Connor Hare

The changing of the guard at the Federal Reserve was formalized this week, as Kevin Warsh was confirmed by the Senate as Powell’s successor on Wednesday. This means Jerome Powell’s eight-year term as Chairman came to an end on Friday. Warsh takes the helm at a time when inflation pressures are rising sharply on the back of elevated global energy prices. Details on a potential resolution to the conflict in Iran remained elusive this week, which led to a 9% uptick in WTI oil prices. Equity markets were roughly unchanged on the week, with the S&P 500 rising 0.2%, as U.S. Treasury yields spiked by roughly 20 basis points, reflecting stronger inflation readings.

In terms of economic data releases, the inflation data for April was the biggest news item. Headline CPI hit a three-year high of 3.8% year-on-year (y/y), on the back of rising energy prices (Chart 1). Stripping out energy and food products, core CPI accelerated for a second consecutive month to 2.7% y/y, partly owing to the feedthrough of energy prices to categories like airline fares. Broad-based passthrough to non-energy categories was absent from the report, but with energy prices rising through early May, subsequent reports may be less benign, particularly if no resolution is reached over the near-term.

Upstream, the influence of higher energy prices was similarly evident for producers in April, with the Producer Price Index up 6% y/y. Selling price pressures have not been this elevated since late 2022, as global supply chain disruptions have begun to converge with those seen during the initial aftermath of the pandemic (Chart 2). The impacts of these developments on businesses, and the follow-through to consumers, will be monitored closely by the Federal Reserve.

To that end, the April retail sales report provided an early snapshot of consumer health. It showed a solid gain of 0.5% month-on-month in nominal terms, but after adjusting for inflation, sales fell 0.2%. This likely reflected, in part, the comparable contraction in real earnings during the month, which, if sustained, would continue to weigh on consumption going forward. A near-term resolution to the Iran conflict would help ease some of this pressure, although the effects would likely be gradual as supply disruptions take time to fully unwind. Taken together, these crosscurrents leave the near-term policy outlook highly dependent on incoming inflation data.

Against this backdrop, Fed officials in public remarks this week flagged concerns about the inflation reports. Several officials, including Chicago Fed President Goolsbee and Boston Fed President Collins, noted that tighter financial conditions may be required to quell emerging inflationary pressures. The balance of opinion among officials emphasized that a neutral stance would be appropriate over the near term to allow time to assess incoming data. As of the time of writing, financial market pricing for a rate hike by year-end has risen to 40%.

Andrew Foran, Economist | 416-350-8927

U.S. financial markets remained firm this week. The S&P 500 advanced roughly 2% to new record highs, supported by a pullback in oil prices and a better-than-expected jobs report. Long-term Treasury yields eased later in the week, with the 10-year note hovering near 4.35% – a hair below last week’s close. Market pricing continues to reflect limited expectations for near-term rate cuts amid ongoing energy market uncertainty and a relatively resilient economy.

Resiliency was on display in the April jobs report, where nonfarm payrolls rose 115,000 – almost double the market consensus forecast. The unemployment rate held steady at 4.3% amid modest declines in both household employment and the labour force. Payrolls were volatile through the first quarter, due in part to factors like inclement weather and a healthcare strike in California. Looking through the volatility, it appears that job growth has picked up from its anemic trend at the end of last year and is now running at a decent pace that’s allowing it to hold the unemployment rate steady (Chart 1). High-frequency indicators reinforced this resilient labour market picture: initial jobless claims remained very low by historical standards, while continuing claims fell to 1.77 million – a new two-year low.

Other economic data lent further support to the resilience theme. The ISM Services Index eased modestly in April but remained comfortably above the 50-point expansion threshold. The details of the report, however, had a few blemishes. New orders recorded a notable pullback, while the prices-paid component remained elevated at 70.7 – the highest level since late 2022 and up notably from earlier this year – pointing to persistent cost pressures in the services sector.

