By Douglas Porter

October 30, 2026

In a week rife with major central banks mostly sticking to the script on rate decisions, markets were instead driven by some real surprises on the earnings front. In particular, there were some wild swings and misses on Q3 results among the mega-cap tech companies, which in turn drove some wild swings in the Nasdaq 100. By week’s end, some spectacular flare-outs left the index down roughly 9% from the record highs hit little more than three weeks ago in early October. Of note, Google’s parent saw one of the single biggest daily drops in market cap on record on Thursday, while Intel and AMD were hammered on Friday—a market priced for perfection was brutally unforgiving of any imperfection whatsoever.

The latest retreat in tech—and, it certainly hasn’t been the first such episode this year—helped further quell the fires in the bond market. Treasury yields took another step back across the curve, with 2-years leading the way with an 8 bp drop to around 4.6%. Tens moved further below 5%, and have dropped more than 40 bps since hitting a 24-year high in early October. The moderation in yields came against a backdrop of the FOMC’s as-expected decision to hold rates steady this week, and a Chair Warsh press conference that didn’t rock the boat. The terse press release read slightly hawkish, with two voters dissenting for a hike and the Fed now reading the economy as “strong”. Richmond President Barkin, a voter in 2027, chimed in Friday that the “direction of travel” on rates was “straightforward”, and only the pace was up for debate.

Adding fuel to the view that the Fed will continue hiking were both a further upswing in oil prices—with the risk of more to come after the midterm elections—and solid economic data. Real GDP slightly topped already robust expectations with a 3.4% advance in Q3; one surprise was another hearty 3.8% increase in consumer spending, which helped power a 5.0% rise in final domestic demand, one of the strongest non-pandemic gains in the past 20 years. Of course, some of this spending is spilling abroad, and net exports carved a massive 3.3 ppts from growth last quarter, the second deepest cut in the past 75 years. (In case you were wondering who is really benefitting from this spillover, Taiwan estimates its Q3 real GDP spiked 14.4% y/y, while Korea’s exports have doubled in the past year.)

On the inflation side, the important core PCE price index was right on expectations in September at +0.3% m/m, nudging up the annual pace to an uncomfortable 3.1%. While far from sprinting, core inflation has been grinding higher since it bottomed out in 2025Q1 at 2.7%. Awkwardly for the Fed, its closely watched measure is the only core metric going the wrong way, as CPI ex food & energy (at 2.6% y/y), the Dallas trimmed-mean (2.3%), and the Cleveland median PCE (2.7%), are on average down by more than half a point from a year ago and half a point below the core PCE. Also encouraging is the fact that growth in the Q3 employment cost index was stable at a 3.4% y/y pace, far from inflationary when productivity is clicking along at better than a 2% y/y rate. Even so, Warsh again reiterated that the Fed’s target is the PCE and it is a hard 2% goal, so the tightening shall continue beyond this month’s pause. We see a hike in December and then again in March, taking the overnight rate to a 4.25%-to-4.50% range.

The ECB also chose to stay on the sidelines this week, holding its key deposit rate steady at 2.5%, after hiking two times earlier this year. The big news from Frankfurt was that ECB President Christine Lagarde will be stepping down eight months early in February 2027, ahead of the French elections. Her main message on rates was that the tightening show must go on, and—like the Fed—a rate hike is widely anticipated at the December meeting. Subsequent economic data reinforced the tightening bias, as the Euro Area economy topped expectations with Q3 GDP growth of 0.4% (1.7% annualized), holding yearly gains to 1.2%. And early October CPI results came in hot in Italy (5.6%) and France (3.8%), only partly cooled by Germany (2.8%).

The key takeaway from the world’s two most important central banks is that with oil prices staying high and demand pressures strong, rates will continue to grind higher into early 2027. That is, of course, unless the recent air pocket in tech morphs into something much more serious.

The Bank of Canada went against the grain of other central banks this week (and, apparently, against this space’s misgivings), and hiked rates for the first time in more than three years. The overnight rate was lifted 25 bps to 2.5%, back in line with the ECB’s target rate after, unusually, being below it for a spell. Having neatly guided the market to this outcome, the decision wasn’t much of a surprise, although the Canadian dollar firmed to 71.7 cents ($1.395) and GoCs slightly underperformed Treasuries. Yet, due to the pull of lower global yields, 2-year Canadian yields still edged lower even in a week of a BoC hike, a testament to the extent to which the move was already fully baked into prices.

But there were a couple other factors tugging on Canadian yields, and dimming the market’s fiery desire to price in many more rate hikes. First, Governor Macklem readily recognized the economic risks facing the economy, and declared the Bank would “proceed carefully”, even if there “could be a need to increase the policy rate further”. That doesn’t rule out a follow-up move in December at all, especially since the Bank has almost always started off tightening cycles—big and small—with at least two moves in succession. And markets were certainly of the mindset that the Bank would almost need to be convinced not to go again in December.

Well, it didn’t take long for the market to have a bit of a rethink on the pace of BoC hikes. First, the initial move was greeted with many more public thumbs down than other rate hikes, including even more moderate voices which aired their disapproval. Many quickly cottoned on to the reality that the struggling housing market will receive another swift kick from this move. Second, the next two data releases landed squarely on the weak side, with payroll employment falling heavily in August and now up just 0.3% y/y, and monthly GDP deeply disappointing with a flat reading for the same month and a flash estimate of a 0.1% drop in September. After incessantly playing up the Q2 rebound in growth, the BoC is suddenly faced with the unappetizing fact that the economy has actually shrunk slightly over the latest three months.

We would never read too much into a single data point, and markets are clinging to the assumption that the BoC hikes again in December. But more signs of weakness like the monthly GDP will chill rate expectations. The wait won’t be long with October jobs next Friday, and the early read on auto and home sales for the same month dripping in earlier in the week. Here’s guessing the results will lean sluggish.

But the focus will temporarily turn away from the economic data and towards Ottawa’s budget on Thursday, which arrives with a bit less fanfare than usual. In part that’s due to this government’s habit of releasing big policy moves outside of the budget confines, with the Productivity Mega Deduction a prime example. Our focus will be on the headline deficit figures, especially amid the raft of tax and spending initiatives lately. But the latest monthly budget figures suggest Ottawa has room to manoeuvre, with the deficit halved to a modest $5.4 billion in the first five months of the fiscal year. This indicates that the spring estimate of a $65 billion shortfall for the full year (or just under 2% of GDP) should be achievable, even with the many new commitments, a sluggish growth backdrop, and, now, a rising interest rate bill.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.