Market Recap: U.S. and Canada

Full on split personality in the markets this week. First off, an AI-driven rally lifted US tech stocks on Monday and Tuesday, but then a global bond sell-off pushed Treasury yields to their highest since 2007 and dragged stocks lower through the middle of the week. Canada took the harder hit, with the TSX posting its biggest one-day drop in more than three months on Wednesday. We did see a fairly strong rebound to end the week, as all indexes came off their weekly lows.

As for the numbers, the Nasdaq 100 led the way with a gain of 3.25%, followed by the S&P 500 at 1.21% and the Dow Jones at 0.28%. The TSX was the lone decliner, slipping 0.45% on the week.

Major Economic Stories | At a Glance

Factory Orders Hold Steady as Business Investment Picks Up

US durable goods orders were flat in August at $338.6 billion, coming in above expectations for a 0.3% decline after July's gain was revised down to 0.9%. The stronger signal sat under the headline, where core capital goods orders, a proxy for business equipment spending, rose 1.6%, more than triple the 0.5% forecast.

• Ex-transportation: up 0.3%, the 16th straight monthly gain, short of the 0.6% forecast

• Transportation equipment: down 0.6%, the third decline in four months, led by a 4.3% drop in nondefense aircraft

• Year over year: headline orders up 8.5%, slowing from 11.8% in July

• Unfilled orders: up 0.6% to $1.61 trillion, higher in 25 of the last 26 months

Consumer Sentiment Sits Near Record Lows

The week’s big news, to me at least, is the University of Michigan's consumer sentiment index coming in at 48.1 in September's final reading, down from 51.7 in August and slightly above both the preliminary 47.8 and the 47.6 consensus. The damage was concentrated in the outlook, with the expectations index sliding about 10% to 46.3 as fuel prices and renewed trade disputes weighed on views of business conditions.

• Current conditions: 50.9, down from 51.9 in August and 60.4 a year ago

• Year-ahead inflation expectations: 4.6%, up from 4.0% and the highest since June

• Long-run inflation expectations: 3.4%, ending a three-month run at 3.3%

• Partisan split: Republican sentiment down 20% since January, Democrats down 13%

TOP INSIGHTS

Businesses Are Still Spending While Households Lose Confidence

If you put this week's two releases side by side, they tell opposite stories. Confusing, right?  Households are about as gloomy as they've been in the survey's history, and yet companies kept ordering equipment at a steady clip, with machinery orders up 1.1% in August on top of a 1.5% gain in July. Core capital goods shipments, the figure that feeds directly into GDP, rose 0.6% for the 11th gain in 12 months.

To me, that gap probably seems odd, and it matters because business investment is carrying more of the load at the same time consumer mood sags, and equipment spending is planned over years rather than months. It also gives the Fed room to stay tight, since the economy doesn't look like it's buckling under higher rates.

Only time will tell how long this split lasts. Sentiment surveys have been a poor guide to actual spending for a few years now, and the orders data points to a solid contribution from business equipment to third-quarter GDP. Here's what I'm watching: if core orders stay firm into the fall, the risk of a recession just because people are feeling bad loses a lot of its force.

Rising Inflation Expectations Put the Fed in a Tight Spot

For me, the most important line in Friday's Michigan release was the inflation outlook. Year-ahead expectations are now above anything recorded in 2024, and the long-run gauge has moved out of the 2.8% to 3.2% range it held that year. What does it mean when long-run expectations drift?  It tells us that the consumer is starting to treat higher inflation as the new normal.

In that environment households that expect prices to keep climbing push harder for raises, and in some cases, bring planned purchases forward. Also, businesses feel more comfortable passing costs along. That's the loop the Fed was trying to head off when it raised rates earlier this month.

This all makes another hike before year-end more likely than markets would like. The Fed can look past a fuel shock for a while, but it will have a much harder time ignoring expectations that keep creeping higher. Watch whether October's preliminary reading shows any relief.

