Dilemmas!

North American equity markets continued their upward march during the month of May underpinned by continuation of news flow on ongoing peace talks between United States and Iran. However, bond yields in the United States continued to advance expressing skepticism on any real progress, in our view. Higher bond yields imply prospects of higher inflation partially driven by expectations that the Strait of Hormuz will remain close for longer.  Bond yields declined in Canada as market participants pared the expectations of rate hikes after Canada fell into a technical recession (defined as two consecutive quarters of negative GDP growth). As of this writing, the expectations of fixed income market participants have advanced from no rate hike in the United States on May 1, 2026 to about one rate hike on June 12, 2026 (See Figure 1); and have dropped in Canada from two rate hikes on May 1, 2026 to about one rate hike on June 12, 2026. (See Figure 2).

Figure 1: United States - Interest Rate Probability (Fed Funds Futures)

Source: Bloomberg

Figure 2: Canada - Interest Rate Probability (Overnight Index Swaps)

Source: Bloomberg

On June 10, 2026, the Bank of Canada held it policy rates at 2.25% in line with market expectations. Tiff Macklem, governor of the Bank of Canada, stated that uncertainty around trade with United States and war in the Middle East could mean that Bank of Canada might need to either cut or increase policy rates. Should the United States impose significant new trade restrictions - it might need to cut rates to support growth; or alternatively, if persistent higher energy prices bleed into generalized inflation - it might need to deliver consecutive rate hikes to contain inflation. Kevin Warsh, the newly sworn in chairman of the United States Federal Reserve, faces a similar dilemma south of the border albeit for different reasons. Stronger-than-expected labour market put together with creeping up inflation along with a spectre of more inflation looming large (given the threat of longer disruption in the middle east); has strengthened the argument for higher policy rates. However, the United States President has mentioned that increasing policy rates would be a mistake since it will increase the interest expense burden of the government and he prefers to allocate the budget to defence instead. While a rate hike signal could be disliked by markets; a rate cut signal could be worse as this will bring the questions of central bank’s independence to fore. We think investors will be keenly watching how the new federal reserve chair navigates through the dilemma presented by competing economic realities and political wishes.

The war in the middle east is another dilemma facing investors and the United States administration alike. With the Strait of Hormuz still closed, news of peace talks taking place have largely kept the lid on energy prices during the past one month. That said, as rest of the world burns through the crude oil reserves, the risk of acute shortage of crude oil hitting the world economy at some point is increasing, in our view. With seasonal pick up in gas demand during summers just around the corner, gas prices are likely to stay elevated in the foreseeable future, in our view. Higher gas prices just before the mid-term elections when voters are already unhappy about inflation does not bode well for the current administrations’ prospects, in our opinion. A quick resolution to middle east situation will improve sentiment and could alleviate the pressure, however, the United States, Israel and Iran seem far apart in their respective demands/objectives at present as also evident of fresh bout of bombing in the past few days.

We think the above mentioned multiple dilemmas will keep volatility elevated over the course of the summer months. Nevertheless, the strong earnings growth story that emerged during the first quarter earnings season remains a strong pillar of support for the markets and hence keeps us constructive in our outlook.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with CI Assante Wealth Management Ltd. The opinions

expressed are those of the author and not necessarily those of CI Assante Wealth

Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss

your circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc