Episode 120 | Midyear 2026 global macroeconomic outlook: trying to move past the Middle East conflict

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So the US is doing fine so far.

Yeah, fine is the technical term,

I would say.

Or like, you know, or okay,

It's been here.

And what does that mean

besides preparing for summer vacation?

Well, for investment strategist

and economists, it means producing market

outlooks for the rest of 2026

and into 2027.

I like to compare market outlooks

with weather forecasts,

and many laugh because they say weather

forecasts are never right.

But I like to push back on that reaction.

The issue of weather forecasts is that

meteorologists are using tons of data,

including satellites, radar and physics,

to try and predict the unpredictable

a civil shift in wind

that can change everything.

When it comes to market and macroeconomic

forecasts, the uncertainty is magnified

because we are dealing with human

behavior, policy decisions and sentiment.

We take the information and data

that we have today

to help make informed decisions, but

the environment can change in an instant.

So we are constantly adjusting our short

term views

while still focus on the longer term.

The difference between markets weather.

When a forecast misses and meteorology,

you grab an umbrella

when it misses the markets.

The stakes are a lot higher, which is why

you should always have an umbrella

in a portfolio,

even if you don't always need it.

On today's episode of Investments

Unplugged, I'm joined by Alex

Grassino, our chief economist

and head of macro strategy and Dominique Lapointe, senior

global macro strategist

and senior economist, to discuss

where we see the markets and the economy

moving over the next 6 to 12 months.

Listen on. This is Investments Unplugged.

So like I mentioned in the intro, uh, the winds tend to change in the markets similar to the weather.

Since our recording, there were some fairly major developments in both the conflict in the Middle East, as well as with the Federal Reserve and the most recent announcement by Kevin Warsh, the new governor.

So we want to add a little bit to the pre-recorded—or the podcast—we already recorded.

Uh, so, just to add some more context in terms of the current developments, uh, Alex, can you talk about some of the changes we're seeing in the conflict in the Middle East?

Certainly. I think one of the things that we're really focused in on, on the conflict, is not so much whether or not the conflict comes to an official end, so much as whether or not the flow of goods goes through the Strait of Hormuz.

Even with the various levels of uncertainty—and the openings and closings and reopenings of the Gulf and different iterations of what we're seeing—we do get the sense that we're moving back towards something resembling a normal flow of goods.

The one thing we'd caution on here, though, is really that it doesn't mean it's going to happen tomorrow.

There's going to be an initial wave of supply as locked-in boats leave, uh, and then the question really becomes whether or not you see insurance companies and a willingness to send boats back into the strait—and whether things are stable enough at that stage.

So it's still wait and see.

Clearly, a positive development at this stage, the immediate impact on things like commodity prices are quite clear, though.

No, that should definitely read through inflation and kind of a direct link to, uh, the most recent announcement by Kevin Warsh as the new Federal Reserve governor.

Uh, let's talk a little bit about, uh, what he said and kind of the surprises, I think, that perhaps the market saw in his tone.

I think one of the biggest things that came through really was just how overtly focused on inflation he was.

One of the things that me and the team certainly had difficulty with going into this whole appointment was just how much of a distinction we would have to make between what the Fed should do and what it would do.

And I think that this sort of brings us back a lot closer to what we thought—at least for now.

What that means in practice is: while we thought that there was probably going to be one or two cuts—25 basis point cuts—put into the next year or so, now it's a much less clear path.

I think underlying that as well, there's some macro factors that are playing a significant role.

When you look at the data, the bottom line is the United States is doing just fine. It’s pretty hard to cut if growth is healthy.

The labor market looks like it's tightening, even if a little bit at the margin. It's not moving in the right direction to justify Fed cuts.

And the other part is the inflationary pressure that we're going to see from the strait and from the conflict also push upward, uh, place upward pressure on inflation as well.

So what that means is there’s really not a lot to do.

So we think that the conversation goes from whether or not they'll cut—whether or not those cuts are because, as I said before, uh, Warsh is like-minded but ultimately independent—which means inflate cuts now, and if the economy runs too hot, hikes…

Moving over to him sort of pushing back against whether or not they should hike, which as we see right now, um, is very much one of the discussions being had at the Fed.

I think the other thing that clouds the picture up somewhat—or rather, a lot—is the lack of forward guidance.

There's going to be more opacity with Fed communications at this stage, and what that means for markets is probably more volatility at the front end of the curve.

So right now we have, uh, roughly two rate cuts priced in by the market, uh, through now to the March meeting. Do you expect that likely to come down a little bit?

