Capital Market Comment January 2026
- Hilary M.K. Poff | CFA
- Feb 3
- 2 min read
Economy
GDP growth in 2025 experienced significant volatility, largely attributed to fluctuations in trade and inventory levels. While Canada is projected to sidestep a technical recession for 2025, ongoing economic challenges are anticipated to persist into the first half of 2026.
In December, Canadian employment saw a modest increase of 8,200 jobs, following a robust three-month period that averaged 60,000 job gains each month. However, the unemployment rate reversed a significant portion of its decline from the previous month, rising three points to reach 6.8%. Overall, in 2025, Canada added approximately 325,000 jobs, indicating a year of uneven yet positive growth.
Canada's headline inflation rose modestly to 2.4% (y/y) in December, slightly above consensus estimates. The rise in the year-over-year headline CPI was primarily influenced by the temporary GST/ HST Sales Tax break that started on December 14, 2024. As a result, monthly declines were observed in exempt goods and services, which have now been excluded from the year-over-year calculations, exerting upward pressure on headline CPI growth. On a positive note, the Bank of Canada's (BoC) preferred core inflation measures, CPI-median and CPI-trim, continued their downward trajectory, hitting their lowest levels since December 2024.
Equity Markets
The beginning of the year was turbulent for U.S. stocks. On January 20th, a sell-off in Japanese government bonds, coupled with escalating tariff tensions, resulted in the S&P 500 experiencing its largest single-day drop since October 2025. However, the market rebounded, with the S&P 500 reaching new all-time highs and ultimately closing the month up 1.45%, despite a decline in the last two trading days. The top-performing sectors during the month were Energy (+14.43%) and Materials (+8.71%), while the worst-performing sector was Financials, declining 2.41%.
The S&P/TSX Composite finished January on a positive note, gaining 0.84%. The top-performing sectors during the month were Energy (+10.57%) and Materials (+8.85%), while the worst-performing sector was Information Technology, declining 17.64%.
On Friday, January 30th, there was a significant selloff in previous metals (see chart below).
The specific reasons behind this decline are still being debated. One probable factor is the market's response to President Trump's nomination of Kevin Warsh as the next Federal Reserve Chair. Warsh is generally perceived as more hawkish on inflation, which shifted expectations towards a less aggressive monetary easing path. This tilt towards higher rates for a longer period, coupled with a stronger U.S dollar, was sufficient to disrupt a crowded trade in zero-yielding assets like gold and silver. This disruption was further exacerbated by the unwinding of leveraged positions.
Fixed Income
Throughout the month, Canadian 10-year bond yields experienced volatility but ultimately ended the month flat (see chart below).
On January 28th, the BoC maintained its policy rate at 2.25%, a move that was largely anticipated. Going forward, the BoC’s decision on interest rates will be influenced by growth, inflation and employment. We are more cautious on the Canadian economic outlook, given slowing population growth, housing-related risks, and trade uncertainty. We believe the BoC is more likely to cut rates this year, potentially in the first half of the year.
As expected, the Federal Reserve kept policy rates unchanged at 3.75% on January 28th. The FOMC noted that they will carefully assess incoming data and the evolving economic outlook to determine the extent and timing of additional adjustments to the target range.
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