RBC Global Asset Management Chief Economist Eric Lascelles delivers his latest #MacroMemo1 against a backdrop of compounding pressures: higher oil prices, rising bond yields, escalating tariffs, and a geopolitical landscape that offers little comfort. Yet beneath the adversity runs a counternarrative of resilience, reform, and, in one critical case, the first credible signs of Canadian productivity recovery in years.
The Triple Threat: Tariffs, Oil, and Yields
Lascelles is candid about the current configuration. "More tariffs, higher oil, higher yields do add to inflation, do subtract from growth," he says, acknowledging that none of these is what investors are looking for. The Middle East conflict is pushing energy prices upward, with Houthi forces securing strategic Red Sea positions and a strike on a critical Saudi pipeline complicating the supply outlook. Long-end bond yields are rising partly in response to energy-driven inflation expectations.
The Fed, as of the #MacroMemo's recording, is on the verge of its first rate hike of the new cycle. Lascelles takes the under on market pricing: "We are taking the under on the market's expectation for four rate hikes priced over the next year." The team believes inflation may ease as energy pressures moderate, though that moderation has not yet materialized. On Canada-U.S. tariffs specifically, a two-quarter normalization horizon is the working assumption, not a certainty.
The U.S.-China Yield Inversion
One of the MacroMemo's more striking observations is the now-significant gap between U.S. and Chinese 10-year sovereign yields. American borrowing costs run at roughly triple the Chinese rate, a complete reversal from the 2010s. Lascelles is explicit that both directions of this spread reflect structural problems, not strengths. U.S. yields are rising due to chronic inflation, deteriorating fiscal fundamentals, reduced foreign demand for Treasuries, and increased bond supply from hyperscaler issuance. Chinese yields are falling because of persistent deflationary pressure, a severe housing bust, central bank accommodation, and capital controls that funnel domestic savings into sovereign bonds.
"You're kind of in a weird situation," Lascelles observes, "in which U.S. yields are up for broadly not great reasons... Meanwhile, Chinese yields are down, also for mostly bad reasons." The net implication: China holds a borrowing cost advantage, which lowers its investment hurdle rate and provides a structural edge in capital deployment.
Data Centre Backlash: Real Risk, Overstated Concern
The AI thematic continues to evolve in complex directions. Lascelles flags a growing public backlash against data centres, particularly in Anglosphere countries, citing electricity costs, water usage, limited local employment, and land consumption. Several U.S. states have moved to temporarily block new builds. The geographic divide is significant, with Asian markets remaining largely supportive of AI infrastructure expansion.
The team's read is measured: the pipeline already underway is not being halted, geographic arbitrage between jurisdictions will continue to enable construction, and the risk is real but "maybe a little bit overstated." Lascelles does not dismiss AI headwinds, but he does not elevate the data centre backlash to a primary portfolio risk.
Midterms: Seasonal Caution, Structural Clarity
From a seasonality standpoint, Lascelles notes that the S&P 500 has historically underperformed in the two months leading into U.S. midterm elections, then rebounded sharply. The most historically favourable outcome has been a Democratic congressional sweep with a Republican president in place, a divided government configuration that Lascelles identifies as among the more probable outcomes. He is careful to contextualize: "I would not say this is the main investment theme right now." AI, energy, inflation, monetary policy, and tariffs dominate. But the midterm seasonal pattern bears watching.
Europe: Underappreciated Resilience
European economic surprises are running at their most positive in roughly three years, with PMIs, sentiment measures, and leading indicators all turning constructive. Germany, whose headline story has been auto sector erosion from Chinese competition, is quietly showing an offset: surging technological exports, much of it AI and data centre infrastructure-related, tracking close to the volume of auto decline. Lascelles flags one risk worth monitoring: deferred natural gas cost pass-throughs to the economy. That headwind has not yet landed, but it is coming.
Canada: The Long Productivity Deficit, and Why This Time May Be Different
The MacroMemo's most substantive section addresses Canadian productivity, and Lascelles holds nothing back. Canada's productivity has been flat for four years and has underperformed the U.S. by a widening margin for decades, falling from near parity in the early 1980s to approximately 73% of U.S. levels today. At the sub-sovereign level, Ontario ranks forty-eighth out of 60 jurisdictions when Canadian provinces and U.S. states are compared, with Canadian provinces collectively occupying the bottom tier.
The causes are multifactorial: regulatory burden, a harsh geographic reality, capital underinvestment by Canadian businesses, low R&D spending, an immigration surge that temporarily diluted productivity metrics, and pandemic-era disruption. "The average Canadian business spends less than half as much as the average U.S. business on CapEx per worker," Lascelles notes, and controlling for sector only widens that gap.
The cautious optimism, however, is real. Policy changes under the current federal government, including deregulation, infrastructure facilitation, and a broadened R&D tax credit, have the potential to shift the trajectory. Lascelles sets the target explicitly: lifting Canada's long-term productivity growth rate from 1% annually to 1.5% or better. "That's really important for prosperity and corporate profits and wages."
Five Key Takeaways for Advisors and Investors
- The headwind cluster is real but potentially temporary. Higher oil, tariffs, and long-end yields create near-term drag on growth and inflation. Lascelles is not dismissing these risks, but the base case remains that they moderate over a 12-month horizon.
- The U.S.-China yield inversion matters more than it looks. China's structurally lower borrowing costs lower its investment hurdle rate, creating a quiet but compounding advantage in capital allocation that advisors should factor into international positioning.
- AI infrastructure disruption is geographic, not existential. The data centre backlash is concentrated in the Anglosphere. Construction pipelines are intact, and geographic arbitrage will distribute capacity. The risk is a delay, not a derailment.
- Europe is outperforming expectations. Three years of positive surprise momentum, a recovering Germany, and AI-related tech export growth offer a credible case for European allocation. The deferred natural gas cost pass-through is the key risk to monitor.
- Canadian productivity may be at an inflection point. Policy reforms, easing immigration pressures, and a global productivity regime shift could lift Canada's structural growth rate. Advisors with Canadian equity or fixed income exposure should factor this into multi-year outlooks.
Footnote:
1 Lascelles, Eric. "Trends, Twists and Turnarounds." RBC Global Asset Management MacroMemo, 15 Sep. – 5 Oct. 2026.