Looks like they've been picking up as Kevin Warsh has been more supportive of, um, combating inflation and less, um, leaning towards the political sensitivity of cutting rates.

Uh, do you mean hiking rates?

So, well, the idea was that many market—or many—there's a thought that Kevin Warsh is going to come in and just cut rates, uh, irrespective of the inflationary data or the strength of the economy.

Now the market's pricing in almost two rate cuts by March.

Uh, do you think it comes down, or are they going to be a pause longer term and just wait and see, um, more about the data—and the pause is more the base case now versus the hike, or…?

Sorry, Kevin, do you mean the markets are pricing in two hikes between now and March?

Oh sorry, did I say cuts? Yes—sorry—two hikes between now and March.

Yes, sorry.

No problem.

Yeah, we think that's overdone.

Um, essentially, we do suspect there's going to be some sort of easing that you'll see—especially with the conflict being done in the coming months—and I think it's a matter of sort of pushing back and holding on until we get to an area where we're a little more comfortable.

Uh, when we look at risks on the Fed path now, right now our call is for rates to stay unchanged for the foreseeable future.

Um, a couple of things we're looking at here:

One, he announced five different working groups at his first meeting. If we see that the working groups’ components will very clearly lean in one direction or another, that to us would be a tell.

The other thing that we could also see potentially happening, um, in terms of risks to adding a little bit more dovishness back in, is if we get a bit of a lull in the fall—uh, just basically because of the World Cup hangover after coming off, uh, the twin sugar hits of fiscal stimulus and the World Cup—and some sort of rollover inflation, that could be an opportunity for markets to get a little bit more, um, dovish about where cuts could be.

On the other side, we're also looking at the labor market.

Um, it's early, but there are tentative signs that you're seeing a bit of tightening there. So if that moves a little faster than expected, we could see a doubling down on the hawkish position that we can see from the Fed.

That’s great. I really appreciate you jumping on, Alex, to add more context to the ever-changing landscape.

And I wouldn’t be surprised that we could see more and more changes as we go forward. I guess this is what makes our job so exciting—trying to figure out the ever-changing landscape of the economy and the markets, and trying to give opinions on where we think things are going and, uh, make better decisions—or help make better decisions—for our clients, um, and their clients as well.

So thanks again for joining us on Investments Unplugged.

No, no—it’s my pleasure. We certainly do live in interesting times.

Welcome back to Investments Unplugged.

I'm your host

Kevin Headland co-chief investment

strategist at Manulife Investments.

And with me are two special guests.

We have Alex Grassino, chief economist

at Manulife Investment Management and Dominique Lapointe, senior

macro strategist and senior economist

at Manulife Investment Management.

Welcome, gentlemen.

Thanks for joining us. Hey, Kevin.

Thanks for having us on. Awesome.

We got lots, lots to talk about today.

We're going to our kind of mid-year

outlook.

See what is in the crystal ball for

the rest of this year and maybe into 2027.

But I want to start off

a bit of a business history, let's say.

So, Alex,

I'll throw it to you first to comment.

What surprised you

the most about the first half of 2026?

You mean outside of the conflict

in the Middle East?

I think the biggest thing really was that

when I look at the conflict

in the Middle East specifically,

I'm quite surprised

by how long it's taken to unwind.

If you'd ask me in early March

what I would have thought about this.

My conviction was pretty high

that people were going

to look right through this,

because it would be one of those things

that happened for 3 or

4 weeks ended, and then we would just

resume our regularly scheduled program.

Well, we didn't get that.

So instead, we have to deal

with the fallout and the sliding scale

of just how long it will take

for the conflict to wind down.

How about yourself?

Yeah, I'm surprised by

if I want to leave out the conflict

to the momentum that came back

real quick

in terms of earnings expectations

after some softness

believe last year, some questions about

the long

term benefits of the AI.

This is just completely went away.

And expectations

come back up and fueled em.

US equities everything linked to

AI as record after record.

So that was a surprise to me

because we thought

that at the beginning of 2026,

the market was starting to be more

nimble,

more peculiar about the AI,

the team, and more selective it is.

It's still more selective to some degree,

but anything related to the hardware

isn't.

Yeah, it's quite interesting

when you look at that.

Like last year,

you started writing out of the SP 500.

You know,

some of the other names were starting

to actually catch a bid

and propelling the equity market forward.

And you kind of see a reversal back

to what we saw last year, where

any announcement on expenses and spending

and those companies when we hire.

