Weak US Jobs Report Dims Fed Rate Hike Expectations

The latest US jobs report revealed significant weakness in the labor market, with only 29,000 new jobs added in September, far below the expected 90,000. The US Department of Labor also revised downward its previous estimates for July and August by an additional 60,000 jobs. This data suggests a slower economic recovery than anticipated.

Average hourly earnings growth slowed to 3% year-over-year, marking the third consecutive month of decline. This trend is notable because it indicates that US inflation is outpacing wage growth, reducing the purchasing power of workers. This disinflationary effect could constrain consumer spending, further cooling the economy.

The weak employment report has reinforced expectations that the Federal Reserve will not raise interest rates at its next meeting on October 27. While the bond futures market still anticipates a 0.25% hike in December 2026 and March 2027, these bets are being scaled back. The proximity of the Fed's meeting to the US mid-term elections on November 3 has also made the central bank hesitant to act.

In Canada, Government of Canada bond yields rose last week, driven by rising oil prices rather than the weak US employment data. The five-year GoC bond yield, which influences fixed mortgage rates, has shown an 86% correlation with the price of West Texas Intermediate oil over the past three months. Canadian mortgage lenders have raised fixed rates in response to the bond yield increase, while variable-rate mortgage discounts have narrowed.

Bond-market investors are pricing in aggressive rate hikes by the Bank of Canada over the next year. However, some analysts believe these expectations are overstated. The current environment favors fixed-rate mortgages due to their stability, but variable rates may still offer long-term savings despite their volatility.