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Global equity markets moved slightly higher over the week ended May 29 on hopes a U.S.-Iran peace deal would eventually be reached with both sides continuing to talk. Still, the U.S. and Iran are far apart on some issues, making investors jittery. In Canada, the S&P/TSX Composite Index edged higher, led by the information technology sector. U.S. equities moved higher over the week. Yields on 10-year government bonds in Canada and the U.S. declined. The price of oil finished lower, while the price of gold was largely unchanged.
Canada’s economy falls into a technical recession
Statistics Canada reported that Canada’s gross domestic product shrank at an annualized pace of 0.1% over the first quarter of 2026, disappointing economists who were expecting the Canadian economy to grow.
The contraction in the fourth quarter of 2025 was revised lower to 1.0%, annualized. The two quarterly declines pushed Canada’s economy into a technical recession.
Hindering first-quarter 2026 growth was a decline in exports, while imports moved higher over the quarter. Business capital investment declined over the quarter, its fifth consecutive quarterly drop. Government spending also fell over the quarter.
Conversely, household consumption increased over the quarter, showing the relative strength of Canadian consumers. However, more recent data is showing that spending has begun to pull back in response to higher energy prices.
The technical recession could weigh on the upcoming interest rate decision of the Bank of Canada (BoC). The BoC will need to weigh slowing economic activity and job market against surging inflationary pressures. The BoC makes its next interest rate announcement on June 10.
U.S. inflationary pressures continue to accelerate
The Personal Consumption Expenditures Price Index (PCE), which is the U.S. Federal Reserve Board’s (Fed) preferred measure of inflation, rose by 3.8% year-over-year in April, its highest level since May 2023.
Stripping out food and energy, which tend to be more volatile, the annual core PCE rose 3.3% over the past year, suggesting price pressures are becoming more broad-based.
Consumer spending, adjusted for inflation, increased by just 0.1% in April. Rising inflationary pressures are squeezing U.S. consumers, which is pulling back discretionary spending.
Meanwhile, a second estimate showed the U.S. economy expanded at an annualized pace of 1.6% over the first quarter of 2026, which was revised down from the 2.0% growth in the initial estimate.
The combination of elevated inflationary pressures and slowing consumer spending puts the Fed in a difficult position. With first-quarter 2026 growth revised lower, the U.S. economy appears to be losing momentum, making it harder for the Fed to raise interest rates to fight inflation without risking a sharper economic slowdown.
Strong AI sector boosts China’s industrial profits
Chinese industrial companies saw profits grow by 24.7%, on year-over-year basis, in April, marking the fastest pace of growth since late 2023. Over the period of January to April 2026, industrial profits increased by 18.2% over the same period one year ago.
The strong results were driven largely by newer areas of the economy, including equipment manufacturing and high-tech industries, supported by government stimulus measures.
Much of the profit growth was concentrated in sectors tied to the global artificial intelligence boom, which raises questions about how broadly the recovery is being felt across the economy.
Conversely, soft domestic demand and ongoing troubles in the property market continue to weigh on broader economic growth, suggesting there are some troubled areas of China’s economy that are weighing on growth.
China’s industrial sector is showing some signs of strength, particularly in the technology space. Still, China’s economy continues to face several challenges, including soft domestic demand, a weak property market and the threat of higher prices, which could eat into industrial profits.
European consumer confidence stays tepid
The European Commission released its monthly consumer confidence report, which showed consumer sentiment improved slightly in May.
Despite the rebound, confidence remains deeply negative, with the confidence gauge sitting at -19.0, well below historical averages and below levels seen before the Middle East conflict began.
European households remain relatively nervous. Europeans are cautious about their finances, hesitant to make big purchases and uncertain about where the economy is headed over the next year.
The broader Economic Sentiment Indicator, which tracks businesses alongside consumers, rose to 93.5 in May after a sharp fall from 96.3 to 93.2 in April, which is also below historical averages.
Lower confidence could weigh on overall economic activity. Weak consumer confidence often translates into softer spending, which can slow economic growth. With sentiment still low and business confidence also slipping, Europe’s economic recovery remains fragile.
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