And I'm going to combine

the two of your responses because

it's amazing how it's like Q1

call it really just month of March

was all focused on headline

risk and geopolitical risk

and the conflict of the Middle East.

And you really go

the bottom was the March 30th almost.

And then the quarter changes to Q2,

and the focus goes on to earnings.

And it's all about

what the companies are announcing.

And then we get through earnings season.

We're back to the conflict.

That's like the back and forth about just

what's really the market is focusing on.

So it's kind of interesting how

it just bounces back between the headlines

and whatever drives the headlines

tends to be what where the market's going.

But let's start off.

We're going to go over the economy

and see what the top down

views are from a macro lens.

You guys are the experts here.

But of course,

despite the shock from all prices

and the conflict in the East,

the global economy seem fairly resilient.

Manufacturing data for the mother

May was solid, the green above 50.

In most of the country

we track on our heat map.

Now, you could take a bit of grain of salt

because there is a certain

factors are there that which are positive

to the index, like lead time

but actually negative because more supply

constraints than increased demand.

But overall it seems positive.

Alex where do you see the global economy

and particularly the US right now?

Well, so far the United States is moving

through the post

beginning of conflict period

with relative ease.

There are signs that you're

starting to see the effects.

So if you look at most recent inflation

prints and we'll get more

this month, you're starting

to see some things firm up.

But when you look at areas

like employment, consumption,

industrial production,

all that stuff is still pointed up

until the right, which is encouraging.

It does create other problems from a fed

positioning perspective

or good problems to have, I would say.

But generally speaking, so far

we're seeing things reasonably well.

And if we expand the lens out to the world

more generally, it's pretty clear that

different areas are going to get hit in

different ways by what we've been seeing.

And really it's a function of one

whether or not

you're an energy exporter

or self-sufficient, and two,

whether or not you have some ability

to buffer the current shocks.

And so far, one of the other surprising

things is being that

most countries have been reasonably okay

and we're still moving along

and we haven't seen any massive

deterioration yet,

we would have thought it would have been

a lot more immediate,

and so far it hasn't been.

So that's, generally speaking,

where things are and a little brighter

than if you give me the parameters

that we would have had

in late February, where I think most

people would have assumed it would be.

Yeah, for sure.

It's it's kind of surprising.

I think, you know,

last time we saw well, back in

22, we saw the invasion of Ukraine

by Russian forces.

All prices jumped, of course.

And next thing you know,

everyone's expecting the world economy

being recession, especially Europe.

And you're not seeing that too much

in terms of data just yet.

And I think, as you said, the longer

this last

perhaps the eventually

you see the contagion impact.

And that'll be something to

to see going forward.

When we look at the US

a little bit tighter here, there's a lot

of talked about the, the K shaped economy.

Are we seeing that

in real life.

Is is that why we're not seeing kind

of the weaker economic data as a whole?

Because the the haves have more because

of the equity market exposure there.

And the haves and have nots have less.

Are we worried

too much about that, that bifurcation

of the economic landscape in the US?

It's certainly a factor

when you look across income brackets.

But I think that when you look at

what you're seeing more generally,

the simple answer is

it looks almost more like resilience.

There is a caveat here.

If you look at the consumer, I'm

a little bit concerned

that we're only going to get

a clean picture of what the consumer

looks like in a couple of months.

And the reason for that is very simply

that they're in the middle of being

the beneficiaries of fiscal stimulus,

so they're getting their tax returns.

There's probably a couple of months.

And if you fast forward to June,

you'll only get the information around

what the consumer really does

look like sometime in July or August.

So there could be something

that we're holding our breath on

and waiting to see what happens.

But so far we think seems generally okay.

And aside from that,

I think one of the things that, you know,

if you go back to our outlook

at the beginning of the year,

we could take some solace in

is if you look at things

like industrial production,

if you look at things like a technical

term called non-defense capital

goods orders, X aircraft,

which really just means business spending.

Yes, there's AI in there,

but the bottom line is that around

August of last year,

they started inflecting up,

which we hadn't seen in two

and a half years in the United States.

So there was evidence

of some of the things

that we'd been looking for this year

were, in fact, starting to play out.

They're still going on under the surface,

but there's clearly a lot more uncertainty

right now.

And then the labor markets,

a whole other story.

I'd encourage everybody

to look past the headline figures.

There's no question

the numbers are very good.

