Capital Market Comment February 2026

Economy

• Canadian GDP is expected to remain below trend through 2026, constrained by slowing population growth, tariff‑related pressures on export demand, and weakening business and consumer confidence. Although lower interest rates have supported a pickup in consumer spending, economists still foresee a muted macroeconomic backdrop, with the unemployment rate likely to stay above its long‑term average until late 2027.

• In January, Canada lost 25,000 jobs—the largest monthly drop since last summer—with manufacturing accounting for roughly 27,000 of the decline and more than 50,000 job losses over the past year. Ontario was hit hardest, reflecting mounting pressures on export‑driven sectors exposed to U.S. demand and tariff headwinds, particularly automotive. The unemployment rate edged down to 6.5%, though the decline was misleading, driven by a 94,000‑person contraction in the labour force rather than genuine hiring strength.

• Canada’s headline inflation eased to 2.3% (y/y) in January, slightly below the 2.4% consensus, despite tax‑related distortions that temporarily pushed prices higher as after‑tax prices were compared against last year’s GST/HST holiday period. Economists viewed the report as broadly constructive, with encouraging trends across several categories and continued improvement in core inflation measures closely monitored by the Bank of Canada (BoC)- see chart below.

  

• The U.S. Supreme Court issued a major 6–3 ruling on February 20, 2026, striking down former Donald Trump’s sweeping tariffs after determining he had exceeded his authority under the International Emergency Economic Powers Act (IEEPA). The Court held that the 1977 statute did not provide the “clear congressional authorization” required to impose the broad, unilateral import duties Trump enacted, including the 10% global tariff and higher targeted rates on key trading partners.

Equity Markets

• February was a difficult month for U.S. equities, as heightened scrutiny of AI‑related capital spending and its implications for corporate profitability weighed on large‑cap stocks. As a result, the S&P 500 declined 0.76%. The top-performing sectors during the month were Utilities (+10.35%) and Energy (+9.43%), while the worst-performing sector was Consumer Discretionary, declining 5.38%.

• The S&P/TSX Composite finished February on a strong note, gaining 7.72%. The top-performing sectors during the month were Materials (+21.68%) and Consumer Discretionary (+10.54%), while the worst-performing sector was Information Technology, declining 6.24%.

Fixed Income

• During the month, yields on Government of Canada 10-Year bonds dropped to a new three-month low of 3.12% -see chart below. This decline was driven by an unexpected 0.6% contraction in Q4 GDP, which strengthened expectations for a shift toward more accommodative monetary policy.

• Earlier this year, markets briefly assigned a meaningful probability to a BoC rate hike—a stance we viewed as misaligned with domestic economic conditions. Since then, expectations have shifted decisively toward easing, with current pricing suggesting roughly a 50% chance of at least one rate cut this year. Softening payrolls, elevated trade uncertainty, and mounting mortgage refinancing pressures are becoming increasingly difficult for policymakers to overlook.

• We continue to anticipate at least one rate cut in 2026, potentially as early as June, with the balance of risks tilted toward further easing as the year progresses. With inflation remaining contained, the BoC has room to act without risking overtightening in an already moderating economic environment. While markets have begun adjusting their expectations, we believe they still underestimate the extent of accommodation that may ultimately be required if labour market weakness persists.