September 2026 market update
Canada Life - Oct 07, 2026
From tariffs and trade disputes to rising interest rates and stubborn inflation, this month's update explains the key economic forces shaping markets and what they could mean for your clients' portfolios in the months ahead
Introduction
Global equity markets moved slightly lower in September as concerns about inflation amid ongoing tensions in the Middle East weighed on sentiment. Global government bond yields rose sharply on inflation and government deficit concerns. Several U.S. yields across the curve reached multi-year highs, with the 30-year U.S. Treasury bond yield reaching its highest level since 2002.
The U.S. Federal Reserve Board (Fed), European Central Bank (ECB) and Bank of Japan all raised interest rates in September, while the Bank of Canada and Bank of England held steady. Energy prices remained affected by slow traffic through the Strait of Hormuz. There have been reports of more oil moving through the waterway, but the U.S. and Iran have been unable to reach an agreement to fully reopen it.
In Canada, the S&P/TSX Composite Index declined, dragged down by the communication services sector. U.S. equities posted a small loss over the month. Yields on 10-year government bonds in Canada and the U.S. increased. The price of oil increased, while the price of gold finished lower.
Canada’s retaliatory tariffs go into effect
On September 8, Canada imposed retaliatory tariffs ranging from 15% to 50% on roughly $28 billion worth of U.S. goods, including steel, aluminum, dairy, appliances, golf clubs and video game consoles. The move was in response to 50% U.S. tariffs placed on about $28 billion of Canadian goods in late August, after trade negotiations broke down. In late September, the U.S. hit back with a ban on nearly US$1 billion (C$1.4 billion) worth of Canadian imports, effective September 29. The ban covers alcoholic beverages, dairy products and motorcycles, with alcohol making up most of its value.
While the ban is small relative to total annual trade between the two countries, the escalating dispute is affecting Canadian businesses and workers. Stelco’s owner Cleveland-Cliffs Inc. announced it will indefinitely idle finishing operations at its Hamilton Works facility, as U.S. tariffs hurt the steel industry. The closure could impact hundreds of jobs. The decision highlights the impact U.S. trade tensions are having on certain critical sectors of Canada’s economy. Higher trade barriers could weigh on exports, business investment and jobs. With Canada’s economy already under pressure, the dispute adds further uncertainty and may make economic growth more challenging in the months ahead.
To diversify trade, Carney visited the European Union (EU) during the month, where Canada was offered a position as an associate member of the EU. While the meaning of such a designation is unclear, it would likely involve a closer trade and security relationship. Any such move will be debated and voted on in the Canadian Parliament.
U.S. Federal Reserve Board lifts interest rates
At its September meeting, the Fed raised its federal funds interest rate by 25 basis points (bps) to a target range of 3.75%-4.00%, its first interest rate increase in more than three years. The decision was unanimous, with the Fed stating that inflation has been elevated for too long. The Fed believes the rate increase was warranted to help put inflation back on a path to its 2% target. Fed Chair Kevin Warsh said underlying inflation trends have not meaningfully improved.
The U.S. annual inflation rate held steady at 3.4% in August, as reported in September, while core inflation, which removes volatile food and energy prices, was 2.4% in August, also above the Fed's 2% target. The Fed now expects inflation to end 2026 at 3.7% and does not see it returning to its target until 2029.
The Fed also raised its economic growth forecast to 2.3% for 2026, a more upbeat view than previous projections. U.S. economic growth slowed slightly to an annualized pace of 2.2% in the second quarter of 2026 from a revised 2.5% in the first quarter. Most Fed officials expect at least one more rate increase before the end of the year. Higher U.S. interest rates could slow American spending, which may help ease price pressures but could also slow economic activity. Lower demand could also reduce spending on Canadian exports, adding more pressure to an already fragile trade relationship.
The European Central Bank lifts rates as inflation climbs higher
Rising inflationary pressures in Europe put the ECB on a path to raise interest rates in September. According to data released in September, Europe’s annual inflation rate rose to 3.2% in August from 2.9% in July, moving further above the ECB’s 2% target. Energy prices were the main culprit, jumping 14.3% from a year earlier as the conflict in the Middle East kept oil and gas prices elevated.