There's potentially some disruptions

due to the World

Cup for a couple of months in areas

like leisure and hospitality,

it was unusual to see 50,000 jobs

get added in government,

which has been negative for two years

since essentially the Trump

administration came in.

But overall, there's slight

signs of things are getting a little bit

more stable to firm at the margin in areas

like ours, worked like quits rates,

like jobless claims.

All those things still suggest that

the environment is pretty stable overall.

So the US is doing fine so far.

Yeah, fine is the technical term,

I would say.

Or like, you know, or okay,

I think the term we tend to use in the,

you know, the technical stuff is below

trend growth,

which is it's avoiding recession positive.

But we shouldn't be singing praises

just yet.

I think that's that's the key right now.

I think it's

even a little better than that.

I don't think we're

necessarily even below trend,

which leaves you feeling underwhelmed.

If anything, there have been bouts,

admittedly not fully reflected

in the numbers,

where people were wondering how on earth

the fed would possibly be able to cut.

You know, it's one number,

but people were referring to now casting

that was a 5% briefly,

and it didn't turn out to be true,

but you're getting gusts up that sort of

give you a measure of optimism

when you look at the United States.

And even when you look at the consumer,

everything is good.

Like, it's not my fine.

I don't mean it in the bad way.

I mean it really in the sense

that everything just looks okay.

That's just the rate of gain

in support of the one big beautiful bill

government spending, as well as tax cuts

for consumers will will help as well.

Where you get that, that kind of impact,

where they start spending

and get that snowball effect.

And of course it just

feeds through to the overall economy,

which is something, as you said,

we'll probably see

in the latter months, one quarter,

if not further on through the data.

Don, if we flip over

to perhaps local or here in Canada,

Q1 GDP came out to negative,

slight negative, negative point 1%,

but Q4 GDP got revised

negatively from negative point 6 to -1%.

So we have we like to call

a technical recession on our hands.

A lot of talk about that.

What do you think that means?

And should we be concerned

from a Canadian economy perspective?

Yeah,

I don't like that technical recession.

I don't use that.

I don't recommend people using it.

And I'll say why.

And then I will address the

the deeper issues.

You look at Q1 -0.1

annualized contraction.

That's -0.0 to 5%.

It's it's zero.

It's a technical adjustment.

And at the same time,

you have

some industries are still growing.

And you look at the energy sectors

and fairly well right now.

And some of the services

are also still growing.

So usually when you want to talk

about a recession, it needs to be more

broad based in that it needs to be

cheri widespread across provinces,

which is also where we

we don't see right now.

So I don't think we should talk

about a recession.

Same thing.

You don't see major layoffs,

you don't see a lot of jobs growth,

but you don't see the kinds of layoffs

that would be associated with a recession.

So yeah, for, for for all these reasons,

I don't think it's,

it's a technical recession, but going back

five quarters, we had three negatives.

And the two that were positive

were that positive.

So it's not to dismiss the

the economic weakness here.

We're in a very

weak slash low growth environment

in, in Canada for multiple reasons.

Some are structural like productivity.

If you scaled back population

growth the way it's being done right

now, you're left

with the zero productivity issue

that we have had for decades.

And now there's nothing that is fueling

growth structurally and cyclically.

You're still with the

the falling out of the,

of the last year's tariff sectoral tariffs

on, on Canada

that has a deep negative impact

on businesses investment.

Do you can even consumer right now

is also more prudent

than the American consumer.

If you look at savings rate

or if you look at the differences

between real income and real spending,

you going to see that

the this environment

into weak household confidence

that leads to lower spending.

So that also is a is an issue.

So you're left with what,

some growth in exports

to non US markets

but not like didn't really offset

the decline you've had to US

market and government spending either

through temporary transfers

that are just piling up or

the more fixed assets

investment

infrastructure defense spending.

So that's a support but that's all.

So all that to say

this is a weak environment we're in.

We think that we're going to stay

in that environment for 2026

until actually

until the end of 2027, when,

when some of that uncertainty

can be lifted, some adjustments

have been made from businesses

to be able to exports to other markets,

and that should also fuel job

security and spending.

So it is what it is.

But it's not a recession.

But it's also not not a very good story.

Yeah.

Describing it as a fragile economy.

Right. You're almost thin.

Ice is going to take a crack

but little pauses to look forward to.

And then you have another kind of wrinkle

in the plan coming forward

as we're getting closer to

the 1st of July of this year,

which is official renegotiation time

for Kuzma Agreement or Usmca or NAFTA.

Number two, whatever you want to call it.

What are the ramifications, risks

for if that doesn't get renegotiated?

