2026 Q2 Economic and Market Commentary

Economic Highlights

GROWTH AND THE LABOUR MARKET

Consumer spending remains cautious. Households continue to contend with the cumulative effect of several years of price increases, despite recent improvements. Uncertainty about trade policy continues to weigh on business investment and hiring decisions.

INFLATION IMPROVING

Inflation (the rate at which prices rise over time) eased through Q2. Headline inflation (the total inflation rate, covering all goods and services) fell to 2.8% in June, down from 3.2% in May. Notably, the two measures the Bank of Canada watches most closely, which strip out the most volatile price movements to show the underlying trend, both fell below the Bank’s 2% target for the first time in nearly six years.

The improvement was driven substantially by gasoline prices, which were 20.5% higher than last June, down sharply from 33.2% in May, and fell 10.2% from the previous month. Excluding the drop in gasoline, inflation was 2.2%, essentially unchanged through the quarter. Grocery price increases eased to 3.9% and shelter costs to 1.5%.

This distinction matters. Despite global volatility,Canadian prices have been relatively steady; what has moved the headline number up and down over the past year is energy. Because energy prices have risen again since the end of Q2, the improvement recorded in that quarter may partially reverse in the months ahead given that global energy prices have since moved higher in July and August.

The Bank of Canada held its policy interest rate at 2.25% in July, its sixth consecutive hold. In its commentary, the Bank pointed to the gap between headline and underlying inflation as a reason for patience.

TRADE: STRONG IMPROVEMENT WITH SOME CAVEATS

Canada’s trade performance improved considerably through Q2. Exports rose for five consecutive months, reaching a record level in June, and the merchandise trade surplus with the United States recovered from an unusually weak February reading to roughly $10 billion in June. Canada recorded four consecutive months of overall trade surpluses.

This good news comes with three caveats. First, February was an unusually weak month, distorted by one-off movements in gold and vehicle imports, so comparisons overstate the underlying improvement. Second, much of the gain reflects higher prices rather than more goods moving: exports rose 13.1% in value but only 5.4% was due to shipping higher volumes, and roughly half was attributable to higher energy prices. Third, a weaker Canadian dollar inflates figures reported in Canadian dollars.

That said, the improvement was not purely a price effect. Export volumes reached a record level in the second quarter. March’s crude oil export volumes were the highest since recording started, as restricted Middle East supply created demand for Canadian oil in the United States (US), Asia and Europe. Exports to destinations other than the US now account for ~30.5% of Canadian exports, up from 25% before the pandemic.

This diversification is a genuine structural development. However, the surge in energy export volumes is closely tied to the disruption of Middle East supply and would likely moderate if that supply returns.

TRADE POLICY EVOLVING

Trade policy developments after Q2 represent a meaningful change rather than a continuation of what came before.

On July 20, 2026, the US issued three proclamations imposing an additional 50% tariff on a specified list of Canadian goods. The measures cover ~$25 billion of Canadian goods,  ~5% of what Canada ships to the US, raising the average tariff applied from approximately 4.4% to 6.3%. The 50% tariffs were originally scheduled to take effect August 19, but were delayed until August 22, the deadline for negotiations. Ultimately, the new US tariffs came into effect after negotiations broke down.

Canada subsequently announced “dollar for dollar” counter-tariffs, taking effect September 8. They target critical industries like steel, dairy, and pulp and paper, however, as of the time of writing, the detailed product list has not yet been released. These measures will impact ~0.9% of American exports.

Two features distinguish these measures from earlier tariffs. First, there is no exemption for goods qualifying under CUSMA. Second, the goods covered bear little relationship to the disputes cited by the US. The measures respond to Canadian practices in motor vehicles, dairy and alcohol, but lists cement, furniture, machinery, apparel, and a range of consumer goods. Motor vehicles themselves are excluded, because they are already subject to separate US tariffs.

Energy, potash, fish and certain critical minerals are excluded, as are goods already covered by existing US sectoral tariffs on steel, aluminum, copper, lumber, semiconductors and pharmaceuticals. Those goods continue to pay their existing rates.

Furthermore, CUSMA was not extended for a further sixteen-year term. The agreement remains in force until 2036 but is now subject to review on an annual basis. In practical terms, trade policy has become a recurring source of uncertainty rather than a single scheduled negotiation.

What happens next is hard to predict. On one hand, there is reason for optimism: negotiations have been suspended rather than concluded; past trade disputes have reversed quickly; and the American measures face possible legal challenges within the United States. On the other hand, the law under to impose these tariffs also allows them to be expanded further. While the impact of these measures is likely to remain limited, the situation continues to be highly dynamic.

