Q1 2026 market update: Inflation concerns reemerge

As we entered 2026, investors continued to navigate a dynamic environment shaped by the global economy, trade developments and rapid progress in artificial intelligence (AI). Even as inflation reemerged as an important factor to watch, Canadian and U.S. equity markets reached new record highs during the quarter. Strong corporate earnings and ongoing optimism around AI helped support markets, while escalating tensions in the Middle East and other late quarter geopolitical events led to some pullback. Overall, North American equities showed notable resilience through the first quarter.

• Tensions in the Middle East push up oil prices
  • The price of oil moved higher over the quarter.
  • The conflict in Iran closed the Strait of Hormuz, which is a key waterway in the global distribution of oil, raising concerns about a potential energy crisis.
  • Rising oil prices raised concerns about inflation and the impact on global economic activity.
• The U.S. Supreme Court voted against tariffs
  • The U.S. Supreme Court voted against U.S. President Donald Trump’s use of emergency powers to impose tariffs.
  • The U.S. Presidential Administration turned to Section 122 of the 1974 Trade Act to impose a new baseline tariff on all imports.
  • This put many trade deals in question, including with Europe and India.
• Canada’s trade activity slows
  • Canadian export and import activity slowed at the beginning of 2026 due to slower activity with the U.S.
  • Despite slower activity in the first quarter, Canada’s trade with countries outside of the U.S. has improved, suggesting diversification efforts have been beneficial.
  • Canada reached several trade agreements with India, looking to sign a free trade deal by the end of the year.
  • Canada and the U.S. restarted trade talks with the Canada-United States-Mexico Agreement (CUSMA) coming up for review.

Geopolitics remains in the spotlight

Geopolitical issues continued over the first quarter of 2026. Tensions in the Middle East flared, raising uncertainty on the global economy, commodity markets, financial markets and inflation.

The conflict in Iran effectively closed the Strait of Hormuz, which is a key waterway in the global distribution of oil. As oil tankers stood idle and strikes against key energy posts heightened, the global supply of oil came into question. This led to a surge in oil prices, which raised concerns about inflation. Several countries, including Canada, vowed to help stabilize the oil market, while the International Energy Agency (IEA) released emergency reserves. These actions could help keep oil prices in check and potentially minimize inflationary pressures.

Trade uncertainty persisted. The U.S. Supreme Court’s decision to vote against President Trump’s use of emergency powers to impose tariffs resulted in the Administration imposing a 10% baseline tariff on U.S. imports. Canada and the U.S. re-entered into trade discussions with the Canada-United States-Mexico Agreement (CUSMA) set to be reviewed. Canada signed several trade deals with other countries and regions over the past few quarters, continuing with its efforts to diversify its trade relationships.

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How are large economies doing?

• The U.S. economy grew at an annualized pace of 0.7% in the fourth quarter of 2025 (as reported in the first quarter).
• China’s economy grew by 4.5% year-over-year.
• Europe’s economy grew by 0.2%.
• The U.K. economy grew by 0.1%.
• Japan’s economy expanded by 1.3%, annualized.

Source: Bloomberg Finance L.P.

Equity markets decline

• Global equity markets fell over the quarter. Much of the decline was concentrated in March after geopolitical tensions escalated.
• North American equity markets reached new record highs early in the quarter before pulling back as geopolitical tensions heightened.
• Equities in the U.S., EAFE, emerging markets, Europe and China declined. Conversely, equities in Canada, the U.K. and Japan increased. A diversified portfolio could help limit the losses from any one region or country.
• Global bond prices moved lower while bond yields increased. Fears of higher inflation raised concerns that central banks could lift interest rates. Global bond investors continue to earn higher income than they were before the COVID-19 pandemic.
• Canadian bond prices and yields increased slightly.
• The price of oil increased. Tensions in the Middle East effectively closed a main waterway in the global distribution of oil. Fears of lower supply pushed prices higher over the quarter.
• Gold prices reached a new record high early in the quarter. The price of gold then pulled back below US$5,000/oz but still finished higher over the quarter.

Source: Bloomberg Finance L.P.

Central banks lower interest rates

The year began with investors considering how much further major central banks will lower interest rates over 2026. Expectations for rate cuts switched as inflationary pressures were building in response to higher energy prices. By the end of the quarter, investors began considering which, if any, central banks may lift interest rates this year. All central banks will need to carefully consider how changing interest rates may affect inflation and economic activity.

• The Bank of Canada’s (BoC) benchmark overnight interest rate currently stands at 2.25%.
• The U.S. Federal Reserve Board (Fed) held its federal funds rate steady at 3.50%-3.75%.
• The European Central Bank kept its main interest rates unchanged.
• The Bank of England held steady at 3.75%.
• The Bank of Japan left its key interest rate at 0.75%.
• The People’s Bank of China kept its loan prime rates at their lowest levels ever.

Source: Bloomberg Finance L.P.

How is Canada’s economy doing?

Canada’s economy shrank over the first quarter of 2026  in response to a decline in business inventories. Outside of that, consumer spending and exports picked up over the quarter. Canadian Prime Minister Mark Carney continued his efforts to diversify trade by signing several trade deals with India, hoping both countries can reach a free trade deal by the end of the year. Consumer spending was solid to start 2026.

• Canada’s economy shrank by 0.6%, annualized, over the fourth quarter of 2025.
• The decline came amid a sharp fall in business inventories.
• Exports increased over the quarter despite ongoing trade disruptions with the U.S.
• Canada’s unemployment rate was 6.7% in February, down slightly from 6.8% at the end of the previous quarter. 
• Canada’s inflation rate was 1.8% in February, just below the BoC’s 2% target.
• Canadian equities finished higher over the quarter. The Energy and Materials sectors were the strongest performers. The Information Technology sector posted the largest decline.
• The yield on the benchmark 10-year Government of Canada bond increased, finishing the quarter at 3.47%. Canadian bonds continue to deliver relatively strong income to investors.

Source: Bloomberg Finance L.P.