And does that create more pain

going forward for the Canadian economy?

Oh yeah.

It's hard to predict

because we don't really know

what's going on with the negotiations.

It doesn't seem that they're going

very well or at all, actually.

But there's there's two options

that I think are very likely.

And the first one

would be that, because Canada

actually last week recommended

to renew the agreement for 16 years.

So that's the positive way to go about it.

But in terms of

what other option that that

the US could do

or is likely to do is to decide

not to renew for 16 years.

And then there's an annual negotiation

to try to get a deal for ten years,

and in ten years,

then if there's no deal,

then the agreement is gone.

But there's also a third option,

which is more worrisome

that we also need to consider,

which is that any party in that agreement

can unilaterally withdraw

at a six month notice.

And it's possible that

if the negotiations don't go well, don't

go anywhere, then this can this is used

as a either a statement or negotiation

negotiation tactic by the United States.

And if that happens,

we've just talked about this

uncertainty on on businesses.

You would add a lot to that uncertainty.

And when I said by the middle of 2027,

we think we're past that,

you're you would delay by a lot

that adjustment process

and hiring and consumer spending.

So that's an option or working

scenario is is the second one I mentioned

which is that it's just staying

stay as they are.

They're still uncertain. But

it's still

a fairly uncertain environment for,

for people across Canada.

Yeah.

It's important as you get kind of kick

the can down the road,

but as we live in more of a certain

environment, kind of puts a lot of

companies and individuals kind of in limbo

in terms of their spending,

you know, thought process, the hiring.

We're not going to make long

term decisions when the world we live in

is so uncertain.

The good news, I would say,

is from a Canadian investor perspectives,

is the TSX

is not as linked to the economy.

Perhaps the SB 500 is.

So even in a weak, fragile

economy in Canada, it doesn't mean

we can't be looking at great

opportunities for investments

within the TSX.

So that silver lining look at positives.

So I think make sure that we're

not overreacting as Canadian investors

to the headlines

that might be coming out of

the negotiations

between Mexico, US and Canada.

I think that's a good segue to our next

part is equities.

You know, coming to the year markets

were pricing in kind of perfection.

Valuation was elevated.

There was a lot of uncertainty

there because people were saying

markets are expensive,

especially in the US.

What can we happen then?

Of course we've got the big pullback

and a bit of a choppiness

as a result of the volatility

from the conflict in the Middle East.

Things bottomed in March 30th as I said.

And then we started to look forward

to improvement in earnings.

And the expectation for earnings growth

kind of moved quite forward,

which was another way

when looking forward price range ratios,

those remain fairly muted

and they haven't really hit levels

that we saw last year

because of the earnings.

Expectations have gone kind of higher.

So Alex, when we looked

at the opportunity set right now,

where do you see the best relative

opportunity for the second half of 2026?

US has been a dominant player here,

but are there opportunities

elsewhere in the world?

So I think the way you look at

this is really in terms of not clear cut,

opportunity set,

but preparedness to act once

meaningful news

coming out of the conflict happens.

If we're in status quo, I think that

the tech story

probably remains very strong overall.

Part of it is just because it is

the most exciting story going around.

And part of it is also, frankly,

when you look at the hyperscalers, there's

probably some flight to safety there.

When you look at just how big,

how strong their cash flows are, how well

prepared they are to

withstand an economic,

economic adversity,

and certainly with their margins as well.

There are factors they're not.

And I think

it'll continue to be a good story.

I think the thing that could happen

over the course of the next few months,

we hope,

is that once even a matter of full

conflict resolution, but a resolution

of the flow of traffic, we shouldn't.

Hormuz happens.

I think you're going to start

to see a pretty fast repricing out

of what people have been hiding in

for the last few months,

and if you get some swift reversals,

you can get website by some ways.

So if you think about things like energy,

you can get a pretty sharp reversal there.

But the thing is, when you look at just

how much

is going to have to get bought in terms

of shoring up strategic

reserves, if there's an overshoot,

that would create an opportunity.

So the energy space is one thing.

The other thing is Cattaro,

frankly, also seems pretty good

because when you think about the two big

drivers, energy and gold,

over the last year and a half or so,

I think some combination

of those commodities

probably is a benefit to investors.

I think all has taken supremacist over

gold since the conflict began,

but I also suspect that gold will

still be something that is

a factor of, well, takes a step back

just in terms of

sort of a hedge

against uncertainty and inflation.

So I think those are interesting areas

I take a look at.

