To date, the Canadian economy has held up surprisingly well. At the beginning of the year, Q1 GDP was flat, but Q2 GDP improved 0.8%, and is now tracking growth rate between 3-3.5%. A stellar performance given that Canada has been brutalized by Trump tariffs since the Presidential inauguration early last year.

Canada has reduced its reliance on US trade, which previously accounted for roughly 75% of Canadian exports. As Ottawa continues to work hard at negotiating trade deals with the rest of the world, the results have been impressive. According to the latest data available, Canada’s balance of trade has improved markedly. Canada recorded a trade surplus of $3.86 billion in June 2026, up from $3.7 billion in May, marking the largest surplus in over four years.

Exports rose by 0.4% from the previous month to a record high of $77.5 billion. Sales rose sharply for metal and non-metallic products (16.5% to $15.02 billion) amid a 27.9% surge in sales of gold, mostly to the UK. Sales of metal ores and non-metallic minerals rose by 17.3% to $3.14 billion with support from copper ores. This offset the 10% plunge in energy products (to $18.37 billion) as a momentary respite in the Middle East war lowered energy prices. Meanwhile, imports rose by 0.2% to a record of $73.6 billion, with drops in industrial machinery, equipment, and parts (-3.3% to $7.6 billion) and metal ores and non-metallic minerals (-3.4% to $2.81 billion). The depreciation of the Canadian dollar lifted trade turnover expressed in the loonie, contributing to the rise in both imports and exports.

We have now posted four consecutive months of a positive trade balance. While the US remains our number one trading partner, trade with the rest of the world has increased sharply. This has boosted economic activity and spurred the improvement in the labour markets. The latest employment report recorded a sharp rise in net new jobs and a decline in the unemployment rate to 6.4%, the lowest jobless rate in two years.

The unemployment rate fell to a record low of 5.2% for core-aged women, firmly below that for core-aged men (5.8%). Meanwhile, the youth unemployment rate fell to 12.6% from 12.7% in the previous month. The rise in net jobs and drop in unemployment corresponded to a 0.1 percentage point increase in the labour force participation rate to 65.1%, the highest so far this year.

Inflation, on the other hand, ticked up a bit to 3% in July of 2026 from 2.8% in the previous month, slightly above market expectations of 2.9%, but remaining below the post-Iran-war peak of 3.2% from two months prior. Gasoline price inflation accelerated to 25.7% from 20.5% in the previous month, tracking wholesale oil and refined product markets globally as strikes between Iran and the US reignited and triggered blockades on tankers in the key region. In turn, core inflation rates tracked by the Bank of Canada inched slightly higher, with the median core rate up at 2% and the trimmed-mean rate at 1.9%. Upward pressure was noted from travel tours (15.2% vs 6.8%) amid higher prices for flights and accommodation due to the FIFA World Cup taking place in North America. Still, prices eased for food (3.0% vs 3.5%) and shelter (1.3% vs 1.5%). From the previous month, consumer prices rose by 0.5%, rebounding from the 0.4% drop in the earlier period.

Here’s the rub: US long-term yields are rising sharply, not just because of inflation, but because of a crowding-out effect as corporate bond issuance by AI hyperscalers has surged.

The 30-year US Treasury bond yield has surged to 5.25%, while the 10-year yield has risen to 4.7%. Upward pressure on US bond yields reflects the unprecedented government debt levels. US national debt hit $40 trillion, and oil prices spiked once again. The US debt-to-GDP ratio is now at a record 120%. Rates rose after the Treasury Department announced it would increase its purchases of long-dated US government bonds in September.

The newly appointed Fed Chair, Kevin Warsh, commented that the bond market is doing the inflation-fighting for the Fed, implying that monetary tightening might not be necessary, at least in the short term.

Treasury Secretary Scott Bessent made a fresh attempt to rein in long-term borrowing costs from multi-year highs. The Treasury Department is increasing its buyback planes for securities dated from the 10-year to the 30-year sector. The new plan drove the US dollar to its weakest level in three months. It also pushed yields on the 30-year bond lower by as much as 10 basis points to 5.18%, moving it away from its highest level since 2007.

The relief in bond land was brief. Potential homebuyers and those refinancing their mortgages should note that the risk of mortgage rate hikes has risen. While Canadian interest rates will remain well below those in the US, and the Bank of Canada is unlikely to hike the overnight rate until next year, upside potential over the next few years has grown.