once sagely advised many years ago: “Never change your fundamental forecast in August”. The thinking was that most of the senior folks on trading desks were luxuriating for much of the month at their summer homes, and that markets could be whipsawed by low volumes and less experienced traders, thus sending off false signals. Beyond the fact that the premise is so last century, we would amend the statement to add… “unless a full-on trade war breaks out”.

Without adding to the mountain of material on the subject, here’s a quick recap: Following the high-profile breakdown of Canada-U.S. negotiations late last Friday, U.S. tariffs of 50% went into effect on US$20 billion of Canadian goods. We estimate that could shave 0.5 ppts from Canadian GDP growth.

In response, Canada plans on imposing counter-tariffs ranging from 15%, to 25%, to 50% on a wide variety of U.S. goods—from chainsaws, to golf clubs, to makeup—also close to US$20 billion, set to kick in on September 8. We estimate that could add around 0.2-to-0.3 ppts to Canadian CPI. In quick response to the pledge of counter-tariffs, the President threatened new 50% tariffs on Canadian autos, auto parts and steel. (Note that steel already faces a 50% tariff.) Since the date for this was set at the start of 2027, we’ll hold off on incorporating that into the forecast, but suffice it to say that such a step would be a powerful blow—to both economies.

Because bilateral U.S.-Canada trade accounts for almost 14 times the impact on the Canadian economy than the U.S. economy, one can readily appreciate that the net impact on the U.S. from the tussle is so far modest (second decimal places on growth and inflation). Thus, there’s no need to adjust the U.S. forecasts due to this unfortunate series of events. In fact, we even upgraded our call on U.S. GDP, due to the even-stronger-than-expected capital spending on AI infrastructure, lifting next year’s call 2 ticks to 2.2%. In contrast, we have shaved Canada by a similar amount, to 1.8% on the trade spat, and despite a notable improvement in business investment in recent quarters (also AI-related).

Financial markets, even in Canada, were remarkably calm about the turn of events. The Canadian dollar softened by about 1% on the week, while the euro was down 0.8%, so it was mostly a broad U.S. move. The TSX managed to hold nearly steady on the week—supported by commodities—and the S&P 500 churned out a modest advance. Bond yields generally pulled back from the highs of last week, but spent much of the week biding time ahead of Fed Chair Kevin Warsh’s Jackson Hole speech Friday morning.

Chair Warsh came out blazing with a mostly hawkish message and interpretation of the recent data. In essence, he said that the 2% target on PCE prices was firm and there was work to be done to get there, since policy is not restrictive. Long-term yields initially appreciated the thrust, with 30-years dropping about 7 bps on the week to near 5.2%, though 10s dipped only slightly on net, ending just above 4.7%. Unsurprisingly, short-term yields took a different tack, with 2-year Treasuries grinding up about 10 bps to above 4.3%—that’s almost 90 bps higher than six months ago, or just before the start of the war with Iran. The net result of Warsh’s stern remarks was that the market is now back to pricing in roughly 50-50 odds of a hike at the mid-September FOMC meeting.

The split decision for markets effectively means that the ball is back in the court of the economic data, and the wait won’t be long for key results. Next week brings a host of August readings, including the ISMs, auto sales and payrolls. We expect a modest 55,000 bounce-back in the latter after the surprising 23,000 dip in July, and look for the jobless rate to rise a tick to 4.2%. On a technical note, preliminary estimates on Friday revealed that last year’s reported job growth will be revised down by 79,000 (or about 6,500 per month)—not a big move by any means, but yet another downward revision, casting some further mild shade on the employment backdrop.

Even so, it’s clear that the ongoing blistering pace of AI-related spending, combined with the persistent pressure from high gasoline and diesel prices, have the Fed on edge. We’re not officially calling for a hike, but Warsh’s tough comments have put the onus squarely on the data—and especially the inflation data—to improve, and with some haste.

The hotted-up trade tiff lands just as the Bank of Canada’s rate decision looms on Wednesday of next week. Even with the dramatic break in the U.S./Canada trade negotiations and the imposition of tariffs and counter-tariffs, Canadian rates markets only slightly budged this week. Yields were down 2-3 bps across the curve, quite a different response to the steepening of the U.S. curve. While the Bank is widely expected to stay on hold again next week, the market continues to merrily price in three rate hikes in 2027. Question: In what world does that make sense, given all of the trade uncertainty? Even with the solid 3.3% growth in Q2, GDP is up just 1.1% in the past four quarters. Core inflation is below 2% on most measures. And while the jobless rate has dipped over the past year (surprisingly), it’s far from a tight job market at 6.4%—we look for it to stay there in next week’s Labour Force Survey for August.

The aggressive pricing and the absence of a big response this week to the trade flare-up can be attributed to two factors: 1) The market believes that it has seen this (trade) movie before, and the experience of the past year was that the Canadian economy generally handled round 1 reasonably well. 2) There must be an underlying assumption of de-escalation before too long, and certainly no account taken of the possibility of wider-ranging auto tariffs.

We’ll just flatly state that there is zero chance the Bank will be hiking next year if 50% tariffs are applied on autos and parts. More broadly, those two sets of expectations may not be unwarranted, but there is also the very real possibility that conditions deteriorate further in coming weeks. Until we get more clarity on the trade front, it seems more than passing strange that the market clings to multiple BoC rate hikes in the coming year—even if the Fed does indeed move in that direction.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.