Yeah,

I think one thing we're looking at right

now is really the notion

of being diversified, not necessarily

across sectors and geographies,

but more about types of businesses.

And I think it's it's important

to not get too caught up in,

you know, the AI opportunity

to be overly risky right now.

But at the same time,

let's not get caught up with the conflict

either in the headlines

and be overly risk averse because we could

miss a great opportunity here.

You know,

the idea is to be, you know, still

well positioned in equities

to take advantage of continued upside.

There's no material risk evaluation here.

Earnings growth

expectations are still elevated.

But the key question will be is

do we get the earnings results

from the expenditures and spending,

especially on the AI story.

But I think that's that's a little bit

further down the road, shall we say.

We should be worried

that too much over the next two quarters.

More about the back

half of 20, 27 year or so.

There's a lot of questions.

This is 1999 all over again.

And we're going to get this bubble

that's going to blow up.

And you know we don't know where to bubble

until it bursts.

And I don't think we're

in the same situation as we were in 99.

And I don't think there should be overly

fearful invest right now just on the on

the move higher in technology

and AI type stocks

to compare it to to nine

nine 2000 tech correct type levels.

Yeah, I mean I think that's a good point.

One of the things I'd say is so far,

the massive CapEx we've seen has been

not entirely, but largely funded

by internal sources from major companies.

It started to shift

around the fall of last year.

As you've seen, debt issuance.

I'd be watching capital structures

very closely.

More recently,

one of the hyperscalers made the news

because they're talking about equity

issues.

That, to me is possibly something

to keep an eye on as we go through.

And that could be a sign that the risk is

perhaps a little more broadly based

than it had been in the past.

I still think there's always to go.

Don't get me wrong, but I'd say

watch the signals of companies are sending

through how they're raising the capital

to pay for all this stuff.

No, thanks. A lot of sense.

Make sure that they're not diluting

the shareholders worth and making

sure that the same time

they're not raising too much debt.

You know, kind of the poor

from Peter to pay Paul idea here.

There's a measurement and a nice balance

between spending too much and growing

that spending.

Now, I think the key is that spending

has been driving some inflation fears

higher. We've got the old price shocks.

And you know this is one

where we're seeing more Maurice.

And this is kind of reading

your your wheelhouse for you too

as well is the inflation story here.

Yields are up across the government

fixing curves

not just the US not just Canada,

but I would say in almost most major

developed countries,

I think people were expecting inflation

to hit closer targets and they're reversed

because of low shocks and other things.

And proven in economic environments

from the US perspective, Alex,

should we be concerned

about this inflation story here?

Are we is it getting past sticky inflation

more about,

you know, higher inflation

and kind of a worrisome right now.

So I think,

you know, transitory

has become a dirty word in our industry.

And we have rolling transitory effects

that we've been dealing with.

I would say that my general bias

is to be a little bit

more slow moving in terms of

just how quickly I react to shocks.

Economic waves

tend to move a little more slowly.

That haven't been said.

The concern that we have right now

is that the shock from the conflict

first is problematic

because it won't be slow linear

development, and you're seeing the ripple

effects different,

different greatly depending

on what part of the world you're in.

So if you look at inflation expectations

or the effect of inflation, places

like Europe or parts of the emerging

markets, it's been a lot faster

and more pronounced in the United States

so far.

The US is higher but well contained.

But the other thing that we're

looking at now, and seeing that has become

increasingly

popular, is the inflationary effect of AI,

which is not

what everybody was talking about

six months ago when people were using AI

as the excuse to talk about productivity

and more fed cuts in practice.

What people are realizing

is that all the equipment creates

demand driven shortages.

And as that happens,

you're pushing inflation up.

Will it last indefinitely?

No, it's probably, you know, rolling,

say 4 to 6 quarters shock

without being too precise about anything.

But what that does in practice

is it means you've gone from tariffs

to conflict, the chip spend.

And the net result is

when you look at core

inflation, it's higher than it

should have been for three years in a row.

So that is something that people

are keeping a close eye on now.

And Dominic,

if you have any thoughts on this,

while means feel free to apply in or

if we want to move over to Canada as well.

It's also great.

No, but I agree on on on the US.

But I said I'm more concerned that

maybe the way you framed it,

I think it's very concerning.

And the reason why it's concerning in is,

is that inflation never went down to 2%.

Like you said, it's rolling shocks.

Like we hit 2.5%

in Q2 of last year before the tariffs.

And then it went up.

And then it started to slow again

in Q1 of this year at 2.7%.

