CIBC Capital Markets’ Managing Director and Head of Global Distribution and Research, Brad Black, leads a semi-annual discussion with Chief Economist, Avery Shenfeld, and Head of FICC Strategy, Ian Pollick, on key trends and challenges in the financial markets as we start the new year. The panel highlights steady market activity, resilient economic performance, and shares insights on opportunities and risks for 2026, including central bank policy, the impact of AI, and evolving market dynamics.
CIBC Perspectives
Economic and Rates Strategy
Brad Black
Managing Director and Head, Global Distribution and Research, CIBC Capital Markets
Hello everyone. I'm Brad Black, Head of Global Distribution and Research at CIBC Capital Markets At CIBC, our mission is to empower you with timely insights and actionable strategies, keeping you ahead of the curve in today's dynamic backdrop. We're extremely committed to helping you navigate markets and achieve your objectives. I'm excited to lead today's economic and strategic outlook discussion, joined by two of our leading experts, Avery Shenfeld, CIBC’s Chief Economist, and Ian Pollick, Head of FICC strategy. Avery, let's begin with your perspective. What can we expect from The Fed and The Bank of Canada as we look ahead in 2026?
Avery Shenfeld
Managing Director and Chief Economist, CIBC
When think of the Bank of Canada, you know, markets have a tendency to believe that the central bank shouldn't just sit there. It should always be doing something. So, we've obviously just completed a rate cutting cycle. But I think the right advice for the Bank of Canada and what they're likely to do is, just sit there. There's still a substantial degree of economic slack on the economy. That was reinforced by the uptick that we saw in last week's, unemployment rate. No reason, therefore, to start thinking about hiking rates anytime soon. The inflation outlook, while there are some pressures on inflation, they're not coming from the demand side. And we do think that rent inflation is going to continue to decelerate, and that's a big component in the CPI. So, inflation should stay reasonably well behaved, and the Bank of Canada, they’re the doctor treating the patient, And the patient is the Canadian economy. And we need some patience from the Bank of Canada, to get the economy moving and enough quarters ahead before they should think about raising rates. Maybe that's a 2027 story. As far as The Fed is concerned, they're in no rush to do anything right now either, at least not this month. Inflation is still running a bit above their target. Not dramatically, but a bit. But the unemployment rate has come down. It's only a hair really, a couple decimal places above where they think full employment is. So, they can also afford to be patient. We do think that if you look at intra-sensitive parts of the economy, things like housing, it's pretty sluggish... Suggests that rates are still above neutral, providing a headwind. And the big lift we're getting from AI? While it's going to be there in 2026, it's probably going to be there at some point in smaller doses. So I think, a forward looking Fed will anticipate that whatever inflation is coming from tariffs is going to be a one off, that the rest of the inflation picture, rents as well on the US side of the border, is looking calmer and that they can afford to give the economy a couple more rate cuts. So, we think that we'll see a quarter point in March, probably a quarter point in June. And you can see in that forecast, we're obviously not thinking that The Fed becomes overly politicized or influenced by what the White House might want to see. It's still very much in our forecast at least, acting like a rational agent.
Brad Black
Great, thank you. Ian, turning to you. What's your baseline outlook on bond yields for 2026, and do you expect any material differences across the various geographies and what's really driving those divergences?
Ian Pollick
Managing Director & Head, Fixed Income, Currency and Commodities Strategy, CIBC Capital Markets
It's a good question. I mean I wish I had a really good story, but like, we don't. We're mildly bearish longer-term interest rates this year. And it's really for two reasons. Number one is really structural. When we think about the global amount of savings in the world, it's just not moving around the world as quickly as it used to. And that's a direct byproduct of the tariffs. So, when you think about some of the Asian economies, some of the European economies, the excess savers... They're doing their own fiscal policy. And so they used to recycle that cash and buy US Treasury securities, and they're just not doing that to the degree that they used to. The other part is a bit more cyclical. You have less restrictive monetary policy. Fiscal policy has been activated in many parts of the world, and you have deregulation. And so, those are the upward pressure on interest rates that we expect. For context, let me just quantify this. Longer-term interest rates, let's say five years or 30 years, 25, 30-basis points higher over the course of the year. Now of course, we're going to get a lot of inter-year volatility, that's obviously to be expected. But the other side of this is there's some downside risks. And those downside risks are moderating the degree the sell off that we expect. And they're both related to AI. And so, what to Avery was saying is, the risks around AI are really cutting the same way. On the one hand, AI works, like, really well. You have a huge amount of productivity, but it displaces a lot of people in the job market. And so, therefore it's disinflationary that pushes bond yields lower or the whole thing implodes. And that is very dovish for risk assets. Bonds have a very good hedging quality. And central banks would respond by cutting interest rates. And so the risk around that is not zero, but it's not one. And so, when I net the two of those two things out, that's why we only expect a very small selloff this year.
Brad Black
Great. Thanks, Ian. Avery, US jobs data suggest a slowdown, yet GDP figures are staying robust. What's behind this disconnect and what does it tell you about the economic landscape as we approach 2026?