With respect to prices, the good news is that the price of WTI crude oil, which had surged above $105/barrel late last week, fell back to the mid-$90s over the course of this week (Chart 2). This followed reports of U.S.–Iran negotiations and tentative de-escalation signals around the Strait of Hormuz. While constructive for inflation expectations, sustained disinflation will depend on a more durable resolution to the tensions

These developments are likely front-of-mind for Fed Chair-nominee Kevin Warsh as he prepares to take the helm. Communication from the Fed this week maintained a cautious stance, with New York Fed President John Williams emphasizing that policy is “well positioned” to balance the risks to the dual mandate. Under the current backdrop, market odds remain strongly in favor of no Fed action over the near term, with the probability that rates are held steady this year still sitting at over 70%. Ultimately, this morning’s better-than-expected jobs report, alongside other high-frequency indicators, helps ease concerns that the U.S. labour market has continued to deteriorate. This should give policymakers more breathing room to assess the extent to which higher energy prices filter into core inflation over the coming months.

Admir Kolaj, Economist | 416-944-6318

U.S. equity markets shrugged off escalating U.S.-Iran tensions and instead focused on this week’s upbeat earnings releases and signs of a still resilient U.S. economy. Further gains in the S&P 500 capped off what has been an impressive run through the month of April, with the index rising +10% m/m – its strongest performance since April 2020. The gain in equities came despite the price of oil moving back above $100 per-barrel (WTI benchmark) on reports that President Trump told aides to prepare for an extended blockade. Meanwhile, Treasury yields across the curve climbed a bit higher, as hawkish undertones in the Fed’s policy statement erased hopes of rate cuts later this year. The 10-year Treasury yield currently sits at 4.38%, while Fed futures are now showing a one-in-three chance of a rate hike by April 2027.

At the onset of the Middle East conflict, we argued that the economic impact from higher oil prices is likely to be relatively small. In large part, that was because of structural factors like the U.S. being less energy intensive and a net exporter of energy products. But we also noted that the shock was hitting the economy from a point of strength, and that was evident in this week’s reading of Q1 GDP. The economy expanded by a respectable 2%, with business investment remaining a bright spot. AI was a significant driver underpinning investment growth, though there was also evidence of some broadening to more traditional areas (Chart 1). The AI spending splurge looks to have legs, with Meta, Alphabet and Microsoft all raising guidance for 2026 planned expenditures this week. Cumulative capex by the “Magnificent 7” is now estimated to be $725 billion – a significant increase from 2025’s ~$375 billion.

Meanwhile, consumer spending was a soft spot in Q1, though some of the weakness appears transitory. The quarter got off to a rough start, as Winter Storm Fern caused major disruptions across most of the U.S. Encouragingly, the spending figures picked up as the quarter progressed, with March’s gain the strongest in fifteen months… in nominal terms. After adjusting for the sharp jump in inflation – partly due to the surge in energy prices – the gain appeared more modest. But it wasn’t only energy prices holding up inflation. Core PCE – the Fed’s preferred inflation gauge – rose 3.2% yr/yr in March, or its fastest rate of growth in over two years (Chart 2).

Rising inflationary pressures have made the FOMC more cautious on the rate outlook, with three Fed officials voting to remove the rate-cutting bias in the policy statement. The shifting sentiment comes at an interesting time for the Fed. This week’s press conference likely marked Powell’s last as chair, with Kevin Warsh expected to be in-seat for the next meeting following his nomination clearing the Senate Banking Committee earlier this week. But Powell noted at the press conference that he plans to stay on the board until the DOJ investigation is “truly over with transparency and finality”. Ultimately, this leaves the composition of the FOMC unchanged, as Warsh will fill the seat of President Trump’s appointee Stephen Miran, leaving little hope that the new Fed chair will be able to deliver on immediate rate cuts.

Thomas Feltmate, Director & Senior Economist | 416-944-5730

As the Iran conflict approaches the two month mark, financial markets remained highly sensitive to signals around energy supply risks. Early in the week, Iran announced that the Strait of Hormuz would be reopened to commercial shipping vessels during a newly brokered ceasefire, triggering a sharp pullback in oil prices and a relief rally in risk assets. WTI crude fell into the low $80s per barrel range, while U.S. equities moved to new highs as immediate worst case supply scenarios were priced out (Chart 1). That said, reporting around actual shipping flows suggested that conditions on the ground were uneven. As a result, while near term fears eased, geopolitical risks remain elevated and sentiment fragile, leaving markets vulnerable to renewed volatility should tensions re escalate.

U.S. economic data this week offered a reminder that domestic momentum has not yet broken down. Retail and food services sales rose 1.7% in March, driven largely by a surge in gasoline prices, but importantly, real (inflation adjusted) spending also increased a solid 0.8%. Core retail sales excluding gasoline, autos, and building materials posted broad-based gains, suggesting that households have not yet pulled back meaningfully on goods consumption. One area of softness was spending at restaurants, which was little changed on the month, highlighting some emerging price sensitivity among consumers.

Forward-looking indicators painted a more mixed picture. The latest U.S. PMI readings showed business activity recovering modestly in April after stalling in March, with manufacturing rebounding more strongly than services. However, the rebound was accompanied by worsening delivery times and a sharp increase in input and output prices, reflecting ongoing supply disruptions tied to the conflict. Firms reported precautionary stock building and rising costs, reinforcing concerns that inflation pressures could re-intensify. The University of Michigan survey released today showed inflation expectations over the next year rising sharply, a key indicator energy-driven price worries are becoming more entrenched (Chart 2).

Markets are also increasingly focused on the Federal Reserve policy backdrop. Kevin Warsh’s confirmation hearing this week underscored uncertainty around the future policy framework, with investors parsing how shifts in leadership could influence the Fed’s reaction function at a time when inflation and growth risks are pulling in opposite directions. While Warsh’s confirmation by the Senate Banking Committee was uncertain amid the ongoing DOJ investigation of Chair Powell, headlines on Friday morning suggested the charges had been dropped. This clears a path for Warsh’s confirmation, which means next week’s interest rate announcement will likely be Jerome Powell’s last as chair. Looking ahead, next week’s data calendar is heavy, with personal income and PCE inflation, first quarter GDP, and ISM surveys all due. Together, these releases will help determine whether the economy is slowing enough to offset renewed price pressures.

Vikram Rai, Senior Economist | 416-923-1692

Financial markets remained focused on geopolitical developments in the Middle East this week, with little economic data to digest. Signs that tensions might ease – most notably President Trump’s decision to postpone strikes on Iran’s power plants – provided temporary relief to oil prices early in the week. Planned strikes have now been delayed for a second time, to April 6th. Additionally, President Trump’s trip to China has reportedly been rescheduled for mid-May, fueling speculation that the administration may seek to de-escalate the conflict and pivot back toward major trade negotiations. Despite tentative signs of optimism, the broader geopolitical backdrop remains highly volatile. Peace proposals from Washington and Tehran remain far apart, hostilities continue, and additional U.S. forces are moving into the region. Energy markets have remained acutely sensitive to these developments (Chart 1).

The conflict has exposed vulnerabilities in the global energy supply system, particularly across parts of Asia that rely heavily on Middle Eastern oil and shipping routes. Fuel rationing remains the exception rather than the rule thus far, so the immediate economic impact has come through higher energy prices. In the U.S., average gasoline prices are hovering near $4 per gallon, while diesel prices have moved above that mark.

Elevated energy prices have complicated the monetary policy backdrop. The Fed has left open the possibility of rate cuts later this year, but policymakers have become increasingly cautious amid renewed inflation risks tied to higher fuel costs and trade disruptions. Market pricing has pushed out rate cuts, and raised the odds of a rate hike (Chart 2). Importantly, this repricing reflects growing uncertainty around the inflation outlook, rather than explicit guidance from the Fed.

Recent communication from Fed officials reinforces this “watchful waiting” stance. Vice Chair Philip Jefferson noted that labor market conditions remain “roughly in balance”, yet he highlighted upside risks to inflation from the recent surge in energy prices and potential tariff pass-through effects. These have stalled disinflation and are likely to keep inflation above target over the near term. He affirmed support for the current policy stance, stating that it is well positioned to respond to evolving risks. Governor Lisa Cook echoed this measured tone, underscoring the need to monitor tail risks that could tighten financial conditions abruptly.