Now it's back above 3%.

With all those factors, a tariff

have a large impact on inflation

right now.

It should be disinflationary.

But now you're adding up some

AI and you're adding up some energy

related factors.

And at the same time

it looks like the like Alex said,

the labor market is picking up.

So the argument about weaker wage growth,

how long will this last.

It's unclear.

And even with our

like we didn't

talk about our oral prices forecast,

but our forecast

with the Strait of Hormuz that remains

closed until the end of July implies

that prices move up to slightly

above $110 per barrel in Q3.

So that's high.

And that corresponds to inflation

in the US moving above 4% year.

For I said I'm concerned. Yeah.

You get yeah one positive

which is housing coming down.

But it just it's not enough.

You've noticed

a big component of inflation to skew

the overall inflation numbers lower.

Everything else moves up faster.

Like that's that's that's why

you can't only be shelter in everything.

You're else. Yeah.

No shelter coming down

as the positive that we don't have,

you know runaway inflation.

But if that settles down

you have no more deflationary forces

or disinflationary forces

say you only have inflationary forces.

That drives number higher.

Now of course that leads you

the the question, Kevin.

Worst

new Federal Reserve governor in place.

The expectation was

we're going to get rate cuts.

And then the data is pushing now

to rate hikes.

And the market is right

now is pricing a full rate

hike by the Federal Reserve

by end of this year.

What do they do.

And more. And broadly,

what do you think they should do?

Alex.

Well, I would say more importantly,

what they do do is

more important

than what we think they should do.

If we look at where the data is right now,

symmetric risk of hikes or cuts

is the appropriate.

What they should do is be

there have a very balanced view.

And so market pricing

that end makes sense.

What they will do is a whole other story.

And I think right now

there's a very awkward

convergence of events

when you look at new fed chair,

who has just been appointed

by a very strong willed administration.

You look at the conflict right now,

it's clear that there is a desire

to move rates lower,

but you need to be able to credibly do it.

So when we look at our forecasts,

we think that a hike

as of now is probably premature.

If we're still talking about the conflict

and disrupted supply around Labor Day

so early September, then it is 100%

something we would think

is something that should be telegraphed

and probably happening.

We're just not

quite there on our scale yet.

But when we look at

the path to we're not even looking

at a meaningful easing cycle.

We're just talking about

a couple of symbolic cuts

to sort of

get back to what the fed would consider

to be a long term view of neutral,

which is somewhere a little bit more 3%.

As of now,

you really need to have a window

to credibly do it.

And the problem is

that window is closing fast

because the argument

was never going to be inflation,

because that was always sticky

and stubbornly high

for the argument.

It'd be slow growth,

possibly, if we got a soft patch,

but there's no evidence of that happening.

So the third leg of the stool that you can

look at really is the labor market.

And the narrative for that for a while

has been, well,

there's nothing really to see here.

If you think about it

in terms of employee versus some player,

it's probably somewhere in the middle

and if anything a little bit skewed

towards the employers favor.

But now if you're moving back

towards neutral and in the employee favor

and moving away from the area

that you could point to,

it gets really hard to make the case

to credibly cut.

Do we think we get just enough data

at some point

to be able for them to ledge

a couple of fine tuning adjustments?

And we think so, but right now the data

is moving in the opposite direction.

So that window could be closing.

The path could be narrowing.

Whatever metaphor you want to mangle

is probably the way I would look at it

at this point.

Yeah, it's the the idea

is that the administration in the pressure

on the cut rates to a more neutral stance,

it remains elevated.

But it's very difficult to

to push that through, give the data.

So maybe we're into 2027 or whatnot.

We've noticed that the market is wildly

whipsawed in terms of their pricing

of central bank or Federal Reserve moves,

especially in the last couple of years.

So something to watch,

but definitely something that hits you

when we're looking at the markets off

spot for the fed and especially next week

with Kellen Moore, she is going to have

to argue against rate hikes.

This is where he doesn't want to be.

Yeah it could be a thing.

Now when we look at this.

I think it's also on the Canada side

the Bank of Canada.

It's kind of interesting how the narrative

that has actually changed went from

can we get cuts in the US on a weaker

labor market and weaker,

you know, softening economy almost.

And in Canada we are going towards

two rate hikes

even maybe more than rate hikes

because the inflation story.

But now the recent data comes out and says

maybe we we get one rate hike.

What does the Bank Canada do

in a situation where inflation is moving

higher.

But yet the labor market

and perhaps the economy is softening here.