Consumers are Bracing For What’s Ahead

Most of this month's drop came from the forward-looking side of the survey. Views of current conditions barely moved, but assessments of both current and year-ahead personal finances weakened by about 10%. The overall index now sits 15% below where it started 2026.

A key here is that forward-looking worry tends to change behaviour before the pain actually lands. Households worried about fuel and renewed trade disputes are more likely to delay a vehicle purchase or a renovation, even with paycheques that are holding up. That's a risk for retailers and automakers heading into the holiday quarter.

We need to keep an eye on the gap between how people feel about today and how they feel about next year. My suspicion is that it widens a bit further before it improves, and I'd expect that caution to start showing up in discretionary spending by the end of the year.

The Week Ahead

It’s a big week ahead for economic releases.

JOLTS job openings for August land Tuesday, with forecasts calling for about 7.23 million, little changed from July, which would keep the picture of a cooling but intact labour market in place.

Personal income and spending for August arrive Wednesday, with spending expected to rise 0.8% and income 0.4%, a real-world test of whether gloomy sentiment is showing up at the till, and the release also kicks off the BEA's annual data revisions.

Core PCE, the Fed's preferred inflation gauge, comes out alongside it Wednesday and is forecast to rise 0.3% for the month and edge up to 3.4% year over year, which would move it the wrong way for a central bank that just started hiking again.

September's jobs report closes the week on Friday, with economists expecting around 100,000 new jobs after August's 162,000 and the unemployment rate holding near 4.1%, and it's the last payroll print the Fed will see before its late-October meeting.

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TOP STORY
US Consumer Sentiment Nears Its Worst Ever

• Four lowest readings on record all came within six months

• Sentiment is down nearly 13% from a year ago

• Republican sentiment has fallen 20% since January 2026

• Year-ahead inflation expectations rose to 4.6% from 4%

As I covered in the economic update above, Michigan's sentiment gauge landed near the bottom of its 74-year history this month. That puts today's mood below the 1970s oil crisis, 9/11, the Great Recession and the pandemic, and that says a ton about how worn down households feel after five and a half years of above-normal inflation. Gas and diesel prices tied to the Iran war are the obvious trigger, and people see them every time they fill up.

Inflation has picked up over the past year because of tariffs and now the conflict in Iran, and with no end in sight, people are frustrated and concerned. Record nominal diesel prices also raise the risk of more price hikes down the road.

Expectations Are the Fed's Real Problem

Long-run inflation expectations moved up to 3.4%, above the 2.8% to 3.2% range from 2024, and that's a number the Fed tracks closely after hiking this month for the first time in three years. If people believe prices will keep rising, they spend sooner and push for higher wages, which is how an energy shock turns into a stickier inflation problem.

Full story here.

Sentiment surveys capture how Americans feel about the economy as a whole. I'd like to bring it closer to home, since higher gas prices, sticky inflation and rising rates have hit some households much harder than others this year. I'm curious to learn where our community stands. Please vote on this week's question:

LAST WEEK’S POLL RESULTS

In last week's poll, I asked which trade priority Canada should focus on first. A clear majority, 70.9%, chose expanding trade with the EU and other partners, while 29.1% would rather repair the Canada-US relationship first. I expected a bit of a closer vote on this one, but obviously most readers see diversification as the better long-term bet. Thanks to everyone who voted.

READER COMMENTS

NOTE: We had more feedback than normal this week, which I love, but I debated whether I should trim back on the number of comments I’ve included below. I hope I struck a reasonable balance.

