Inflation remained stubborn, while markets stuttered
Did Canadian inflation go up?
Canada’s inflation report looked worse on the surface, with the Consumer Price Index (CPI) rising to 3.2% in May, higher than expectations. Gasoline and food were the biggest contributors. The underlying story was less dramatic, however. Core inflation excluding food and energy was still below 2%, and the Bank of Canada’s preferred measures stayed close to target (which is between 1-3%). That gives policymakers room to look through some of the headline noise.
For investors, the data appears balanced. The Bank of Canada does not have a green light to lower rates aggressively, but neither does it look forced into a more defensive posture. With inflation breadth still contained and energy prices easing in June, patience remains the likely path.
What happened to U.S. inflation?
U.S. Personal Consumption Expenditures (PCE) inflation came in firm, with headline inflation at 4.1% and core at 3.4%. That is not the kind of report that gives the U.S. Federal Reserve (the Fed) much room to soften its tone and bring in rate cuts. Still, the consumer is spending. Real consumer spending rose 0.3% in May, personal income improved, and jobless claims fell to 215,000. The labour market still has some resilience, even with inflation taking a bigger bite.
That mix is not bad for the economy: it supports earnings and keeps recession concerns contained. The trade-off is that sticky inflation and steady spending leave the Fed with little reason to rush toward cutting rates.
Why are the markets down?
The S&P 500 was down modestly on the week, led by weakness in technology and communication services. The market has been leaning heavily on high-performing AI and cloud computing companies, so some profit-taking was not a surprise.
The important detail is breadth; more S&P 500 names rose than fell, and health care, utilities and industrials all posted gains. That looks less like a market-wide retreat and more like market rotation (where investors sell shares in one market sector and move it to another).
Investors are not walking away from the AI theme; they’re asking for clearer proof from AI companies’ earnings and forecast data. That is a healthy question to ask whenever market gains are concentrated among a small number of stocks.
What’s next for inflation and tech stocks?
The focus now is follow-through. Canada needs confirmation that energy-driven inflation will fade. The U.S. needs evidence that core inflation can cool without cracks appearing in consumer spending. Technology needs earnings and guidance that are strong enough to justify the capital spending story investors have already priced in.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