Looking ahead, the path of the conflict is highly uncertain. Against this backdrop, the Fed is likely to remain cautious, with recent communications suggesting that the path toward eventual easing has not been closed, but it is increasingly contingent on a sustained easing in inflation pressures. Next week features a heavy slate of data, including the first readings for March. The ISMs will be closely watched to see if the conflict has affected sentiment yet, while the jobs numbers will shed light on how “balanced” the labor market remained. The consensus is that both measures will remain fairly steady, but the details will be closely parsed.

Admir Kolaj, Economist | 416-944-6318

Financial markets remained on edge this week as the conflict in the Middle East escalated, with uncertainty expanding into physical energy supply rather than just shipping disruptions. Reports of damage to key oil and LNG facilities in the Gulf, including infrastructure that could take months—if not longer—to repair, have injected a persistent risk premium into energy markets. Oil prices have swung sharply day‑to‑day and remain well above pre‑conflict levels (Chart 1). This dynamic remains consistent with the base case in our Quarterly Economic Forecast, but risks of even higher prices are growing. Higher gasoline prices hurt consumer spending and the prolonged uncertainty raises downside risks in energy‑importing regions. We flagged these concerns this week in our State Economic Forecast, especially for states with higher exposure to transportation, manufacturing, and energy‑intensive industries.

Against this backdrop, the Federal Reserve held its policy rate steady this week, as expected, but the statement was cautious. Chairman Powell acknowledged the heightened uncertainty stemming from the Middle East conflict, and revised projections showed higher inflation relative to December. The Fed continues to signal just one rate cut this year, reflecting concern that higher energy prices could slow the disinflation process at a time when core inflation is already proving sticky. Market reaction reinforced inflation concerns, with fed funds futures beginning to price a non‑trivial risk that the next move in rates may not be lower (Chart 2). Our commentary noted that the Fed appears intent on preserving flexibility, particularly given the risk that a prolonged energy shock could push the economy toward an uncomfortable mix of slower growth and firmer inflation.

Against this backdrop, markets continued to reprice risk this week in response to higher energy prices and a more cautious Federal Reserve. Equity markets struggled to find footing, while Treasury yields pushed higher as inflation risks moved back to the foreground. Incoming economic data offered a mixed picture. New home sales fell sharply in January, a reminder that interest‑rate‑sensitive sectors remain vulnerable to higher yields, though weather effects likely exaggerated the weakness. More broadly, the data flow reinforces that financial conditions are doing more of the near‑term adjustment work as the economy absorbs another external shock.

Looking ahead to next week, attention will undoubtedly remain on developments in the Middle East. Beyond the headlines, investors will also be watching how Fed officials are responding to the evolving situation and also the University of Michigan Consumer Sentiment Survey, a widely followed gauge of household confidence and inflation expectations. With energy prices and volatility high, these data could offer early signs of whether the current shock is beginning to weigh more materially on sentiment—or inflation expectations—an outcome that would further complicate the policy backdrop.

Financial markets faced another week of volatility as the conflict in the Middle East intensified. Iranian attacks against vessels passing through the Strait of Hormuz and energy infrastructure in the region has kept energy prices elevated, with oil prices remaining in the $90-100 per barrel range through the end of the week. The announcement that International Energy Agency member countries would release strategic oil reserves provided some relief to the tumult in financial markets, but on aggregate, the near-term risk outlook for the global economy remains elevated. As of the time of writing, the S&P 500 is down 1.2% and the U.S. 10-Year yield is up 14 basis points on the week to 4.27%.

The U.S. remains partially insulated from the spike in global energy prices as a net energy exporter, but the conflict is still expected to create a light headwind for growth this year. The duration of the conflict and its impact on energy prices remains highly uncertain, but the recovery time for energy markets is expected to be measured in months not weeks. This will likely weigh on U.S. consumers and businesses over the near-term.

Inflation data for February, which pre-dated the rise in global energy prices, showed that inflationary pressures were still somewhat elevated to start the new year. The 3-month annualized percentage change in core CPI was back at 3% in February after briefly falling in the post-shutdown period (Chart 1). With energy prices rising sharply and tariff cost passthrough still occurring in the background, elevated inflation pressures are likely to keep the Federal Reserve cautious moving forward. As of the time of writing, financial markets have priced in a one-third chance of the Federal Reserve remaining on hold through this year.

