Weak US and Canadian Employment Reports Fuel Rate-Cut Speculation

Highlights Last Week

On Friday, Statistics Canada estimated that our economy shed 65,500 jobs in August, adding to the 41,000 jobs that were lost in July. Last month marked our worst monthly print since January 2022.

As a result, our unemployment rate increased to 7.1% in August, its highest level since May 2016, and our average wage growth declined from 3.3% in July to 3.2% (year-over-year).

This weaker-than-expected employment data (the consensus estimate was +5,000) provide further evidence of the negative impacts that US President Trump’s tariffs, both real and threatened, are having on our economy.

The latest US employment data confirmed that the US economy is also experiencing increasingly negative impacts from Trump’s tariff war.

The Bureau of Labor Statistics estimated that the US economy added just 22,000 jobs in August, well below the consensus forecast of 75,000.

Revisions to their original June estimate also changed from a gain of 14,000 jobs to a loss of 13,000, marking the first monthly job loss for the US economy in nearly four years. For the first time since April 2021, the number of US job openings fell below the number of US job seekers.

The Latest on Mortgage Rates

Fixed Rates

Government of Canada (GoC) bond yields were range bound last week before dropping on Friday in response to the weak employment reports on both sides of the 49^th parallel.

It will be interesting to see what they do next.

Weaker employment data have increased speculation that both the US Federal Reserve (Fed) and the Bank of Canada (BoC) will cut their policy rates at their next meetings on September 17. But those cuts will impact only the short end of the bond-yield curve directly.

Investors have recently pushed longer-term bond yields higher to price in their concerns about profligate fiscal spending. If the Fed and BoC decide to cut rates at a time when inflation is rising, the longer-term bond yields, which our fixed mortgage rates are priced on could move higher (as happened after the Fed’s last rate cut in December 2024).

Given that, the bond market’s initial reaction on Friday may not be a reliable indication of what’s to come.

To borrow a phrase from Warren Buffett, over the short term the bond market responds to economic data releases like a voting machine: in knee-jerk fashion. But over the longer term, it is a weighing machine. And once sober second thought is applied, inflation concerns may tilt the scales in the other direction.

Variable Rates

Variable-rate discounts held steady last week.

To quickly recap, on July 30 BoC Governor Macklem said the Bank stands ready to enact further cuts if the tariff-related effects on growth are more significant than forecast and if “the upward pressure [on inflation] from tariffs and trade disruption is contained”.

Since then, Stats Can confirmed that our economy contracted by 1.6% in Q2 and shed another 65,500 jobs in August (bringing our total two-month job losses to more than 100,000).

Taken together, those results should qualify as worse than forecast, at least as far as the consensus was concerned.

As for the upward pressure on inflation from tariffs, we won’t receive our next inflation data until September 16. But in the meantime, Prime Minister Carney recently removed most of the counter tariffs he had imposed on US imports, and our mounting job losses portend reduced inflation pressure ahead.

All of this points to a BoC rate cut at its next meeting on September 17, and bond-market investors now put the odds of that happening at about 90%.

Insider’s Tip for Borrowers

Home buyers who want to sell one property and buy another may not be able to line up their closing dates on the same day.

In such cases, in addition to their new mortgage, they will need bridge financing to cover the gap between their buy and sell dates.

That does make the transaction a little more complicated, but in the right hands, it can be easily handled.

This post provides a detailed explanation of how bridge financing works, and this bridge-loan calculator shows how much can be bridged in a given scenario, and at what cost.

My Take on Today’s Most Popular Mortgage Options

Fixed rates have now returned to their long-term average levels.

Right now, the best available three- and five-year fixed rates are both good options. If these rates remain roughly equal, I think five-year fixed-rate terms offer slightly better value.

I continue to believe that today’s variable mortgage rates will likely produce the lowest borrowing cost over their full term, and BoC rate cuts now appear imminent.

Anyone choosing a variable rate should do so only if they can live with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and, in some cases, higher payments) should my forecast prove incorrect.

Three Posts Every New Visitor to My Blog Should Read

1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?

This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages.

2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties

This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender. A lower penalty can save borrowers thousands of dollars if rates drop.

3. What’s in the Fine Print

This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract.