By Douglas Porter

September 4, 2026

Soaring government bond yields globally. Record U.S. diesel prices. A conflict in the Persian Gulf which shows few signs of easing off. Ditto for a U.S.-Canada trade spat. A teetering yen. Lofty valuations. A bevy of Fed officials eager to hike rates. The seasonally most dangerous month of the year for equities. And what do stocks say? “Yawn… earnings”: After a back-and-forth week, the S&P 500 is just 1% from its all-time high (set in mid-August) and the VIX is probing multi-year lows.

We said last week that the ball was now in the court of the economic data after Fed Chair Warsh’s fiery Jackson Hole speech. (As an aside, upon further review, his maiden speech at that forum was notably conventional, and could readily have been delivered by a few of his recent predecessors with nary an eyebrow raised.)

And a surprisingly sturdy August payrolls result hit a forehand right down the line to the hiking camp. However, this simply countered a surprisingly clear volley the prior day from Fed Governor Waller, who flatly stated that the FOMC could wait a meeting and “give disinflation a chance”. On net, Treasury yields were little-changed this week, with next Friday’s August CPI likely to be the tiebreaker for the September 16 rate decision.

The market is leaning slightly to a hike at the upcoming meeting, while we lean slightly to another pause. We suspect that the CPI will be relatively quiet, with the yearly rate holding steady at 3.4% on the headline, even with an energy-led 0.4% monthly rise. Core is expected to be a non-event, rising a moderate 0.2% m/m, which could shave the yearly rate a tick to a pedestrian 2.4% pace.

Yes, the Fed’s target is the PCE price index, but we won’t have the luxury of its August reading until the last day of this month. Moreover, pending revisions to the PCE cloud the story there, and Waller noted the possibility of large downward adjustments.

Looking beyond September, the upward pressure on short-term rates is unlikely to abate quickly. Even the most ardent dove—ahem!—must allow for the relentless rise in fuel prices. While crude oil was up about 8% this week to above $90 for WTI, that has long since stopped being the big story for energy prices. With 3-2-1 crack spreads still hovering around $60/barrel, pump prices are poised for their highest Labour Day levels on record in the U.S., and diesel prices are now at all-time highs period.

This can’t help but flow into a variety of other prices, but especially putting renewed upward pressure on food prices. Wages haven’t shown any break higher yet, with average hourly earnings cooling to a 3.1% y/y pace last month, but they will inevitably follow headline inflation higher should it persist above 3%.

As a result, the market is pricing in more than two Fed rate hikes by next spring, regardless of what happens later this month. That would take overnight rates back above 4%, and likely back into restrictive territory by most accounts. While equities have so far managed to look past the upswing in 10-year yields to above 4.75% and 30s to around 5.25%, it may be a higher hurdle if the Fed ratifies the higher-for-longer theme with actual hikes.

In stark contrast to the robust U.S. payroll rise of 162,000 last month, Canada hit the net with a 41,700 job loss. While below consensus, the jobs pullback was no big surprise in light of the run of strong gains in earlier months. While Treasury Secretary Bessent helpfully pointed to the August job growth divergence between the two economies, note that the opposite was the case just one short month ago.

On balance, while the Bank is talking tough, our view is that they are much more likely to stay firmly on hold, unless and until the dark cloud of trade uncertainty dissipates.

And, looking over the past 12 months, Canadian employment is 1.0% above year-ago levels, while U.S. payrolls are up just 0.4% y/y (and the U.S. household report shows a 0.4% y/y decline). In other words, one shouldn’t judge an economy by the cover of one month’s job tally.

Having said that, the soft Canadian jobs data threw an ice bucket on the market’s over-heated expectations of Bank of Canada rate hikes. This week’s BoC meeting produced zero surprise with yet another on-hold rate decision, but Governor Macklem’s comments landed decidedly on the hawkish side of expectations.

Largely downplaying the macro growth impact of new U.S. tariffs, he fairly clearly fretted more about the inflationary effect of lofty energy prices as well as the impact of Canadian counter-tariffs. As a result, the Canadian dollar shot higher mid-week and rate hike expectations jumped—taking two-year yields above 3.15% at one stage, or 90 bps above the 2.25% overnight target rate. The jobs data unwound about half of the back-up, even as U.S. yields pushed higher post jobs.

Canadian rate expectations won’t get much of a domestic push next week, as the economic data calendar is almost bare. Thus, much like U.S. markets, the focus will largely fall on U.S. CPI, although Canada’s version follows the next Monday. Similar to the stateside results, we look for headline inflation to hold steady (at 3.0%), while cores remain even calmer near 2.0%. The Governor did note that the above-target readings on inflation were almost entirely due to energy costs—ex. gasoline inflation was a mild 2.2% y/y in July.

This may help explain Ottawa’s decision to extend the federal gas tax cut another five months, thus delaying a two-tick rise in headline inflation. But Macklem’s tough stance shows that the Bank has limited patience with any miss on headline inflation, even if it can be attributed to events far outside the BoC’s control—i.e., in Iran or in Russia.

Markets are clearly listening attentively to the hawkish rhetoric from the Bank, even if it is mostly aimed at convincing consumers and businesses that officials won’t let inflation spread. Expectations continue to centre on fully three rate hikes by the Bank over the next year, taking the overnight rate back to around 3%, or the upper end of the neutral range (2.25% to 3.25%). At the risk of echoing prior week’s remarks, we would note the following:

• The job market is not tight. While the unemployment rate has dipped in the past year, there are still nearly 3 unemployed Canadians for every vacant job.
• Wage growth has cooled to just 2.0% y/y, the slowest in nearly a decade and well below headline inflation. Core inflation is also close to 2.0% on all major measures.
• While growth “broadened out” in Q2, it may not continue to in Q3. The early results from manufacturing and trade point to a pullback. The Bank noted that housing was turning higher as well. That, too, could stall if confidence is sapped. Toronto reported a dip in home sales last month, clipping a nascent recovery.
• The new U.S. tariffs and threats of more could yet more seriously chill business capital spending (aside from data centres).

On balance, while the Bank is talking tough, our view is that they are much more likely to stay firmly on hold, unless and until the dark cloud of trade uncertainty dissipates.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.