On the tariff front, U.S. Trade Representative Greer announced several new Section 301 tariff investigations covering dozens of countries this week. Section 301 tariffs are imposed against nations engaging in unfair/anti-competitive trading practices which disadvantage U.S. commerce. The first investigation announced on Wednesday relates to “structural excess capacity and production in manufacturing” which will target 15 countries and the E.U. The targeted countries account for roughly 75% of U.S. imports, with the E.U., Mexico, and China accounting for 40-50 percentage-points of that share (Chart 2). The other Section 301 tariff investigations relate to the failure of foreign nations to effectively prohibit the importation of goods produced using forced labor and targets the 60 largest U.S. trading partners. With the global 10% Section 122 tariff imposed last month set to expire at the end of July, the administration is likely to expedite these investigations to create a new tariff regime roughly equivalent to what was in place before the IEEPA tariffs were stuck down.

Looking ahead to next week, the Federal Reserve is widely expected to hold rates steady. However, investors will be keenly watching for their views on the balance of risks amid the spike in oil prices and elevated uncertainty. The labor market has weakened in recent months, but inflation pressures appear likely to keep inflation well above 2% through the year. Chairman Powell is likely to reiterate the data dependency of the FOMC and the need for patience to monitor the sustainability of emerging trends.

The United States and Israel launched coordinated strikes on Iran over the weekend, prompting retaliatory counterattacks across other countries in the Middle East. On Monday, Iran announced that it would attack tanker ships passing through the Strait of Hormuz – a crucial choke point for 20% of global oil supply. Based on satellite imagery, shipping through the passage has effectively come to a halt. Energy prices pushed meaningfully higher this week, with WTI up roughly 33% (or $18per-barrel) and currently sits just north of $88 – its highest level since September 2023. U.S. equities were under pressure for most of the week, with February’s softer employment report adding further insult to injury on Friday. The S&P 500 looks to end the week down over 2%. Meanwhile, Treasury yields across the curve were about 20 basis points higher, as market participants pushed out the timing of expected rate cuts amid fears that higher oil prices will add further upward pressure to inflation.

Despite the sharp move in oil prices, the impact to U.S. economy (so far) remains relatively small. In large part, that’s because the U.S. is now a small net exporter of oil, so energy shocks don’t pack the same punch that they used to. Case in point: we’ve marked-to-market our oil forecast, and the upgrade (shown in Chart 1) only shaves about a tenth of a percentage point from 2026 GDP growth – barely moving the needle considering our forecast of 2.7%.

But to say that uncertainty is elevated at the moment would be an understatement. President Trump and other administration senior officials have said this week that the conflict could drag on for at least another several weeks. This suggests further upside to oil prices over the near term, particularly if oil supplies were to remain choked off indefinitely.

From the Federal Reserve’s perspective, economic theory would tell us that policymakers should “look through” the energy shock given its supply driven nature. But because the jump in oil prices is coming atop already elevated inflationary pressures, Fed officials are likely to keep a close eye on inflation expectations. So far, market-based measures have remained well anchored, but there is a risk that they could start to drift higher, particularly if the conflict were to drag on.

The further upside risk to the inflation outlook comes at a time when market participants have started to question the labor market narrative. Nonfarm employment unexpectedly declined in February (Chart 2), while the unemployment rate ticked up to 4.4%. On the surface, the employment report looked very weak, but there were a few factors including a strike and potential weather-related impacts that contributed to at least some of last month’s pullback. We feel it’s still too early to upend our prior thinking of the labor market – but it certainly underscores that current conditions are far from perfect. At the moment, the greater threat to the Fed’s dual mandate is price stability. That is reflected in market participants having pushed out the timing of next rate cut until September and are only 80% priced for a second cut.

Financial markets were largely rangebound for much of this week as investors digested the January FOMC minutes and an important run of macro data. Early market reaction to the Supreme Court’s decision to strike down a large chunk of President Trump’s second term tariffs appears broadly positive, with the S&P 500 is up 0.9% from last week’s close at time of writing.

The Supreme Court ruling found that the law that underpins many of Trump’s global tariffs – the International Emergency Economic Powers Act (IEEPA) – “does not authorize the President to impose tariffs”. The decision did not rule on how or if tariffs that have already been paid should be refunded – a potentially messy process. We expect the U.S. administration will act quickly to recreate its tariff regime using justification from other statutes. For more on this, see our commentary here.

