Key Focus This Week: 

“U.S. inflation and consumer data are once again driving interest rate expectations, while Canada’s real economy figures, tech earnings reports, and energy risks jointly influence the market.”

After the notable divergence in U.S. and Canadian employment data last week, this week’s focus in North American financial markets will shift back to inflation and consumer activity. The U.S. will release reports on consumer prices, producer prices, and retail sales—data that will help assess whether recent changes in energy costs, imports, and corporate expenses are spilling over into broader goods and services pricing, while also testing whether consumer spending can continue to support economic growth.

Meanwhile, a marked slowdown in U.S. job growth last week has dampened market expectations for further tightening by the Federal Reserve in the near term. However, the unemployment rate did not deteriorate in tandem, leaving mixed signals from the labor market. As a result, this week’s inflation data carries heightened importance: if price pressures remain sticky, the Fed may still have grounds to maintain a cautious or even tighter policy stance; if inflation continues to cool, it could ease market concerns about further rate hikes.

Middle East tensions remain a key source of uncertainty for markets this week. Iran and Oman have made some progress on shipping arrangements in the Strait of Hormuz, but full resumption of normal passage remains conditional and uncertain. Meanwhile, shipping routes in the Red Sea and surrounding areas continue to face security risks.

As such, oil prices may continue to fluctuate between hopes for diplomatic easing and lingering supply disruption risks. If shipping gradually resumes, falling energy prices could alleviate global inflation and bond yield pressures. Conversely, if negotiations stall again or military conflict escalates, oil prices could once more become a major driver of inflation expectations.

For Canada, rising energy prices typically support energy stocks and certain resource companies, but also increase inflationary pressure. A drop in oil prices could have the opposite effect. Therefore, the energy market is likely to remain a significant influence on both the Canadian stock market and the Canadian dollar this week.

Week’s Key Economic Data & News Recap

The US job market has clearly cooled, but the unemployment rate is sending conflicting signals.

Last week’s US jobs report showed that job growth was significantly weaker than previously expected, and earlier employment data was also revised downwards, indicating that overall hiring demand from businesses is cooling. Employment performance in some consumer and service sectors was particularly weak.

However, the US unemployment rate did not rise in tandem; instead, it declined, mainly due to changes in labor supply and labor participation. Therefore, last week’s jobs report cannot be simply interpreted as the US economy having entered a clear recession, but rather as the labor market entering a slow phase of “low hiring, low layoffs.”

Following the release of the jobs data, the market lowered its expectations for further tightening of monetary policy by the Federal Reserve in the near future, putting some pressure on US Treasury yields and the dollar, while supporting stock market sentiment.

Improved US productivity helps alleviate some labor cost pressures.

Last week’s US labor productivity report showed that the pace of improvement in business productivity has accelerated, while unit labor cost pressures have remained relatively moderate.

Improved productivity is particularly important for the current market. If businesses can improve output efficiency through artificial intelligence, automation, software, and other capital investments, even if wages continue to rise, it may not necessarily create the same level of inflationary pressure.

This trend also provides a longer-term economic logic for AI investment: the value of AI capital expenditure lies not only in the revenue growth of tech companies, but also in its potential to impact the US economy’s potential growth and inflation levels by boosting productivity across a wider range of industries. However, more data over a longer period is needed to determine whether this trend can be sustained.

Significant divisions remain within the Federal Reserve regarding further policy tightening.

Despite signs of a cooling job market, some Fed officials last week believed that inflation risks were not yet fully controlled and advocated for a tighter monetary policy.

Meanwhile, following the release of the jobs report, financial markets significantly reduced their expectations for near-term interest rate hikes. This indicates a continued divergence between the market and some Fed policymakers: the market is more focused on the economic and employment slowdown, while some policymakers are more concerned about inflation remaining above target for an extended period.

This divergence is why this week’s inflation report is so important. If price pressures remain significant, voices within the Fed supporting tighter policy may persist; if inflation cools in tandem, the importance of a weakening job market will increase significantly.

Corporate earnings remained generally strong, but AI-related stocks experienced significantly increased volatility.

Last week, US corporate earnings generally continued to support the stock market, with artificial intelligence, cloud computing, and semiconductors remaining among the main growth themes. Strong earnings performance helped major US stock indices approach or reach new highs.

However, the divergence within AI-related stocks has widened significantly. Investors are increasingly focusing on whether companies can translate their increasing AI capital expenditures into actual profits and cash flow, rather than simply assigning higher valuations based on revenue growth or AI-related orders.

Therefore, last week the market continued a new trend emerging in recent weeks: the AI ​​theme itself remains recognized, but the market is no longer indiscriminately chasing all AI-related companies; the importance of earnings quality, valuation, and return on capital has increased significantly.

US stocks remained high, driven by strong earnings reports and weak employment data

US stocks performed strongly overall last week, with the technology and semiconductor sectors continuing to provide significant support. Weaker employment data reduced market concerns about near-term interest rate hikes, while overall corporate earnings remained strong, both factors supporting risk assets.

However, the market is currently more sensitive to macroeconomic data. With stock indices at high levels and technology stock valuations high, the stock market could be more volatile if inflation strengthens again or bond yields rise significantly. Therefore, this week’s US inflation report will be one of the key events to test whether the recent stock market rally can be sustained.