Canada’s S&P/TSX Composite Index dropped 1.1% on Wednesday following a surge in building permits that reshaped expectations for the Bank of Canada’s next interest rate move. Statistics Canada reported an 8.8% rise in August building permits, significantly outperforming economist forecasts. This unexpected jump led traders to anticipate a potential rate hike in December, rather than the previously expected late-October meeting, according to National Bank of Canada Capital Markets.
The shift in rate expectations caused investors to reassess their portfolios, favoring defensive sectors over growth-dependent ones. When rate hikes loom, areas reliant on easy borrowing tend to underperform, while more stable sectors hold up better. Meanwhile, the Canadian government successfully sold CA$3 billion in 30-year bonds, attracting CA$7.6 billion in bids, indicating strong demand for long-term debt despite the changing rate outlook.
For borrowers, the timing of rate hikes has significant implications. Variable-rate debt, such as mortgages and lines of credit, will feel the impact of a rate hike more quickly than fixed-rate loans. Fixed mortgage rates, however, are more influenced by Government of Canada bond yields, which can mitigate some of the effects of rising rate expectations. This means households with variable-rate debt may experience higher costs sooner than those with fixed-rate agreements.