Executive summary:
- Global inflation continues to ease toward 2.5 percent, although regional divergence is widening. The United States faces persistent services inflation that is likely to keep core PCE (1) near three percent into 2026, while the euro zone is expected to undershoot target and China remains in deflation due to chronic over investment. Supply chain pressures are minimal, and energy prices are expected to provide a modest drag on developed market inflation.
- The Federal Reserve enters December with one of its most divided committees in years. Limited data availability has deepened the split between hawks and doves, but recent communication suggests there is just enough support for another 25 basis point cut. Sticky supercore (2) inflation near 3.3 percent and persistent concerns among regional presidents raise the likelihood of multiple dissents and increase the probability of a policy pause early in 2026.
- Canada’s economy is weaker than the headline GDP figures imply. Third quarter growth of 2.6 percent was driven entirely by an 8.6 percent annualised slump in imports, while domestic demand fell. Household consumption contracted for the first time since 2020, and business investment declined for a third straight quarter. October’s advance GDP estimate points to further underlying weakness.
- Labour market conditions remain mixed. The Labour Force Survey shows strong gains, but these appear overstated given population scaling that has not yet adjusted to slowing immigration. In contrast, the Survey of Employment, Payrolls and Hours show cumulative job losses through September, concentrated in tariff exposed sectors, highlighting the fragility of underlying labour demand.
- The Bank of Canada is widely expected to hold its policy rate at 2.25 percent in December. Weak domestic demand and moderating core price pressures, supported by the removal of counter tariffs, create the conditions for further easing in 2026 once inflation returns sustainably to target. Policymakers remain cautious for now but are likely to take the policy rate below neutral by mid 2026 if economic momentum does not improve.
Setting the Stage: A Shifting Macro Landscape Across Major Economies
Incoming data across major economies point to an environment where inflation is gradually normalising, but the underlying forces differ widely. For Canada, the combination of weakening domestic demand and fading core inflation pressures is creating a more challenging macro backdrop than headline growth suggests. In the United States, policymakers are navigating considerable uncertainty and internal disagreement, even as inflation remains above target. These dynamics will shape financial conditions as we move into 2026.
Global Inflation is Easing but Remains Uneven
Inflation is expected to hover near 2.4 to 2.5 percent globally through the year ahead, although the balance of risks varies significantly across regions. The United States continues to experience elevated services inflation, Japan faces persistent wage driven price pressures, the euro zone is likely to undershoot its two percent target, and China remains in deflation due to long standing excess capacity.
Across advanced economies, capacity utilisation remains low and reported shortages have fallen back toward pre pandemic norms. This reflects the broader easing of supply chain constraints. As highlighted in the Global Inflation Watch, energy prices are expected to provide a modest drag on inflation, reinforcing the disinflationary trend across developed markets.
United States: A fractured Federal Reserve Approaches a Contested Vote
The upcoming December FOMC meeting is shaping into one of the most divided decisions since 2016. The lack of timely official data has widened the gap between competing policy views, while mixed signals from the labour market and inflation datasets have added to the uncertainty.
Labour Market Ambiguity
The September payroll rebound is counterbalanced by softer private sector hiring and a rise in the unemployment rate to 4.4 percent. Inflation readings send mixed messages. Core PCE is holding near 2.9 percent and supercore services inflation remains around 3.3 percent, underscoring the stickiness in the most cyclical components of inflation.
Policy Outlook
While recent communication suggests a narrow majority supports another 25 basis point cut, concerns from several regional presidents raise the probability of multiple dissents. Forward guidance is likely to tilt more cautiously, emphasising the potential for a pause early in 2026. With inflation still above target and labour demand showing tentative signs of stabilisation, the Fed is unlikely to match the number of cuts currently embedded in market pricing.
Canada: Weak Domestic Demand and Moderating Inflation
Canada’s domestic economy continues to weaken even as headline GDP masks the underlying softness. The third quarter’s upside surprise was driven entirely by an unusually sharp decline in imports, with little contribution from domestic activity.
A Growth Profile Driven by Imports, Not Strength
Imports fell at an 8.6 percent annualised rate, contributing almost three percentage points to the quarter’s GDP figure. Domestic demand, however, contracted. Household consumption declined for the first time since 2020 and business investment fell for a third consecutive quarter. October’s advance GDP estimate of a 0.3 percent decline reinforces this weaker momentum.
Labour Market Signals Remain Mixed
The Labour Force Survey continues to show strong headline gains, but these figures appear overstated due to population scaling issues that have not yet reflected slowing immigration. In contrast, the Survey of Employment, Payrolls and Hours show cumulative job losses through September. These declines are concentrated in manufacturing, wholesale and retail trade, and transportation and warehousing, which tend to be more sensitive to tariff related conditions and provide a clearer view of underlying labour demand.
