Today
Oil prices are back on the move after the U.S. and Iran failed to reach an agreement, with the U.S. rejecting Iran’s latest truce proposal. The most actively traded Brent contract is up over 3% and back above $100 a barrel. However, if you’re following commodity prices more closely this morning, including on Bloomberg, you’ll see Brent quoted around $107. Both prices are right. The $107 price reflects the November contract, which expires this week, while the more actively traded December contract is just over $100. Trading typically shifts into the next contract as expiry approaches, but what stands out is the more than $7 gap between the two. That’s backwardation, when near-term oil trades at a premium to later delivery. Backwardation itself isn’t unusual for oil, but the degree of it is, with the unusually wide spread pointing to tightness in near-term supplies. That tightness is also feeding into inflation concerns and pushing government borrowing costs higher, with the U.S. 10-year Treasury yield back above 5.2% after ending last week at its highest level since 2007. U.S. and Canadian equity futures are pointing lower this morning, while markets elsewhere are mixed, with gains in Europe and losses across much of Asia to start the week.
Iran isn’t budging when it comes to their proposal to reopen the Strait of Hormuz, even after Trump rejected the latest offer. Iranian officials want to negotiate but continue to demand concessions including relief from the U.S. blockade and sanctions, arguing that Iran has little reason to return to diplomacy without changes from the U.S. Over the weekend, Trump said Iran overplayed its hand, while Treasury Secretary Scott Bessent said that U.S. economic pressure is working as China reduces its purchases and assistance to Iran, incentivizing Iran to reach an agreement. Previous discussions suggested that there would be a phased arrangement, where Iran would reopen the strait while the U.S. lifted its blockade of Iranian ports, like the short-lived agreement reached in June. Tensions rose over the weekend when Iran-backed Houthi militants launched drones and a ballistic missile toward Saudi Arabia, which were reportedly intercepted. With no deal yet and the gap between U.S. and Iranian demands widening, the timing of reopening Hormuz remains uncertain.
Canadian economists are raising their inflation forecasts as higher energy prices from the Middle East war threaten to keep price pressures elevated for longer. A recent Bloomberg survey expects CPI inflation to average 3% over the next six months, up 0.6% from last month’s forecast, with inflation not returning to the BoC’s 2% target until Q3 of 2027. Tiff Macklem has warned that high gasoline prices could not only lift headline inflation but also spread into broader price pressures. Despite the stronger inflation outlook, economists expect the BoC to hold its policy rate at 2.25% until June 2027, while markets seem more hawkish and expect a hike as early as October. At the same time, the growth outlook is weakening, with economists cutting annualized GDP forecasts to 1.5% for both Q4 and Q1 2027 while estimating a 30% probability of recession. The combination of above-target inflation and softer growth leaves the BoC facing a difficult policy trade-off, with the next CPI report that much more important in determining whether policymakers need to tighten sooner than economists currently expect.
Balancing act. The U.S. economy remains strong despite tariffs, the Iran war, and high interest rates, but that strength is becoming more crucial to keeping the country’s growing debt burden manageable. Nominal GDP growth remains above 6%, exceeding the current 10-year Treasury yield of 5.2%, meaning the economy is still expanding faster than a key measure of federal borrowing costs, even as real growth runs closer to 2%. A major engine is the AI investment boom, with capital spending by six large tech companies projected to reach $870 bln this year and over $1.3 tln in 2027, which is benefitting industrial and non-tech businesses as well. Large federal deficits are providing another source of economic stimulus, but at the same time are adding to the $40 tln national debt and increasing Treasury financing requirements. The main risk is that borrowing costs remain around 5% while nominal economic growth eventually slows toward 4%. That leaves the U.S. in a tricky balancing act. Strong nominal growth helps keep the debt burden manageable but can also sustain inflation and higher yields. Weaker growth could ease some inflation pressure, but risks leaving borrowing costs above nominal GDP growth, making the debt burden more difficult to manage.
A tale of two sectors. Consumer stocks in China have fallen towards a 10-year low, with weak domestic demand contrasting with the country’s booming AI and tech sectors. MSCI China’s consumer goods sub-indexes have dropped 18% over the past six months, while the tech index has risen to more than twice its 2016 level. The divergence reflects China’s economic imbalance, where Beijing’s technology and export-focused policies have helped support tech stocks but generated limited benefits for household consumption, with August retail sales rising just 0.4%. A prolonged property downturn, sluggish wage growth, and weak consumer confidence continues to weigh on spending, leading to earnings disappointments, including close to a 50% miss versus expectations for consumer staples companies. A recovery in consumer stocks will likely require stronger household incomes, stabilization in property, and even more policy support, meaning for the time being, China’s economic and equity-market growth could remain heavily tilted towards tech.
Step aside Olivia, it’s Charlotte’s turn to shine. Charlotte overtook Olivia as Canada’s most popular baby girl name last year, ending Olivia’s nine-year run at the top. A recent Stats Canada report found that Olivia slipped to second place, followed by Emma, while the rest of the girls’ top 10 remained mostly unchanged, with Nora replacing Ava in the final spot. Among boys, Noah remained the most popular name for a fifth consecutive year, followed by Theodore and Liam, after Liam had previously held the top position from 2012 until 2020. Looking at the top 10 names for both boys and girls, experts point to a continued preference for traditional British names, with both royal and pop-culture influences helping keep them in the spotlight. Charlotte’s rise has been linked to Princess Charlotte, while Noah has benefited over the years from cultural figures and characters including Noah Wyle, The Notebook’s Noah and more recently singer Noah Kahan.
Diversion: I bet teachers didn’t like him