Diversify Beyond the US

“Before I start, let me say I'm answering this as an American citizen living in the U.S., so I fully understand my voice means little here… Carney should go big with the EU, IMHO. Why? Quite frankly, Trump and his administration cannot be trusted, and any pacts made with the U.S. aren't worth the paper they're printed on, IMO.” — callawayguy

“The more diversified our trade is outside of the US, the less reliant we are on them, and the better our bargaining position becomes with the US.” — mrrobpog

“As long as Trump is the US president, there is no way to repair the trade relationship with the US. Forget about it.” — tochitocchi

“Our trade relationship is at its limit with Trump in power. We can repair it when he is gone and they have a new leader.” — 103woodview

“Always best to expand trade no matter who your neighbour is. Should have been doing this all along.” — ndpady

“Expanding trade will have greater long-term benefits and grow the economy faster.” — mcleodm64b

“To the 28.6% who said 'repair the Canada-US trade relationship': BAP to the side of the head. Why, even if we could, would we WANT TO RESTORE ANY RELATIONSHIP WITH AN UNSTABLE, POWER-HUNGRY IDIOT LIKE TRUMP? This is not against the American people, but the AMERICAN LEADER WHO HAS THE CONTROLS AND BLOODY WELL SHOULD NOT.” — lancasterjake

“Think about the EU as an additional partner while waiting for the USA to straighten out its long-term intentions.” — bill.geneau

“I don't believe it's worth the effort right now. It is hard to repair a relationship with a partner who is basically a narcissistic wannabe dictator/cult leader who lies, cheats and steals.” — suebeeseed

“How much abuse do Canadians and Canada have to take from an uneducated country and its leader? No more. We have much more class than the Trumpets. We must increase our trade with Europe and Asia and leave the US behind us. Anyone that does not believe in Canada's ability to build a strong, independent economy needs to move on and leave us to build, not sit around whining about how tough it could be. It's much tougher trying to work with the little Trumpets to the south. O Canada, I will stand on guard for thee.” — entender1012

“There's no point in going backwards and acquiescing to the whims of the USA! We need to keep broadening and growing with other like-minded nations. Nations who themselves are sovereign countries and who will work alongside Canada and not try to destroy our nation!” — gardens_1

Repair US Trade Ties

“The US is our biggest trading partner, and it will be difficult to replace that amount of trade, especially with the EU. The real trading battle is between the US and the British Empire free trade pact, and transshipping. Canada is the pawn in this globalist battle of control against the US. Repeal Bill C-69 and become a trading superpower with our resources.” — postma.bill62

“The US is our largest trading partner and closest neighbour. Fixing that relationship and negotiating a renewed CUSMA should come before spending billions chasing new partners elsewhere. I'd also prioritize fixing internal interprovincial trade barriers before external expansion. Whatever one thinks of Trump's tactics, the tariff pressure forced Canada to confront problems (interprovincial trade, over-reliance on the US) that we should have addressed long ago. We're still behind, but at least the urgency is finally there.” — angellodarko

“The US is and will always be our largest trading partner. We do over 400 billion in trade with them vs. something like 37 with the EU. We've had a free trade agreement with the EU for 10 years now, and that's only added about 8.5 billion to the trade with them, and we buy more from them than they do from us. Also, 10 EU countries have still not ratified the deal, mostly over things like our dairy supply management. I think expanding trade with the EU or other market economies is great and we should always pursue that, but I am wary of ties that bind us to Europe's or other countries' regulatory requirements. As Mario Draghi said recently, 'America innovates, China replicates and the EU regulates.' Canada moves too slowly already on large projects, and the EU would slow us down even further if we get too tight with them.” — ddelano1

“EU GDP is not growing as well as US GDP. We will not replace a significant portion of US trade. There is an ocean between Canada and the EU. We supposedly have a free trade agreement with the EU; how has it changed our sales to the EU compared to sales to the US?” — keenrg

“We need to keep North America strong together.” — sdh1981

ARTIFICIAL INTELLIGENCE

Fake Food Photos Are Turning Diners Off

• Diners online are mocking rubbery, surreal AI-generated menu images

• 41% of surveyed restaurants report losses or break-even results

• Fancy Induced Burger gets AI-enhanced images out in minutes

• Experts see low false advertising risk if images stay accurate

I’ll just start by saying ‘Yuck’. Small restaurants have begun leaning heavily on tools like ChatGPT to jazz up menu photos instead of paying photographers, and a lot of customers are noticing. For Toronto diner Cynthia Lem, the look signals inauthenticity and makes her wonder what will actually land on her plate. The business case is easy to understand in an industry where rising fuel costs are squeezing already thin margins, but it doesn’t mean consumers have to like it.