Prior to the tariff decision, the January FOMC minutes dominated the financial market limelight. Two key takeaways stood out from the minutes. First, the balance of risks has shifted away from labor market weakness and toward inflation staying uncomfortably high. Driving home this point was the fact that most committee members judged that “downside risks to employment had moderated, while the risk of more persistent inflation remained”. Importantly, this assessment occurred before the release of last week’s delayed payrolls report, which showed a firmer labor market than many feared. Second, most participants judged that the current policy rate is closer to neutral rather than restrictive. That assessment diminishes the urgency to resume rate cuts.

his week’s macro data broadly echoed the tone of the minutes, even as growth was weaker than expected at the end of 2025. Fourth-quarter GDP growth came in at 1.4% annualized in the first estimate, a notable slowdown from 4.4% in the third quarter (Chart 1). The disappointment was driven largely by a steep pullback in federal outlays, reflecting the 43-day government shutdown. Importantly, final sales to private domestic purchasers rose 2.4%, underscoring the resilience of underlying private sector demand despite the headline slowdown.

The December personal income and outlays report added further color to the economic backdrop at year‑end. Real consumer spending was up just 0.1% m/m in December, reflecting a pullback in goods spending. Inflation pressures, meanwhile, re‑accelerated at the margin. Core PCE inflation rose to 3.0% y/y, remaining well above target (Chart 2).

All told, even after accounting for this morning’s miss on Q4 growth, we still feel that the U.S. economy has entered 2026 with considerable momentum. That said, it appears that 2026 may start off in similar fashion to 2025 after all – with elevated tariff uncertainty. This reinforces the notion that the Fed will remain on hold for the time being, as it waits for the policy fog to clear.

Financial markets endured a rough patch this week, with a broad sell off across equities reflecting anxiety about the threat AI could pose to earnings and employment, the path of interest rates, and the durability of the ongoing expansion. That market reaction stood in contrast to the message from the January employment report. Payrolls growth came in well ahead of expectations, accompanied by a further dip in the unemployment rate. While revisions did reveal that job growth over much of 2025 was weaker than previously thought, the January rebound suggests that labor demand remains intact (Chart 1).

The rest of the data flow painted a more mixed picture of the economy. Headline CPI inflation came in softer than expected this morning, but core CPI picked up the most since August. Services inflation heated up while core goods inflation (excluding used vehicles) rose at its fastest monthly pace in nearly a year. The inflation report comes at a pivotal moment, as reports that the Trump administration may scale back its steel and aluminum tariffs suggest the administration is conscious of inflation risks.

Retail sales ended 2025 on a soft note. December sales were flat after a solid November, and downward revisions tempered the momentum implied by earlier releases. Housing data were also notably weak. Existing home sales posted their largest monthly decline in nearly four years in January, reflecting a combination of affordability constraints and bad weather (Chart 2).

Markets, meanwhile, struggled to reconcile the week’s macro data with a less accommodating policy backdrop. The equity sell off reflected concerns about growth-sensitive sectors and fear that advancements in AI may dislodge large incumbents across a wide swath of the economy, and a reassessment of the path for interest rates following a string of Fed communications. Market pricing for the Federal Reserve to reduce rates in its June meeting have fallen from 60% to around 50% over the course of this week. Speeches this week from Federal Reserve officials revealed a balance of opinion. More hawkish voices stressed that inflation remains above target and warned against premature easing, while others acknowledged that, even with a strong jobs report, there is still an argument for rate cuts later this year if disinflation continues. On balance, we read the prevailing sentiment from Fed officials as one of patience rather than urgency, but still hold on to our call for a rate cut in June. This morning’s softer CPI release may help move the Fed’s perceived balance of risks slightly towards easing, particularly if the disinflationary pressure were to persist over the coming months.

Looking ahead, our eyes will be on next week’s release of the FOMC meeting minutes, which should provide additional insight into how policymakers have been weighing inflation risks against signs of labor market stabilization. And next Friday’s PCE inflation and consumer spending data will be helpful in assessing the durability of consumer spending and the extent of momentum in recent inflation data.