INTEREST RATES AND BONDS

As we’ve noted before, when interest rates rise, existing bond prices fall (and vice versa). This is because newer bonds issued at higher rates become more attractive by comparison. Figure 1 shows the interest rates on Government of Canada bonds across different time horizons (called maturities). Rates fell modestly across the curve, though shorter duration rates remain higher than the start of the year.

Source: Bloomberg

Shorter-term interest rates remained steady, in line with the Bank of Canada’s policy rate, which was unchanged through the quarter. Longer-term rates continue to reflect investor concerns about government borrowing levels and the future path of inflation. These longer-term rates have come down slightly from their peak,, but they’re still high enough to affect borrowing costs across the economy, including mortgages and business investment.

Market Highlights

Financial markets performed strongly in the second quarter as concerns about stagflation, the combination of rising prices and slowing growth, receded.

Source: Bloomberg

Stocks (Equities): Stock markets performed well through Q2. US and global equities led, gaining 17.3% and 16.4% respectively, while Canadian equities rose 8.2%. Over the past twelve months Canadian equities have been the strongest of the three, returning 31.3%.

Several factors helped drive these gains: falling energy prices, strong corporate earnings, and continued optimism that investment in artificial intelligence will continue to translate into earnings and productivity growth. Canadian market gains were concentrated in energy, materials and financial companies.

Stock prices, particularly in the United States, remain high by historical standards. A small number of very large companies now account for a substantial share of major US index values. Both factors suggest markets may be more sensitive than usual to disappointing earnings or unexpected changes in interest rates.

Bonds: Bonds delivered positive returns, with broad Canadian bonds up 2.1% and short-term bonds up 1.2%. Improving inflation data supported bond prices through the quarter, particularly at shorter maturities where the Bank of Canada’s unchanged policy rate provides an anchor.

Corporate bonds (debt issued by companies rather than governments) remained stable. Companies overall appear financially healthy, which kept the extra interest they pay compared to government bonds — known as the “spread” — relatively small. Spreads could widen, meaning corporate bonds would become relatively cheaper, if growth slows or market stress increases.

Outlook and Conclusion

Several forces continue to pull in different directions.

On the positive side, underlying inflation is at its lowest level in nearly six years, which gives the Bank of Canada room to cut interest rates should growth weaken. Corporate earnings have stayed strong; consumers have kept spending more than expected; and Canada’s export performance has improved. Bond yields remain well above the levels during the pandemic, which improves the return available to longer-term investors.

On the other side, energy prices haven’t fully retreated to their pre-war levels and remain sensitive to developments in the Middle East, which makes headline inflation difficult to forecast. Equity valuations also leave limited room for disappointment after a strong twelve months. And trade policy has become an ongoing risk  rather than a one-time event, with new US tariff measures subject to negotiation, possible legal challenge, and escalation.

Investors should resist the impulse to read either the second quarter’s strong rebound or the improving inflation data as a settled trend. Both measures rested substantially on a decline in energy prices that has since partially reversed. The more durable observations are that underlying inflation is well behaved, that Canada’s export base is gradually diversifying, but also that the domestic economy remains weaker than the headline market numbers suggest.

As always, Encasa remains committed to helping investors align their portfolios with their objectives, time horizons, and willingness and ability to bear risk. Periods of volatility are a normal feature of investing, and the most reliable protection against them is a portfolio that is well matched to the purpose the money serves. If you have questions about your portfolio or the Encasa Funds, please contact your Encasa advisor.

Encasa Fund Results (%, as at June 30, 2026)⁽¹⁾

	QTD	1 Year	3 Years	5 Years	10 Years	Since Inception(2)
Encasa Canadian Short-Term Bond Fund	1.1	2.7	4.5	1.6	1.5	2.5
FTSE Canada Short Term Overall Bond Index	1.2	3.1	5.0	2.2	2.1	3.1
Encasa Canadian Bond Fund	1.9	3.1	4.0	0.2	1.1	3.2
FTSE Canada Universe Bond Index	2.0	3.4	4.4	0.8	1.7	3.9
Encasa Equity Fund	13.8	38.0	27.1	15.0	12.5	9.7
Encasa Equity Fund Benchmark(3)	12.7	28.9	23.0	15.1	13.2	10.9

Encasa Canadian Short-Term Bond Fund

The Short-Term Bond Fund delivered a return of 1.1% for the quarter, bringing the 1-year return to 2.7%. For comparison, the Fund’s benchmark, which doesn’t include fees or expenses, delivered a return of 1.2% for the quarter and 3.1% for the year.

