Global equity markets moved higher over the month of May. While the U.S. and Iran were unable to complete a peace deal, the two sides continued to negotiate and largely maintained their agreed-upon ceasefire. Oil prices finished lower over the month but remain elevated, putting upward pressure on inflation in countries around the world.

Inflation in Canada, the U.S. and Europe, among others, was reported to have surged higher, and began putting pressure on consumers and businesses, who showed a bit more cautiousness with spending. Late in May, it was reported that Canada’s economy shrank in the first quarter of 2026, pushing the economy into a technical recession. Gross domestic product (GDP) reports from several countries showed lacklustre growth in the quarter. Data from the second quarter of 2026 show economies hurting from higher prices, lower confidence and slower global economic activity.

The S&P/TSX Composite Index advanced in May, reaching a new record high along the way. The communication services sector was the top performer over the month, offsetting weakness in the health care sector. U.S. equities posted a solid gain over the month. The 10-year Government of Canada bond yield edged lower over the month, while the yield on the 10-year U.S. Treasury bond inched higher. The price of gold finished lower.

High gas prices hurting Canadians’ spending

As reported in May, Canada’s retail sales rose by 0.9% in March, but the headline proved to be a bit misleading when digging into the data a bit further. March’s increase was driven by a rise in sales at gasoline stations, which increased by 12.4%. However, the increase was not because Canadians were filling up more, but because fuel prices spiked due to the conflict in the Middle East. Removing gasoline sales, the landscape of Canadian spending was a bit less rosy. Core retail sales, which exclude sales at gasoline stations and automotive dealers, were down 0.1% in March. Overall retail sales in volume terms fell 0.7%. This suggests Canadians were spending more dollars but buying less. Canada’s annual inflation rate rose to 2.8% in April from 2.4% in March, with energy prices the main contributor. Adding to the uncertainty over Canada’s economy, GDP shrank at an annualized pace of 0.1% over the first quarter of 2026, surprising economists who were expecting a relatively healthy expansion. This marked the second consecutive quarter Canada’s economy has contracted, pointing to a technical recession. Weighing on economic growth was a decline in business and government spending, along with a drop in net exports, where exports declined and imports increased over the quarter. Inflation-adjusted consumer spending appears to be pulling back, and early signals suggest the second quarter of 2026 could be meaningfully weaker. Rising prices, sluggish economic growth and cautious consumers and businesses paint a picture of an economy facing several headwinds. The Bank of Canada will have a difficult decision to make on June 10 as it navigates through weak economic activity and rising inflationary pressures.

U.S. consumer confidence plummets   

The University of Michigan’s Consumer Sentiment Index fell to a record low of 44.8 in May, marking the third straight monthly decline, as supply disruptions from the effective closure of the Strait of Hormuz continued to push gasoline prices higher. The cost of living is the top concern, with 57% of consumers saying high prices are eroding their personal finances, with lower-income households feeling the pressure most acutely. Long-run inflation expectations climbed to a seven-month high, reflecting worry that price pressures will extend well beyond fuel. Adding to those concerns, the U.S. annual inflation rate accelerated to 3.8% in April, which was the highest since May 2023, driven largely by energy costs surging nearly 18% on a year-over-year basis. This rise in energy costs is beginning to force consumers to pull back on spending. The personal consumption expenditure price index (PCE) rose by 3.8%, on a year-over-year basis, in April. The PCE report also showed that personal spending increased by just 0.1% on an inflation-adjusted basis. Until the Middle East conflict is resolved and energy prices ease, consumer and business activity could remain under pressure. Record-low consumer confidence and rising inflationary pressures paint a cautious picture for the U.S. economy. A second estimate showed the U.S. economy grew by 1.6%, annualized, in the first quarter of 2026, down from the initial estimate of 2.0%.

European private business activity drops to multi-year low  

A flash estimate from S&P Global showed that private business activity in Europe contracted for a second consecutive month in May. The S&P Global Eurozone Composite Purchasing Managers Index fell to 47.5 in May from 48.8 in April, which was its lowest level in over two-and-a-half years. The services sector was the primary detractor, with activity falling to a 63-month low, while manufacturing output grew modestly, extending a five-month streak of expansion, although at a slower pace than in April. European and global consumers appear to be pulling back on spending for travel and dining. Conversely, factories are still producing, partly due to stockpiling ahead of potential supply shortages. A key factor behind the slowdown in discretionary spending is surging cost pressures, with input prices rising at the fastest pace in three-and-a-half years. This ties directly into the broader inflation picture, with Europe’s annual inflation reaching 3.0% in April 2026, marking its highest level since September 2023, in response to the sharp jump in energy prices linked to the Middle East supply disruptions. Rising prices are squeezing household budgets and eroding business confidence across the region. Soft consumer and business demand could continue to weigh on Europe’s economy and hinder a robust economic recovery.

UAE pulls out of OPEC+

The Organization of the Petroleum Exporting Countries and allies (OPEC+) held its first meeting in early May without the United Arab Emirates (UAE), which formally departed the group on May 1, 2026, ending a nearly six-decade membership. The UAE had been producing well below its 4.85 million barrel-per-day capacity under its OPEC+ quota, and its exit means it can now ramp up output freely once the Strait of Hormuz reopens. At the May 3, 2026 meeting, the remaining members agreed to a modest production increase of 188,000 barrels per day (bpd) for June, though the move may be largely symbolic. Member nations in the Middle East will be unable to implement the increase unless the Strait of Hormuz, which is blocked by the U.S.-Israeli conflict with Iran, is reopened. In its May report, the oil organization also lowered its global demand for oil to 1.17 million bpd in response to the conflict in the Middle East. The UAE’s departure also means the group has fewer members available to manage potential future supply disruptions. OPEC+ appears to be holding together, but its influence over global oil supply has weakened. Until the strait reopens and the UAE’s future production intentions become clear, oil prices are likely to remain elevated, which will continue to weigh on inflation and consumer spending around the world. The price of oil finished lower over May in response to hopes the U.S. and Iran would be able to reach an agreement on a peace deal.