Does a rate hike even matter because they

can't control the price of oil anyway?

So do they just kind of look

through this current inflation story?

Yeah.

If the hike it wouldn't be once

it would be 3 or 4 times, right.

To have meaningful impact

on on the economy.

And also

it wouldn't be about energy and gas,

it would be about core

inflation that would have moved up.

So that's, that's that's

the reason the starting point,

like you mentioned, however, is changed

because it looks like core

inflation is straining lower.

It's kind of depending on the measure

you look at.

It's either below target

or getting close to target.

And so to get to a point

where there's a rate hike,

first of all, that conflict would need

to last longer than what we envision.

Again, going back to this

July timing for a reopening.

And then you have to see some transmission

over the summer to core inflation.

We haven't seen that right now.

Businesses

pricing power is much weaker in Canada.

We talked about we

we consumption week wages

even if there's an impact from

higher global input prices to

gain businesses import cost, it's unclear

how much you can actually pass it to

consumer under the space case scenario.

At some point they would but

it probably just means weaker

income in the near term, however.

So that's for 2026.

And if I if,

if we assume that we don't move, but

also we think that next year

under a working assumption traffic ends,

they still hike anyway

at some point next year.

And that's because if it wasn't

for the tariffs of 2025

there, we would be 3% for the policy rate.

Right now we're at 2.25%.

So that means the last three cuts

we think were very related

to the tariffs and the uncertainty

in the supported economy.

I think they've cut

as much as they thought it's possible

to do or useful to do in that environment.

So we don't think that

they would cut even more,

even if there is no deal on the US.

You need to see a meaning a big increase

in the area for them to move.

But when this uncertainty

is sort of lifted or stabilized

dating that they need to normalize up.

And for them I think normal is 3%.

So that's why you look at our forecast.

There's nothing going on this year

in the beginning

of next year,

but at some point they have to to move up.

And funnily enough, because of

the Iran conflict, the market is is there.

They're pricing in three hikes

by the end of 2027.

That's tied to the Middle East

conflicts.

If we if that falls apart then for sure

we're going to price those out.

There's going to be some some movement

in the Canadian yield curve.

But ultimately if we look at it

objectively, that's where our forecast is.

That makes sense.

So we're in a bit of a weaker territory

or stimulative territory for the Bank

Canada in anticipation of we're already.

So that will hopefully help

the economy survive that

that technical recession get out of it,

you know, get some better growth,

get past some of the uncertainty here

and eventually get back to 3%,

which is neutral territory.

And then the fed eventually coming down

to their own neutral territory.

Kind of a convergence between one

that's in a bit of a restrictive territory

and one that's in a more of a less

restrictive stimulative territory.

So that makes a lot of sense.

And ultimately, it wouldn't make sense

in terms of fixed income is

management is so more important because of

the movement of the yield curve.

It's stay away from long duration

whip sawing even though the yields are

similar attractive.

I think from an investment perspective,

we prefer going into the corporate bond

specter section and playing similar

yields in high quality, high yield,

or even invest grade bonds with duration

protection, their lower duration.

Call it 3 to 4 years

and getting better yields.

So you can actually kind of avoid

some of the this volatility and government

yield curve by just staying away

from kind of that plain vanilla

bond in Canada

and embracing corporate bonds

as more of your core fixed income,

which is that counterintuitive.

But that seems to be the

the best place to be.

I want to

thank you guys for taking your time here.

There's a lot to unpack and get in 30

minutes or so, so I appreciate your time.

Ultimately, our views right now.

Steady, Eddie.

Equity markets continue to move upward,

but still in a choppy trend.

A lot of headline news, a lot of

still uncertainty that is living there.

But some really strong fundamentals.

Resilient economies especially in the US

supportive of better earnings growth.

And I think that's going to be the driver

going forward.

But diversification remains key.

Diversify across

geographies and businesses.

But also don't forget about fixed income

because should we get some kind of bigger

you know uncertainty that's move on.

If we get some kind of whip song of

the equity markets been a momentum trade,

upward fixing remains a nice ballast

for long term investment success.

So that's quite important.

But we still believe we should be

still overweight equities

in a balanced portfolio right now

slightly to take advantage

of some of the opportunities

that we seek forward.

So ultimately things are looking good.

We don't want to be too cautious

right now, but still be aware

of some of the headline risks that exist.

So once again, thanks very much

for taking the time, guys.

I appreciate it.

And for Investors

Unplugged, I'm Kevin Hedlund.

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