In response, the ECB raised its three policy interest rates by 25 bps at its September meeting. The main refinancing interest rate now sits at 2.65%. The ECB expects inflation to average 3.0% in 2026 before gradually easing to 2.1% by 2028.
Importantly, Europe’s economy has held up better than expected, giving the ECB room to raise interest rates. Europe’s gross domestic product grew by 0.6% in the second quarter, and the ECB raised its 2026 growth forecast to 0.9%. The labour market also remains solid, with the unemployment rate at 6.4% in July and employment edging higher. The ECB did not commit to further interest rate increases, saying it will make decisions meeting by meeting. The ECB's fight against higher prices highlights the global inflation challenge facing Europe and many other economies around the world.
China’s economy dominated by strong exports
Data released in September showed that China’s economy continued to be heavily reliant on foreign demand for growth, while domestic demand remained underwhelming. China’s exports surged 25.0% year-over-year in August, picking up from 23.9% in July. Strong global demand for high-tech goods and artificial intelligence equipment drove the gain, with semiconductor exports more than doubling and auto exports rising 43%. Exports to the U.S. jumped by 34.4%, while shipments to Southeast Asia climbed 30.2%. Factories also stayed busy, with industrial production rising by 5.2% year-over-year in August, faster than July and ahead of economists’ expectations.
However, the overall picture of China’s economy was far less encouraging. Retail sales, a key measure of consumer spending, grew by just 0.4% year-over-year in August, slowing from 0.6% in the previous month and falling short of forecasts. Chinese consumers remain cautious, as a lengthy downturn in the property market continues to weigh on household wealth and confidence. Business investment also remains weak, falling 7.2% over the first eight months of the year.
Put together, China’s economy is leaning heavily on its factories and overseas buyers to make up for soft spending at home. Without further policy support, it may be difficult for China to meet Beijing’s economic growth targets for 2026.
| Equity Markets | Level | Month to date | Month to date (C$) | Year to date | Year to date (C$) | 1 year | 1 year (C$) |
|---|---|---|---|---|---|---|---|
| S&P/TSX Composite Index C$ | 35,235.87 | -2.85% | -2.85% | 11.11% | 11.11% | 17.36% | 17.36% |
| MSCI USA Index US$ | 7,295.52 | -0.47% | 2.09% | 11.68% | 15.71% | 14.05% | 16.45% |
| MSCI EAFE Index US$ | 3,125.70 | -3.33% | -0.84% | 8.05% | 11.95% | 12.96% | 15.35% |
| MSCI Emerging Markets Index US$ | 1,704.87 | -0.84% | 1.71% | 21.40% | 25.78% | 26.66% | 29.33% |
| MSCI Europe Index US$ | 2,744.00 | -4.63% | -2.18% | 3.83% | 7.58% | 9.91% | 12.23% |
| MSCI AC Asia Pacific Index US$ | 276.46 | -0.62% | 1.93% | 21.43% | 25.81% | 25.32% | 27.97% |
| Fixed Income Markets | Level | Month to date | Month to date (C$) | Year to date | Year to date (C$) | 1 year | 1 year (C$) |
|---|---|---|---|---|---|---|---|
| FTSE Canada Universe Bond Index C$ | 1,190.38 | -1.22% | -1.22% | -0.78% | 0.78% | -1.10% | -1.10% |
| FTSE World Investment Grade Bond Index US$ | 223.51 | -2.67% | -0.17% | -3.13% | 0.37% | -2.71% | -0.65% |
| Currencies | Level | Month to date | Month to date (C$) | Year to date | Year to date (C$) | 1 year | 1 year (C$) |
|---|---|---|---|---|---|---|---|
| CAD/USD | 0.7027 | -2.66% | - | -3.57% | - | -2.19% | - |
| Commodities | Level | Month to date | Month to date (C$) | Year to date | Year to date (C$) | 1 year | 1 year (C$) |
|---|---|---|---|---|---|---|---|
| West Texas Intermediate (US$/bbl) | 90.42 | 5.34% | - | 57.33% | - | 44.85% | - |
| Gold (US$/oz) | 4,157.41 | -6.30% | - | -3.74% | - | 7.75% | - |
| Silver (US$/oz) | 60.43 | -9.24% | - | -15.68% | - | 29.54% | - |
This commentary represents Canada Life Investment Management Ltd.'s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of Canada Life Investment Management Ltd.
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