By Douglas Porter 

October 9, 2026

In a back-and-forth week, most major financial markets ended little-changed on net, albeit only after the S&P 500 hit a new record, and bond yields visited fresh 24-year highs. The first full week in October has often marked important turning points for markets historically, with many bear markets coming to a sudden halt around this time.

However, this year is clearly different, with the conflict with Iran seeing few off-ramps, the midterm elections looming, and the AI spending boom rolling onward and upward. Given that Friday marks John Lennon’s birthday (he would have been 86)—and, oddly, also the date of Che Guevara’s death in 1967 (another 1960s icon, for some)—we’ll ask the great singer-songwriter to help us sort out the many moving parts in the global economy.

Give Peace a Chance: Oil prices pushed back above $90 for WTI and near $104 for Brent as Iran targeted ships deep in the Persian Gulf, and the Saudi-Houthi conflict worsened. President Trump vowed not to attack Iran prior to the midterm elections, perhaps in response to reports that an escalation was imminent. On balance, energy prices didn’t make a big move on net, as oil is managing to get out of the Gulf—reportedly back to pre-war levels, prior to the latest flare-up in violence. Still, for markets, happiness is not a warm gun.

Help!: Bond yields pulled back from midweek extremes. At one point, the 10-year Treasury yield hit 5.36%, up from below 4% at some points last October, and its highest since early 2002. Some solid Treasury auctions helped cool the fires, revealing that there is real demand for bonds at yields above 5%. As well, a variety of Fed speakers indicated that there was little urgency to hike rates immediately further, pushing many to circle the December 9 FOMC decision as the next likely step, in line with our view. However, previously dovish Governor Waller—he of the Give Disinflation a Chance—suggested that rate hikes may still eventually be needed to rein in inflation.

Revolution: The focal point for the global bond sell-off has shifted to France in recent weeks, with yields there bolting up close to 5% and about 140 bps above their German counterparts. A weak fiscal backdrop, an uncertain political outlook ahead of next year’s elections, and widespread student protests bordering on civil unrest have markets doubting if borrowing needs can be brought down enough to tame yields. “Le Spread” with bunds managed to narrow a tad for the week, with Marine Le Pen vowing to cut spending if elected President (and she is leading the polls).

Imagine: Besides fiscal concerns and high energy prices, the other factor pacing yields has been the voracious demand for capital from the AI buildout. The previously capital-light large tech companies are in the midst of arguably the biggest capital spending boom in U.S. history. While still not in the same league as U.S. government draws on funding—Washington’s budget deficit widened 12% in FY26 to an estimated $2.0 trillion, or over 6% of GDP—the scale of tech borrowing would have been unimaginable just a few short years ago.

Strawberry Fields Forever: Perhaps not forever, with data centre construction continuing apace in many rural areas—in the U.S., in China, and perhaps next in Canada as well. However, said construction has met increasing resistance in many areas, and has become a flashpoint in this year’s midterms. It’s quite possible that a slowdown here will throw sand in the gears of the AI buildout.

Don’t Let Me Down: Despite those very real hurdles, as well as relentless concerns about the sustainability of the spending boom, investors have barely blinked. Even in the face of multi-decade highs in yields, the Nasdaq hit record highs this week, with the largest companies bouncing 13% just from the late-July lull. But beneath that shiny surface, the vast majority of the rest of the market is being weighed down by higher yields, especially in the small- and mid-cap space.

A Day in the Life: Currencies are also facing a mixed picture, with some falling in and out of favour within days. But the overriding story has been U.S. dollar firmness since early this year. True, a trade-weighted version of the dollar is up only modestly from a year ago, but it has climbed more than 6% against the euro since early 2026. The Fed’s hawkish shift and the relentless capital pull from the massive tech companies have supported the greenback, while Europe’s fiscal woes and energy reliance have sacked the euro.

Working Class Hero: The Canadian dollar has also been under steady downward pressure since the spring. The flare-up in trade tensions has weighed, as has the related widening in U.S./Canada interest rate spreads. Two-year spreads now tower above 160 bps and the 10-year gap is not far from record wides at almost 140 bps. A surprisingly weak September jobs report in Canada further widened the gap—employment fell 68,300, a second straight big drop, hours worked were down 1.5% m/m, and the jobless rate ticked up to 6.5%. While an odd 37,500 decline in Quebec education jobs may have distorted the figures, there’s no debate the result was still soft, clipping the loonie to 70.0 cents. Notably, the election of the avowedly separatist PQ party in Quebec earlier in the week had no discernible impact on the currency, in part because they secured just 28% of the vote and were left with a minority win.

(Just Like) Starting Over: The weak Canadian jobs report didn’t quite force a total rethink of expectations for the Bank of Canada, but it certainly should put the hawks on the defensive. We have long argued that trade uncertainty could eventually weigh heavily on jobs and thus growth and thus underlying inflation, suggesting the best course of action for the Bank is to stand pat (as it has since late last year). Of course, 3% inflation is a pressure point, and the September CPI (due Oct 19) along with that day’s quarterly Business Outlook Survey will guide the next rate decision. But with most measures of core inflation close to 2%, trade uncertainty lingering, and the economy shedding 110,000 jobs in two months, it’s very tough to see the rationale for the market pricing of more than 3 hikes by mid-2027. We have often felt like a lonesome dove in recent weeks calling for no BoC hikes, but this bird can sing after the weak jobs data.

Come Together: Next week’s focus will be on the U.S. September CPI (due Wednesday) and retail sales the next day. Headline prices will be juiced 0.6% by a pop in gasoline, likely lifting overall inflation a few ticks to 3.6%. However, we expect core to edge up a moderate 0.2%, nudging the annual rate up a tick to 2.5%—not great, but likely mild enough to stay the Fed’s hand in late October. Before that, U.S. bonds will be closed for Columbus Day, while Canadians will come together for Thanksgiving. Given the ongoing turmoil in trade, energy prices, and upcoming elections, a common refrain may be: Whatever gets you through the night, it’s alright.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.