Avery Shenfeld
What you hear a lot of people saying is, “this is the productivity miracle from AI that were replacing humans with bots”, and so on. Survey data of CEOs and people actually running these businesses say that that's not really happening to a big degree. I think part of it is that where we are generating GDP growth happens to be in industries that are light, in terms of their employment needs. So the AI space, for example, when you're spending a lot on chips, it is creating US GDP. Even if the chips are made overseas, the intellectual property is American and it counts as American value added. But if you look at the employment in that sector, in the computer industry and service sector there, it's been pretty flat for the past few years. So where generating a lot of GDP, doesn't really require a lot of people even in retailing. So much of the retailing is tilting towards, you know, click, spend, deliver it to my house, generates some jobs in trucking and warehousing. But doesn't generate the kind of employment you would get if people were shopping at the mall and the store. So again, employment light. I think the second thing that's happening here is a new normal that we have to get used to, which is that population isn't growing the way it used to. So we used to see a number like 20,000 jobs in nonfarm payrolls, that would have been a terrible number a few years ago. We needed 150,000, 200,000 to keep the unemployment rate steady. And what you've seen is we've had virtually no hiring outside of things like hospitals and medical care in the past year or so, very little private sector hiring, but yet the unemployment rate has barely budged. And so that's a new normal that we have to get used to. And it will be the same, very much the same in Canada. We don't need GDP or employment to grow as quickly. So, because of the population deceleration. So I think in the US it's partly this sector that's growing. Some of the sectors that are growing don't need a lot of workers to generate output. And partly because, we don't need as many jobs or have as many people to be employed because of the tighter population and the deportations and so on. So, that's a new normal. We're going to have to get used to that.
Brad Black
Right. Thanks Avery. Ian, historically speaking, market expectations for monetary policy in most regions have long been dictated by the Federal Reserve. In your mind, should we expect that to continue into 2026, or do you think that markets will begin to price more divergence in the path of policy in different regions?
Ian Pollick
So that's a great question. You know, you take five years ago, COVID happened, monetary policy around the world was super synchronized. Everybody cut rates. Inflation overshot, everyone's start hiking rates. And so there's almost no divergence around the world. In 2024, what you saw was there was early cutters, late cutters. And so the theme in the market right now is some of these early cutters, which is Canada, New Zealand and Europe will naturally, by consequence become early hikers. And that's exactly what the market's been pricing in. And so, very rarely do you see that kind of disconnect between the direction of the Federal Reserve and other advanced economies’ central banks. And so when you look at what's priced into the market, what we see is interest rate hikes, price for all of those early cutters this year. And the consequence of this is really interesting, because number one is, obviously impacts the level of interest rates, but also impacts the shape of the yield curve. And so in some of these jurisdictions like Canada, we do expect the term structure to be much flatter relative to United States. And so when we think about portfolio hedges, we think about relative cross asset performance. You know, you need for example for financials whether it's equities or credit, a steep yield curve to have some outperformance. And so I think investors need to start thinking about the bond market even if they're not traditionally bond investors.
Brad Black
Right. Thanks Ian. Avery, let's pivot to risks for a moment. Are there greater risks that policy rates could deviate from your forecast either higher or lower? And what are the other key risks that we should be watching as we look ahead? Well, as Ian said, in Canada, the markets priced for some probability small, but still some probability of a rate hike this year. Our own view is that if there is a move by the Bank of Canada, it's more likely to be a cut than a hike. And it does go to some of the risks that Ian was talking about for the economy.
Avery Shenfeld
A lot has been riding on the powerful equity market in terms of generating wealth and spending that in both on US and Canada. A lot of that is tied to optimism over AI. If that were to melt away, it could put some downside risks to policy rates in both the US and Canada. And I think in Canada, remember, we're still dealing with Donald Trump. Our forecast as well as the consensus is all based on the view, basically, “Don't worry. Be happy.” We're going to negotiate some sort of trade extension that preserves free trade for most exports from Canada. Maybe not autos, steel, aluminum, but the rest of the basket. That's not a sure thing. And so that again poses risks that the Bank of Canada could have to ease again. And ultimately it's also because rates aren't that low yet. This isn't like the past cycles where we had economic weakness and the Bank of Canada cut rates to a quarter of a percent. Rates are barely stimulative, and so they might need to nudge them a little lower. And I would say the same is true for the US. Rates are still there above neutral. And so, our forecast has them going to around where we estimate as neutral. But should any downside risks to the US economy happen, this Federal Reserve has shown that it's a little more sensitive to a rise in the unemployment rate than it is to inflation running, you know, a half point or three quarters of a point above target. And so again, we've got two cuts priced in for The Fed. But it could be more if there's disappointments. Not our base case but it's something that we'll be watching for.
Brad Black
Great. Thanks, Avery. Ian, last question to you. Continuing on the theme of risks, are there vulnerabilities building within the system that you believe deserve more attention than they currently are?
Ian Pollick
I think so. You know, if you take a step back and you think about the tech cycle for the past really 20 years, it was software led, minimal capital investment, not so capital intensive. Now when we think about the AI spend, it is hardware led, huge infrastructure spending. And you need to spend that money on infrastructure to eventually have the software build in the future. But what that implicitly means is that your expenditures relative to your revenues are just very, very far apart. And so all of these hyperscalers have really turned to the financial markets for leverage. And so leverage is building up in the system very aggressively. With monetization, that's obviously a big question that we have about AI. But we're not going to find out this year. And we're probably not finding out next year. And so in the absence of having that revenue being realized today, leverage is being required, whether it's coming from public markets or private markets. And so when you think about volatility, which is the sum of kind of leverage and surprises, one part of that equation is rising. And so it's going to be a more volatile environment. But the system as a whole is inherently more fragile.
Brad Black
Well thanks Avery and Ian. Great insights and discussion. And to our viewers, thank you for joining us. We hope today's discussion provided valuable insights to inform your decisions. As always, our CIBC team is here to support you. Please feel free to reach out to discuss your specific circumstances and opportunities to make your objectives a reality.