Bad Images Cost More Than Photographers

David Pullara, a marketing professor at Schulich School of Business, says great food photography sells, and a terrible AI image can end up hurting both sales and the brand. The problem, in his view, is skipping the common-sense filter, since tweaking a real, high-resolution photo can produce something worthy of a menu.

The Backlash Could Be a Gift for Stylists

Rotman School of Management marketing professor David Soberman says the line is crossed when the image misrepresents the product, like a steak that looks an inch thick and arrives at half that size. Not sure about you, but for years, even long before AI, I’ve been annoyed by incredible looking menu photos that end up disappointing when the actual food arrives.

Full story here.

FIXED INCOME
Bond Yields Hit Levels Not Seen Since 2007

• US 10-year Treasury yield topped 5.20% on Thursday

• Brent crude slipped 1.7% on hopes Hormuz reopens

• Oil remains well above late February's $72 level

• Trump-Xi meeting produced limited concrete progress, analysts say

Thankfully global stocks mostly steadied on Friday, but they were shaken after another round of bond selling pushed borrowing costs to levels last seen before the Great Financial Crisis. This is an event that I suggest we shouldn’t ignore. Investors are demanding more and more compensation to hold government debt, largely because the war in Iran has caused an energy shock, and that’s feeding inflation worries.

Yields Are the Market's New Ceiling

ING analysts wrote this week that they’re expecting elevated energy prices and inflation pressure to keep pushing the 10-year higher, which lines up with the rising inflation expectations I flagged in the economic update above. The yield eased to around 5.17% early Friday, but one calm morning doesn't change the trend.

Hormuz Holds the Key

As has been the case for so many months now, oil is still the swing factor, and Brent near $98.50 a barrel is a reflection of hope for a reopening of the Strait of Hormuz more than any concrete deal. Until that route is clear, we can expect bonds to stay on edge and stocks to keep trading off every move in yields.

Full story here.

PREDICTION MARKETS
Kalshi Loses Again as States Gain Ground

• 6th Circuit panel ruled unanimously for Ohio and Tennessee

• Court found Kalshi's sports contracts don't qualify as swaps

• Prediction markets have now lost two appeals court rulings

• New Jersey has already asked the Supreme Court to weigh in

Way back when, I covered the prediction markets in The Pulse and expressed my concerns.  Now, the fight over these markets comes down to one question: are sports event contracts financial derivatives or bets? Kalshi says they're swaps that fall under the CFTC's exclusive jurisdiction, but many states treat them as gambling subject to their own rules and taxes. A decision this week by the 6th U.S. Circuit Court of Appeals overturned a Tennessee ruling that had gone Kalshi's way and upheld an Ohio ruling that sided with the state.

The Patchwork Problem Is Real

Tennessee Attorney General Jonathan Skrmetti said Kalshi "attempted an end run around Tennessee law to avoid any of the rules or taxes associated with sports gambling." Kalshi's Dani Lever pushed back, saying that the ruling shows why a state-by-state patchwork doesn't work, since markets can't operate when the rules change at every state line.

The Supreme Court Now Looks Likely

The 3rd Circuit sided with Kalshi in April, while the 9th and now the 6th have gone the other way.  I’d say we can pretty much expect now that this suit will work its way up to the Supreme Court. Until it steps in, platforms will continue to face a sprawling mix of state lawsuits and cease-and-desist orders, with the CFTC's own suits against nine states dragging on in the background.

Full story here.