In Q2, the Fund held more corporate and provincial bonds and fewer federal bonds compared to the benchmark. At the end of the quarter, the portfolio’s overall interest rate sensitivity was slightly greater than the benchmark’s.

As at June 30, the Fund’s yield to maturity (expected return if bonds are held to maturity) was 3.2%, compared to 3.1% for the benchmark.

Reflecting Encasa’s commitment to Responsible Investment, 28.9% of the Fund’s portfolio was invested in Sustainable Labelled bonds (bonds that help fund environmentally or socially beneficial projects), compared to 4.2% for the benchmark.

Encasa Canadian Bond Fund

The Canadian Bond Fund rose 1.9% in the quarter, bringing its one-year return to 3.4% after fees. The Fund’s benchmark, which doesn’t include fees, returned 2.0% for the quarter and 3.4% over the past 12 months.

During the quarter, the Fund had a higher allocation of corporate bonds and a lower allocation of federal bonds compared to the benchmark, with provincial bonds roughly in line with the benchmark. The fund increased its interest rate sensitivity slightly during the quarter, expecting a reversal in the rise in interest rates. At the end of the quarter, the Fund’s yield to maturity was 3.7%, compared to 3.6% for the benchmark.

Encasa Equity Fund

The Equity Fund rose by 13.8% in Q2, bringing its return for the one-year period to 38.0% after fees. The Fund’s benchmark, which doesn’t include fees, returned 12.7% for the quarter and 28.9% for the past 12 months.

The Fund’s geographic mix (how investments are spread across different countries) remained close to the benchmark’s over the quarter. Stock selection continued to add value in the quarter with the largest gains coming from the Information Technology, Communication Services, and Energy sectors.

At the end of Q2, the Fund had slightly more exposure to the US than its benchmark, and a smaller share invested in Canada as well as markets outside North America. The Fund continues to focus on companies with strong fundamentals and growth potential.

Consistent with Encasa’s commitment to Responsible Investment, the Fund continues to avoid companies with controversial business practices or industries.

Concluding Note

As always, volatility is possible – and as always, the best way to manage that risk is to ensure that your portfolio is well matched with your goals, time horizon, and comfort with market fluctuations.

If you have questions or concerns, please contact your Encasa advisor.

Endnotes

1. Rates of return assume reinvestment of all distributions, after deduction of fees. Returns are annualized for periods of greater than one year.
2. Inception date Jan. 1, 2003.
3. Prior to July 1, 2020, the benchmark for the Encasa Equity Fund was 70% S&P/TSX Composite Index and 30% MSCI World Ex-Canada Index.

Important Information

This material is provided for informational purposes only. It does not constitute investment, tax, financial, accounting, or legal advice, nor does it constitute an offer, solicitation, or recommendation to purchase or sell any security or to adopt any investment or portfolio strategy. The views and information presented do not take into account the investment objectives, financial situation, or needs of any specific person or organization. Investors should consult their advisors regarding their individual circumstances prior to making any investment decisions.

This document may contain forward‑looking information, including statements about expected economic or market conditions, interest rate trends, or potential future outcomes. Forward‑looking statements involve numerous risks, uncertainties, and assumptions, including changes in economic conditions, financial markets, interest and foreign exchange rates, regulatory or political developments, and other factors. Actual results may differ materially. Any forecasts, projections, or estimates are provided for general informational purposes only and should not be relied upon as guarantees of future events.

Information presented in this commentary has been obtained from sources believed to be reliable; however, Encasa Financial Inc. does not represent or warrant its accuracy, completeness, timeliness, or reliability. Encasa Financial Inc. is not responsible for any errors or omissions, nor for any loss or damage arising from reliance on this material.

All views, opinions, and estimates expressed reflect the author’s judgment as of the date of publication and are subject to change without notice as market and economic conditions evolve. This commentary was prepared solely by Encasa Financial Inc. No third party, including the Encasa Funds’ principal distributor, has reviewed, endorsed, influenced, or approved its content.

If performance data, illustrative scenarios, or model results are referenced in any accompanying materials, please note that past performance does not guarantee future results. Any examples, case studies, or hypothetical illustrations are for explanatory purposes only and may not reflect actual future outcomes.

Encasa Financial Inc. is a social purpose investment fund manager dedicated to supporting non‑profits, co‑operatives, and affordable housing providers by offering professional investment management grounded in community impact, long‑term stewardship, and responsible financial governance.