Capital Market Comments May 2026

Economy

• Canada’s first quarter GDP report revealed the economy experienced a significant growth shortfall, slipping into a technical recession. The headline real GDP contracted by 0.1% (y/y), which is notably below the anticipated 1.5% growth. Furthermore, domestic demand contracted by 0.4% (y/y), and gross fixed capital formation decreased by 4.3%, indicating a slowdown in both household and business activities (see chart below). Overall, the Canadian economy is forecast to remain below trend, expanding 1.0% in 2026.

  

• Canada's unemployment rate has increased to a six-month high of 6.9% in April.  A modest drop in employment levels coupled with a sizable jump in the labour force drove the unemployment rate higher. Going forward, the labour market is anticipated to face ongoing challenges through 2026.

• Headline inflation surged to 2.8% in April from 2.4% in March. The significant increase was primarily attributed to higher gasoline prices and fading favourable energy base effects from the previous year’s carbon levy removal. Despite the jump in headline inflation, core inflation measures preferred by the BoC actually eased, indicating that the underlying domestic price pressures remained contained. Specifically, CPI-trim and CPI-median averaged 2.1% (y/y) in April compared to 2.3% in March.  The report is consistent with our broader perspective that increased oil prices will elevate headline inflation and diminish household purchasing power, but is unlikely to reignite systemic inflation pressures.

Equity Markets

• The rally in U.S. equities continued in May, as strong tech earnings and AI-related exuberance propelled the S&P 500 to eleven all-time closing highs.  The S&P 500 finished the month with a 5.26% gain.

• The top-performing sector during the month was Information Technology (+15.99%), while the worst-performing sector was Energy, declining 5.56%.

• The S&P/TSX Composite finished May on a positive note, gaining 2.52%. The top-performing sector during the month was Communication Services (+6.86), while the worst-performing sector was Health Care, declining 5.04%.  

  
  

Fixed Income

• Global bond markets experienced extreme volatility in May, driven by inflation fears and escalating geopolitical tensions in the Middle East. Yields surged to multi-year highs before retreating late in the month as peace talks progressed and oil prices eased.

• Canadian 10-year bond yields ended the month lower, generating positive returns (see chart below).

  

• The FTSE Mid Index returned 1.26%. Both Corporate (+1.35%) and Provincial (+1.28%) bonds outperformed Gov’t of Canada (+1.21%) bonds.

• Presently, global inflation data have enabled bond markets to look through the energy shock.  Price data from the U.S, Canada, and Europe indicate that most of the war-induced pressure is still centred around energy.

• The more concerning development is the projected growth outlook. U.S. Q1 GDP was revised downwards to a below-trend 1.6% (y/y) pace, while the Euro area has decelerated to 0.6%.  Additionally, Mexico experienced contraction in Q1, and Canada has entered a technical recession.

• Central banks are in a difficult position. If oil prices stay contained and Hormuz traffic normalizes, markets can continue to look through the upside risk to energy. However, if the truce stalls or oil reverses higher, policymakers will face trade-offs between growth and inflation.

• On May 22^nd, Kevin Warsh took office as the 17^th, Chairman of the Federal Reserve. The ex-Fed Governor has long been known as an inflation hawk but has softened his tone dramatically over the past year. It’s unclear which version of Warsh will arrive in Washington.