Capital Market Comments March 2026

Economy

• Canadian GDP is expected to remain below trend through 2026, constrained by slowing population growth, tariff-related pressure on export demand, and weakening business and consumer confidence.

• Canada’s economy lost 84,000 jobs in February, a 0.4% decline from the previous month and well below expectations for a 10,000-job gain. Consequently, the unemployment rate increased from 6.5% in January to 6.7%. Looking ahead, the labour market is expected to remain stagnant through 2026, as slower population growth limits labour supply and weak economic conditions continue to constrain hiring.

• In February, Canada’s headline inflation rate eased to 1.8% y/y, slightly below expectations. The decline was largely driven by lower energy prices, including a 14.2% y/y drop in gasoline prices and a 17.1% y/y decline in natural gas prices. However, the recent surge in oil prices (see chart below), driven by the U.S.-Israeli conflict with Iran, suggests headline inflation could rise toward 3% in the coming months

Equity Markets

• U.S. equities endured a volatile first quarter, weighed down by tariff-related anxiety, renewed concerns over AI, and worries about private credit. Market jitters intensified in March as conflict in the Middle East revived stagflation fears and expectations for Fed rate cuts subsided. As a result, the S&P 500 declined 4.98%. The top-performing sector during the month was Energy (+10.40%), while the worst-performing sector was Industrials, declining 8.44%.

• The S&P/TSX Composite finished March on a negative note, declining 4.32%. The top-performing sectors during the month were Energy (+8.17%) and Utilities (+0.38%), while the worst-performing sector was Materials, declining 16.43%.  

Fixed Income

• During the month, Canadian bond yields rose sharply across the curve, resulting in negative returns (see chart below). The FTSE Short Index fell 0.89%, the FTSE Mid Index dropped 2.03%, and the FTSE Long Index declined 3.37%.

  

• Markets are increasingly looking beyond the initial oil price shock to broader second-order effects, including higher inflation expectations, rising interest rates, and tighter financial conditions.

• On March 18^th, the Bank of Canada (BoC) held its overnight rate at 2.25% for a third straight meeting. The bank recognized slower economic momentum and a softening labour market, while also warning of possible inflationary pressures stemming from the Iran conflict.

• The Federal Reserve (Fed) held the Fed Funds rate at 3.75% on March 18^th. The decision to maintain its policy rate was widely expected by market participants, even before the onset of the Iran conflict. However, the spike in oil prices and accompanying financial market volatility has added additional uncertainty for policymakers.  

• Central banks around the world are focused on one key question: whether the energy price shock will be temporary or become more persistent. For now, policymakers appear willing to look through the near-term impact of higher oil prices and leave interest rates unchanged. If the Iran conflict continues, policy divergence among central banks is likely to widen further, with mandate design increasingly shaping their response. In particular, the Fed’s dual mandate gives it greater flexibility to respond if labour market weakness becomes more pronounced, while central banks with a narrower price-stability mandate, such as the BoC, may have less room to maneuver if higher energy prices keep pushing up headline inflation.