Today
Stocks and bonds lost their footing yesterday after Fed officials raised rates and signalled more tightening could be ahead before year-end. Those moves, however, are reversing this morning, with stock futures higher, led by the Nasdaq, and bond yields easing. The U.S. 10-year Treasury yield is back below 5%. Lower oil prices are helping, with Brent below $104 at the time of writing, down from $109 earlier this week. Across the pond, the Bank of England held its key rate at 3.75%, resisting pressure to respond immediately to rising inflation as policymakers assess whether the latest price surge is becoming entrenched. Traders are betting the BoE won’t stay on hold for long, pricing in a 25 bps hike at its November meeting. And while we’re across the pond, Canada is looking to deepen its ties with Europe. Mark Carney told the European Parliament this morning that Canada welcomes the EU’s proposal for a new form of associate membership, part of a broader push for closer cooperation on defence, energy, critical minerals, AI and financial services. Stay tuned.
No real surprise from the Fed yesterday, but a clear message nonetheless. Policymakers voted unanimously to raise rates 25 bps to 3.75%–4.00%, their first increase since 2023, after hotter August inflation pointed to signs that price pressures are broadening. Chair Kevin Warsh said too many categories are still running above 3% and that the Fed had removed “a dose of accommodation” to reinforce its commitment to price stability. Officials also signalled more tightening may be coming, with 16 of 18 projecting at least one additional hike this year and the median year-end rate forecast rising to 4.1% from 3.8%. Also unsurprising was Trump’s continued push for lower rates, calling for 1% or less, though he stopped short of criticizing Warsh directly and said he still has confidence in the Fed chair.
There’s something about round numbers that gets markets’ attention, and 5% on the benchmark U.S. 10-year Treasury is no exception. The yield briefly crossed that threshold this week after climbing more than a percentage point since early March, reviving concerns about what higher borrowing costs could mean for equities, housing and the economy. But is 5% really a tipping point, or just a number that makes investors uncomfortable? Bloomberg’s Jonathan Levin makes the case for the latter, noting that the last move above 5% in 2023 generated similar concerns, yet the economy continued to grow and corporate profits, household wealth and equities subsequently reached new highs. He also points out that today’s real 10-year yield of roughly 2.6% is close to its longer-term average and that much of consumer spending is relatively insensitive to long-term rates. Housing is the obvious exception, with mortgage rates above 7% adding to already stretched affordability and weak turnover. Levin’s broader point is that higher yields can also be a byproduct of stronger growth, and 5% may be more of a psychological threshold for markets than an economic tipping point.
The devil’s in the details. Canada could become the European Union’s first “associate member” under a proposal from European Commission President Ursula von der Leyen that would take the relationship beyond the existing CETA trade agreement. Exactly what associate membership means has yet to be defined, but the idea is closer economic and strategic integration without Canada becoming a full EU member. Possible areas include manufacturing, technology, critical minerals, energy, defence, financial services and even easier travel and education links. Canada has already become the only non-EU country participating in the bloc’s €150 billion SAFE defence procurement program. There are some big details to work through, including how much Canada would contribute financially, which EU rules it might have to follow and whether it would have a say in decisions. Canada’s deeply integrated relationship with the U.S. adds another complication, especially where European and U.S. standards differ. For now, this is a proposal rather than a done deal, but both sides are describing something more ambitious than another trade agreement.
New reports are putting numbers around the cost of the seven-month U.S. war with Iran, beyond the human toll of the conflict. According to the nonpartisan Congressional Budget Office (CBO), the direct cost to the U.S. is about $38 billion, including $21.7 billion to replace munitions, with each additional month of fighting estimated to cost another $2 billion to $3 billion. A separate Pentagon Inspector General report identified “strategic inventory shortfalls,” with missile interceptors and other weapons being used faster than the defence industry can replace them. Production is also constrained by bottlenecks in rocket motors, explosives, propellants and skilled labour. Meanwhile, U.S. aircraft, military bases and diplomatic facilities across the Middle East have also been damaged or destroyed. Beyond the direct military costs, the CBO estimates the conflict will add roughly 0.5 percentage points to U.S. inflation this year. Together, the reports provide a clear assessment of the financial, economic and military pressures created by the war.
Much of the recent debate around AI has focused on regulation and guardrails, including whether too many rules could slow innovation while other countries continue pushing ahead. But governments may have another way to influence the direction of AI. By owning a piece of it. The U.S. has already crossed that bridge in semiconductors, taking a 10% stake in Intel last year, albeit without board representation or governance rights. Trump has since floated extending the idea to AI companies, saying the government could take small stakes so the American public shares in the upside. China is further down this road. In DeepSeek’s recent funding round, China’s National Artificial Intelligence Industry Investment Fund invested directly in the company and received voting rights, a privilege not given to the other outside investors. Writing in the Financial Times, Winston Ma, an adjunct professor at NYU Law and former executive at China’s sovereign wealth fund, sees these developments as part of a shift toward governments becoming direct participants in strategically important AI companies rather than regulating them from the outside. It’s a different approach, but one that raises an interesting question. As AI becomes more strategically important, will the debate be less about how governments regulate it and more about whether they should own a piece of it.
Cinemas are back. Reports of the movie theatre’s demise have proved premature. The U.S. box office pulled in a record $4.76 billion this summer, narrowly topping the previous high from 2013 and putting the industry on track for its first $10 billion year since 2019. Spider-Man: Brand New Day and The Odyssey did much of the heavy lifting, helped by family, horror and smaller-budget films. But there’s a catch. The industry is still selling a quarter-billion fewer tickets than before the pandemic, with fewer screens and 14% fewer wide releases than in 2019. Streaming, shorter waits between theatre and home releases and better home setups (75” is the new 65″) have raised the bar for getting people off the couch. Higher prices are helping bridge the gap, with the average U.S. ticket rising from $9.16 in 2019 to $12.75 today and premium formats averaging over $18. For Canadian moviegoers, add the exchange rate, popcorn, candy and a drink or two, and it isn’t exactly a cheap night out. It also fits a consumer trend we’ve been watching… people are willing to spend on experiences worth leaving the house for, and theatres are responding with bigger screens, better seats and more premium offerings. So, what did you see this summer?
Diversion: Smarter than you think
