US Jobs Report Weakens Rate Hike Expectations Fed Pause Likely

The latest US jobs report, released last week, revealed a significant slowdown in employment growth. The economy added just 29,000 new jobs in September, far below the expected 90,000. The US Department of Labor also revised downward its previous estimates for July and August by 60,000 jobs, further weakening the employment outlook.

Average hourly earnings growth slowed to 3% year-over-year, marking the third consecutive month of decline. This trend is important because it suggests that inflation is outpacing wage growth, reducing the purchasing power of workers. This disinflationary effect could limit future inflation if wages do not keep up with rising prices.

The weak jobs report has reinforced expectations that the Federal Reserve will likely pause its rate hikes at the next meeting on October 27. However, the bond futures market still anticipates additional 0.25% hikes in December 2026 and March 2027, though these expectations are being adjusted in light of the recent economic data.

In Canada, Government of Canada bond yields continued to rise, driven by higher oil prices despite the weak US employment data. The five-year GoC bond yield, which influences five-year fixed mortgage rates, has shown an 86% positive correlation with the price of West Texas Intermediate oil over the past three months. As a result, Canadian mortgage lenders have raised their fixed rates, while variable-rate discounts have narrowed.

Bond-market investors are pricing in aggressive rate hikes by the Bank of Canada over the next year, but some analysts question whether these hikes will materialize. The current environment remains volatile, with fixed rates offering stability but variable rates potentially saving borrowers money over the long term.