By Douglas Porter

March 20, 2026

Even with a series of attacks on Mideast energy infrastructure, North American oil and gas prices finished about where they started this week. But that was cold comfort for other markets, as yields headed higher yet again, stocks reversed an early rally, and gold and other metals fell hard.

While President Trump assured that the war wouldn’t last much longer, and no troops would be deployed, Iran intensified its attacks on nearby energy sites, including Qatar’s large LNG operations and even a Saudi refinery near the Red Sea (i.e., the supposed safety valve away from the Persian Gulf).

The ongoing Iranian aggression against its neighbours is ramping up concern about long-term damage to capacity, raising doubts about how quickly production can recover. So, while WTI was relatively calm this week, Brent rose another $7 to around $110 and is now up more than 50% from pre-war levels.

In the middle of the maelstrom, almost every major central bank in the industrialized world had a rate decision scheduled for this week—a highly unusual synchronicity. The widespread consensus among central bankers was to hold tight amid the volatility (like Olympic judging, we’ll disregard the high and low extremes—Australia hiked 25 bps, as expected, and Brazil cut 25 bps).

The Bank of Canada may well have spoken for all others when it said the situation is a “dilemma for central banks”. As for what it means for monetary policy, in a very succinct fashion, it noted: “Raising interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target.” And given that policy interest rates are fairly close to neutral now in most economies, the appropriate response by the central banks is to hold policy steady, for now.

Apparently, not every major central bank was quite on the same page as the BoC, and it’s also not the main message that the markets took away from this week’s flurry of rate announcements. Both the BoE and the ECB delivered surprisingly hawkish remarks, and markets are now pricing in about three rate hikes apiece by the end of the year—a big ramp-up from just a month ago. And, critically, the once-expected rate cuts from the Fed later this year are now in serious doubt, with somewhat greater odds of hikes now priced in for 2026. Even Governor Waller, a former ardent dove, allowed that the spike in oil prices has shifted his view away from cuts.

Markets took some of the mildly hawkish remarks by various central bankers, along with the latest run-up in global energy prices, and ran with it. Yields bolted higher across the board in late-week action, with the benchmark 10-year Treasury approaching 4.4% for the first time since July and up 40 bps since the start of the war. The short end has seen an even bigger upswing, with two-year yields ratcheting up more than 50 bps in the past three weeks to around 3.9%.

That move is particularly significant as the two-year has abruptly gone from hovering below the current fed funds target range (3.50%-to-3.75%) to suddenly lurching above the range, in line with the swing in market pricing from cuts to hikes. We’ll just note that only one member of the FOMC had pencilled in a hike in the next two years in the latest dot plot, and that wasn’t until 2027.

The limited economic data this week hardly helped matters, suggesting that U.S. inflation and growth was on the firm side heading into the conflict. Arguably the most troubling of all was the February PPI. Landing on the same day as the Fed, and seemingly a bit stale, it didn’t make big waves.

Still, the 0.5% rise in core PPI lifted the annual increase to a three-year high of 3.9%, a concerning acceleration given that the index does tend to act as a decent leading indicator for core CPI. Most of the growth indicators this week, while of secondary nature, suggested that manufacturing was solid in the late winter, while the job market was stable.

If anything, the upward lurch in Canadian yields has been even more eye-popping in the past three weeks. At the top of the heap, the 2-year yield has blasted up by more than 60 bps to around 3%, or 75 bps north of the Bank of Canada’s overnight lending rate. Let’s just say that last week’s rant in this space about the inadvisability of the Bank even considering rate hikes has fallen into its very own echo chamber.

This was in spite of a friendly CPI for February, which showed headline inflation cooling to just 1.8% before the war, and to that same pace excluding food, energy and sales taxes. Call us old-fashioned, but where’s the case for rate hikes when core inflation is below target?

The back-up in Canadian rates extended to the important 5-year yield—which can heavily influence longer-term mortgage rates, and it has jumped a whopping 53 bps since the start of the month to almost 3.2%. This surge comes at a time when Canada’s housing market is already very clearly swimming upstream. While the weather did the sector no favours, sales fell yet again last month to 8.1% below year-ago levels.

This left the market balance on the soft side and continued to undercut prices. The benchmark MLS index dropped 4.8% from a year ago and is now almost exactly 20% below the peaks hit precisely four years earlier. Yes, that ranks as arguably the most serious, sustained home price correction on record, even when adjusted for inflation. (True, it also followed one of the most energetic, sustained booms in prices in the prior years.)

The combination of rising long-term yields, zero population growth, weak consumer confidence, and affordability still not back to long-run norms spells a long drought ahead for the housing market. That reality only weakens the case for BoC hikes. After all, if the most interest-sensitive portion of the economy is struggling heavily, then it’s patently obvious that policy is not overly easy.

Meantime, the prior wealth effect from rollicking stocks is in danger of going into reverse. With gold prices falling hard again this week—and now down 14% (or more than $700/oz) from pre-war levels—the TSX is getting hit much harder than its U.S. counterparts, despite the support from the large energy sector. Mostly due to weakness in precious metals, but certainly not exclusively so, the TSX fell more than 3% this week and is now down by almost 9% from its late February peak, closing in on official correction terrain.

For comparison, the S&P 500 is down “just” 6% from its recent highs. To briefly recap, while the market is busily pricing in a series of rate hikes from the Bank, we would point to calm core CPI, weak job growth, a struggling housing market, tightening financial conditions, and the looming USMCA uncertainty as Exhibits A, B, C, D and E for policymakers to stay on hold.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.