Friday 23 October 2026

August’s retail rebound makes a 25 basis point hike on Wednesday 28 October more likely, not less. We keep the call we made earlier this week.

Why we think so. The last argument for a hold was that households were too stretched to keep spending while inflation ran above 3%. The August numbers weaken it. Sales rose 1.2% in the month after a 0.7% fall in July, and excluding motor vehicles and parts they also rose 1.2%, ahead of forecasts in the 1.0% to 1.1% range. More telling than the headline is the breadth: sales rose in all nine subsectors, led by car dealers, and Statistics Canada’s advance estimate for September is a further 0.7% gain. A central bank weighing a hike wants to know whether demand can bear it, and a broad rebound with a positive handoff into the next month says it can. The limits of the data deserve honesty. The report is in dollars, and gasoline and food were both dearer, so part of the gain is price rather than volume, and the agency’s outage page meant the split between the two could not be read. But all nine subsectors rising is not a price effect alone.

What the market is pricing. Overnight swaps were pricing a hike at just under 80% on Friday morning, little changed from Wednesday and Thursday, and we agree. Bonds have settled: the 2-year closed at 3.32%, the 5-year at 3.62% and the 10-year at 3.90% on 21 October, each within a basis point of Tuesday. That stability suggests the hike itself is largely priced, so the Bank’s language about what comes next may move yields more than the decision.

What it means. If the Bank raises its overnight rate to 2.50%, the prime rate moves within a day or two, and with it every variable-rate mortgage, home equity line and floating business loan. On a $500,000 variable mortgage at a rate in the low-4% range, a quarter point adds roughly $68 a month, and the economists calling for a hike are talking about two moves, not one. Running the payment at 0.25% and 0.50% higher before Wednesday, and deciding where the extra comes from, turns a headline into a plan. If a renewal falls in the next six months, a written rate hold requested now rather than after the decision protects against further increases. The broader 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 selling long-term investments.

What would change our mind. Statistics Canada’s own release showing that real sales volumes were flat or down in August, together with a hold on Wednesday paired with language that the Bank will look through energy. That would send the 2-year yield back under 3.20% within days and show the Bank weighs the weak jobs market more heavily than we do.

What to watch. The volume detail in Statistics Canada’s retail release once its website is back; today’s advance indicator for September manufacturing; Monday’s advance indicator for September wholesale trade; and the Bank of Canada decision and Monetary Policy Report on Wednesday 28 October at 06:45 PT, followed by the Federal Reserve at 11:00 PT.

The top of our US$100 to US$115 band for Brent is now being tested, and the odds of a break above it before the 3 November midterms have risen. We would prepare for that break rather than bet on it, because the premium is still insurance, not a loss of supply.

Why we think so. Brent rose 4% on Thursday to settle at US$113.17, its highest in five months, after starting October under US$97; WTI rose to US$99.47 after briefly trading above US$100. The news was serious: Iran said seven tankers caught fire or were damaged by mines, the U.S. State Department ordered all American staff and families out of the embassy in Saudi Arabia, and Saudi Aramco told essential staff at its eastern headquarters to evacuate. But the volumes are still moving. Aramco’s Amin Nasser said the East-West pipeline to the Red Sea now carries 7 million barrels a day, up from 2 million, which is why aggregate Gulf exports have been largely restored even though direct transits through Hormuz remain heavily disrupted. Tankers are also running at night through a protected lane near Oman’s coast. While barrels keep arriving, the premium above US$100 reflects fear of what Washington does after 3 November. What has changed is the near-term risk: President Trump said further action could come “fairly soon”, without a target or timetable, which raises the chance of a spike before the vote.

The bigger picture. Thursday showed the limits of the usual hedges. Gold dropped nearly 3% on a day when the geopolitical news got worse, because higher oil means higher rates for longer, and higher rates raise the cost of holding an asset that pays no income. The energy-heavy TSX fell anyway. When oil rises on fear, it pushes up inflation expectations and, through them, interest rates, which can hurt the very assets investors count on for protection.

What it means. The pump price and the winter heating bill are where this lands first; the Bank of Canada decision is where it lands second, because crude above US$110 keeps headline CPI above 3% while core sits nearer 2%. For households with heating or fuel as a large winter expense, locking what can be locked, such as a fixed-price natural gas or heating-oil contract where one is offered, limits exposure to a spike. For business owners with fuel in the cost base, October has delivered a 17% swing within a single month, so a budget needs a buffer for a winter at today’s prices. For investors, adding energy stocks after a 17% move in a month is chasing, not planning, and it is worth asking whether an energy-heavy portfolio is a deliberate choice or an accident of living in Canada.

What would change our mind. A confirmed loss of Gulf export volume, from a closure of the protected lane or a sustained hit to Saudi loading or the East-West pipeline. That would take Brent through US$120 and force the Bank of Canada to treat this as a supply shock rather than a price spike.

What to watch. Any U.S. action against Iran ahead of the 3 November midterms; today’s final University of Michigan reading on one-year inflation expectations, previously 4.7%; and the Bank of Canada decision on Wednesday 28 October.

There will be no Canada-U.S. trade agreement before the 3 November midterms. Wednesday’s call keeps a channel open, nothing more; serious talks resume only after the vote, and the shape of the next Congress will decide how much room the President has.

Why we think so. The signals point in opposite directions, and the harder ones carry more weight. Prime Minister Mark Carney said the call covered Iran, Ukraine and some of the issues around trade, and that Canada is ready to negotiate, but no date was announced. The same day, U.S. officials released a fact sheet saying Washington is monitoring Canadian activities in American politics, naming Industry Minister Mélanie Joly five times over counter-tariffs aimed at Republican-held states and citing the Ontario television ad that quoted Ronald Reagan. Ambassador Pete Hoekstra warned Canadian politicians to stay out of U.S. politics, and at a rally in Arizona the President said Canada treats the U.S. very badly. Public accusations like these make it harder for either government to be seen giving ground before an election. We read the fact sheet as a negotiating tactic aimed at the provinces as much as at Ottawa, since it targets the politicians whose counter-measures and advertising have pressed on Republican districts.

The bigger picture. Trade negotiations rarely conclude just before an election, because concessions look like weakness to voters and wins are easier to claim afterwards. Meanwhile the damage accumulates. Since talks collapsed in August, the U.S. has imposed 50% tariffs on about $20 billion of Canadian goods and, in early September, banned certain imports including motorcycles and alcohol. Canadian auto exports to the U.S. are down more than 10%, U.S. exports to Canada are down more than 20%, and Joly has given Cleveland-Cliffs, the U.S. owner of Stelco, 15 days to reverse the Hamilton layoffs or face possible legal action. The Canada-Ontario package for steel and autos helps, but it does not change the tariffs.

What it means. For businesses selling into the U.S., the planning assumption should be the current tariff schedule into 2027, not a fix by Christmas. Pricing the fourth quarter and the first quarter of 2027 on today’s schedule, and checking whether customer contracts allow terms to be reopened if the schedule changes either way, is the prudent base. Owners should know how much of the business depends on a single tariff-exposed customer or market, and whether a sale or succession timeline should wait for a deal or proceed regardless. For households, the trade war is already in the price of a new vehicle and in the loonie, which has recovered to 71 cents US on rate expectations rather than trade news. A deal would be upside, not something to budget on.

What would change our mind. An announced date for ministerial talks, or relief on any one sector tariff, before 3 November. That would mean Washington wants a Canadian win to show voters.

What to watch. The U.S. midterm elections on 3 November and the make-up of the next Congress, and the 15-day deadline Joly has set for Cleveland-Cliffs over the Hamilton layoffs.