Bank of Canada: Easing Pause but Not the End of the Cycle
The Bank of Canada is expected to hold its policy rate at 2.25 percent at the December meeting. While policymakers emphasise that tariffs represent a supply side constraint that limits the impact of monetary stimulus, inflation dynamics are shifting. The Bank’s preferred core measures rose only 0.18 percent in October, the closest they have been to a target consistent pace in over a year. The latest business surveys show a continued decline in planned price increases, suggesting that inflation pressures will continue to ease.
If these trends continue and domestic demand fails to strengthen, the Bank will likely need to bring the policy rate below neutral by mid 2026.
A Period of Policy Divergence Lies Ahead
Monetary policy paths across North America are beginning to diverge. The Federal Reserve continues to contend with persistent services inflation, stickier wage dynamics, and a committee that remains divided on the pace and timing of future easing. By contrast, the Bank of Canada faces softening domestic demand and moderating inflation pressures that point toward earlier policy flexibility in 2026. This divergence carries implications for interest rate differentials, the Canadian dollar, and the relative performance of Canadian and U.S. fixed income markets.
As we move into 2026, the challenge for investors will be distinguishing cyclical volatility from deeper structural forces shaping returns. The United States continues to benefit from stronger underlying demand and a labour market that, although moderating, remains comparatively resilient. Canada faces a more fragile backdrop marked by weaker consumption, slower investment, and ongoing uncertainty around trade policy and tariff exposures.
Portfolio Implications in a Diverging Policy Environment
These evolving dynamics suggest several considerations for investors assessing multi asset portfolios:
Interest Rate Sensitivity May Matter More as Policy Paths Diverge
With the Bank of Canada likely to ease sooner and more decisively than the Federal Reserve, relative duration exposure between Canadian and U.S. fixed income markets may influence return dispersion. Investors may observe that Canadian yields could adjust more quickly to softer domestic conditions, while U.S. yields may remain anchored by a slower disinflation trend.
Currency Dynamics May Become a More Prominent Source of Volatility
A more accommodative Bank of Canada, paired with a cautious Federal Reserve, may place downward pressure on the Canadian dollar. For globally diversified portfolios, this environment may increase the contribution of foreign currency exposure to overall risk and return. Maintaining mandates with currency-aware strategies or built-in hedging flexibility could help manage these fluctuations.
Regional Equity Performance May Increasingly Reflect Macro Dispersion
A U.S. economy supported by stronger domestic demand and AI driven investment may continue to show relative earnings resilience compared with Canada’s more subdued environment. Investors may therefore focus on mandates that emphasise quality and earnings delivery in the United States, while in Canada they may seek managers who emphasise balance sheet strength, sustainable payout capacity, and exposure to sectors less sensitive to domestic consumption.
The Importance of Diversification is Rising, not Diminishing
A diverging policy backdrop increases the value of broad diversification across regions, styles, and asset classes. Exposure to alternative strategies that offer low correlation to traditional equities and bonds, such as systematic macro, managed futures, or multi strategy alternatives, may help reduce portfolio-level volatility during policy transitions.
Structural Forces Should Remain Central when Evaluating Long term Positioning
Policy divergence may dominate short term market narratives, but longer-term trends such as an ageing labour force, fiscal constraints, and investment in productivity enhancing technologies are likely to shape relative performance across asset classes. Maintaining exposure to mandates that systematically capture these structural growth drivers may help portfolios navigate beyond the immediate policy cycle.
Positioning for a More Complex Macro Landscape
In this environment, investors may benefit from maintaining portfolio balance while ensuring that each mandate contributes a distinct and complementary source of risk and return. As policy paths diverge further in 2026, differences in inflation trajectories, rate expectations, and growth momentum are likely to shape cross asset opportunities. Focusing on mandates that demonstrate discipline in risk management, diversification across factors and geographies, and the ability to adapt to shifting macro conditions may help support portfolio resilience.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
- Core PCE, or core Personal Consumption Expenditures inflation, is the United States Federal Reserve’s preferred measure of underlying inflation. It tracks the prices of a wide basket of goods and services consumed by households but excludes food and energy, which tend to be more volatile. Core PCE is considered a more stable gauge of inflation trends because it reflects changes in consumer behaviour, adjusts for shifts in spending patterns, and captures the broad underlying momentum in prices. It is used by the Federal Reserve to assess whether inflation is moving sustainably toward its two percent target.
- Supercore inflation refers to a narrow measure of services inflation that excludes both food, energy, and shelter costs. It captures the most cyclical and labour sensitive components of the inflation basket, such as medical services, transportation services, and personal care. Because these categories are heavily influenced by wage growth and domestic demand conditions, supercore inflation is often viewed as a signal of underlying inflation persistence and is closely monitored by central banks when assessing whether price pressures are easing.
Disclaimer:
The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
The views expressed in this commentary are those of Canada Life Investment Management Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial security advisor for advice based on their specific circumstances.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of December 4, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
