Thursday 22 October 2026

The Bank of Canada raises its overnight rate by 25 basis points to 2.50% on 28 October. That is a change from the hold we expected at the start of the week, and a second move is far from settled: it depends on where oil goes.

Why we think so. Three things changed this week. First, the data. September CPI came in at 3.1%, the third month in a row at or above 3%, and the Bank’s quarterly surveys showed consumers’ longer-term inflation expectations rising, with about half of firms planning to pass higher oil and tariff costs on to customers. Second, the Bank’s own framing. Governor Tiff Macklem said in Bangkok that the question is whether inflation is likely to come back down toward target on its own. Core measures have run closer to 2% for several months, but the concern is that energy is spreading into everything else, and on the evidence of the surveys the answer to the governor’s question is no longer clearly yes. Third, financial conditions. The 2-year yield closed at 3.32% on 20 October against 3.21% a week earlier. If the Bank held now, yields would fall back and financial conditions would loosen at the moment it wants them tighter. As Desjardins’ Royce Mendes put it, central bankers can no longer look through the inflationary impact of high energy prices.

What the market is pricing. Overnight swaps put the odds of a move at 87% by mid-afternoon on Monday, up from near 70% earlier that day and about 30% the previous Friday, and pricing was still near 80% on Wednesday and Thursday morning. Scotiabank, Desjardins and BMO now forecast a hike and Bloomberg reported RBC flipping too. We now agree with the market on 28 October. Where we are more cautious is the follow-up. Desjardins expects a second move in January; we think that depends on oil.

What it means. If the Bank moves, the prime rate at the big lenders follows within a day or two, and so does the cost of every variable-rate mortgage, home equity line and floating business loan. A household with a $500,000 variable mortgage pays roughly $70 a month more for each quarter-point rise, and the economists quoted are talking about two of them. Fixed rates have already repriced off the 5-year yield, so the window to lock ahead of the decision is nearly closed. For savers, the same move keeps GIC and high-interest savings rates from drifting lower. The wider question is the fixed-versus-variable balance across all of a household’s borrowing, and whether a short-term cash reserve covers a year of higher payments without touching long-term investments.

What would change our mind. A hold on 28 October paired with language that the Bank will look through energy, or a sharp drop in oil below US$90 before the decision. That would send the 2-year yield back below 3.20% within days and tell us the Bank weighs the weak jobs market more heavily than we do.

What to watch. Canada’s August retail sales on Friday, with a consensus of 1.3% in the month, as a final read on household demand; then the Bank of Canada decision and Monetary Policy Report on 28 October at 06:45 PT.

The $8.7 billion Canada-Ontario plan protects large, capital-intensive incumbents and buys time, but it does not change the tariff arithmetic. The emissions freeze through the 2029 model year is the more lasting change.

Why we think so. The largest piece is a Joint Steel Action Fund, with five-year commitments of $3.55 billion from Ottawa and $1.67 billion from Ontario, delivered through existing channels such as the federal Strategic Response Fund. Autos get an additional $2.5 billion over two years for large capital projects, and Ottawa will match Ontario’s commitment of up to $1 billion over three years for road infrastructure into the Ring of Fire. This is capital funding for large projects, not operating support. It helps big producers modernize and stay open, but it does not lower the tariff a Canadian steel or auto exporter pays at the U.S. border. No new wage, employment insurance or training money is attached; the plan points back to the August measures, including the $3.5 billion Rapid Response Supports and the $1.5 billion Regional Tariff Response Initiative. The funds are only as useful as the trade deal that does or does not arrive before they are spent. The emissions decision is different. Freezing the fleet-average standard at 172 grams per mile through the 2029 model year, with tightening resuming in 2030 and the 75% electric-vehicle target for 2035 kept, changes what the industry has to build for three model years regardless of what Washington does.

The bigger picture. Industrial support packages work best as bridges, keeping capacity intact while a larger problem is resolved; their value depends on that problem being resolved. Procurement is the other lever. Buy Canadian and Buy Ontario policies that put Canadian steel first in public procurement, with tighter enforcement by the Canada Border Services Agency, create domestic demand that does not depend on U.S. tariffs, although public projects can replace only part of an export market.

What it means. For business owners in steel, auto parts or mining supply chains in Ontario, this is the money and the procurement rule set to watch. A smaller supplier benefits only if a large customer invests, so the useful question is which customers are likely to apply and what they plan to build. Check eligibility under the Strategic Response Fund route the steel fund will use, and read the Buy Canadian rules before the end of the year, when bids for federal infrastructure and defence work start to reflect them. For vehicle buyers, the freeze means less pressure on manufacturers to push electric volumes, which tends to show up in pricing and availability. For taxpayers, this is more than $6 billion of new federal commitments on a deficit that was already rising.

What would change our mind. A Canada-U.S. agreement that lowers the sector tariffs before mid-2027, which would turn the funds from a lifeline into a bonus, or steel production that keeps falling despite the money, which would show it came too late.

What to watch. The detailed rules for the steel fund and the Buy Canadian procurement policy as bids for federal work begin to reflect them before year end, and any movement toward a Canada-U.S. agreement on the sector tariffs.

With the U.S. 10-year yield above 5% and the Federal Reserve having raised rates in September, equity gains driven by a handful of AI names are fragile. We would not add to that concentration through this reporting season.

Why we think so. Wednesday’s gains were real but narrow. The S&P/TSX composite rose 217.03 points to 36,324.99, the S&P 500 0.6% and the Nasdaq 1.1%, led by technology after SpaceX reported a stronger summer profit than expected and its shares rose 7.8%; Nvidia added 2.5% and Super Micro Computer 9.5%. Meanwhile borrowing costs sit at levels not seen in a generation: the U.S. 10-year Treasury yield ended at 5.12%, and Freddie Mac’s 30-year mortgage average held at 7.40% for a second week. When a safe government bond pays this much, stocks must justify their prices with profits, and a rally resting on a few companies’ growth stories is more exposed to disappointment than one supported across the market. The mood can turn fast: by Thursday morning S&P 500 futures were down about 0.9% as oil jumped.

The bigger picture. Tesla shows how a headline and a business can diverge. Revenue of US$28.05 billion was flat on a year earlier, and adjusted earnings of US$0.48 a share beat the US$0.45 consensus. Yet net income fell 43% to US$787 million, operating margin of 2.6% remains well below the 5.8% of a year ago, deliveries fell 2.1%, and research spending rose 69% to US$2.76 billion as the company spends on AI and robotics. A beat against the forecast can sit alongside a business earning far less than it did, and the share price follows the headline for about a day. Index investors should also remember that funds weighted by market value hold more of the largest companies, so a U.S. index fund owns more of a few AI-linked names than its label suggests.

What it means. For Canadian investors, check how much of the portfolio sits in a handful of U.S. technology names, including through index funds, and whether that matches the risk you intended to take. If it has drifted, a rebalance is a decision about risk, not a prediction about prices. Which account a sale comes from matters: capital gains realized in a non-registered account are taxed, while those inside a TFSA or RRSP are not, so rebalancing within registered accounts first can avoid an unnecessary tax bill. For those holding cash or bonds, high yields mean fixed income offers a genuine return while waiting. For borrowers, U.S. long rates above 5% keep pressure on borrowing costs well beyond the United States.

What would change our mind. Earnings growth broadening to industrials, banks and consumer companies through the current reporting season, together with a 10-year yield back under 4.75%. That would mean the rally rests on profits rather than on a few stories.

What to watch. Today’s Freddie Mac weekly mortgage rate survey, last at 7.40%, and U.S. initial jobless claims, which came in at 194,000 against 200,000 expected; the rest of the reporting season for signs that earnings are broadening; and the Bank of Canada decision on 28 October.