Friday 11 September 2026

A Fed hike on 16 September is now the base case, not the risk case, and Canadian fixed rates will stay near current levels through October whatever the Bank of Canada does. We expect the Bank to hold at 2.25% on 28 October, and we no longer see a Canadian cut this year.

Why we think so. U.S. inflation is not cooling. Consumer prices rose 0.4% in August and 3.4% over twelve months, the same annual rate as July. Core CPI, which leaves out food and energy, rose 0.3% in the month, and a monthly pace like that, if sustained, is well above what the Federal Reserve wants. Energy is the main driver: gasoline rose 3.9% in August alone and is 27.4% higher than a year ago, and Thursday’s producer price report put wholesale inflation at 5.4%, which points to more pressure on consumer prices ahead. Canadian yields follow Washington. The 5-year Government of Canada yield, the benchmark for fixed mortgage pricing, closed Wednesday at 3.48%, about 30 basis points higher than a month ago, while the U.S. 10-year closed Thursday at 4.91%, its highest since 2023. At home, August’s loss of 42,000 jobs, unemployment at 6.4% and the trade dispute argue against the Bank of Canada following the Fed up, so the gap between the two central banks widens.

What the market is pricing. By late morning, CME FedWatch pricing showed about an 86% chance of a 25 basis point Fed hike on 16 September, up from a coin flip a month ago. Core prices rose 0.3% in the month against a consensus of 0.2%, a hotter reading than expected, which explains the move. We agree with the market on the Fed. Our call on Canada goes further than the consensus hold on 28 October: we think the window for a Canadian cut this year has closed.

What it means. A 30 basis point rise in the 5-year yield over a month is roughly the difference between a 4.1% five-year fixed quote and a 4.4% one, about $80 a month on a $500,000 mortgage. Anyone with a renewal or a purchase closing in the next 120 days can ask a lender for a rate hold, which costs nothing and protects against the direction yields are moving. Savers gain what borrowers lose: a 1-year GIC or a high-interest savings account now pays more than inflation, which was not true a year ago. The more useful household question is how much debt reprices in the next 24 months, and whether the budget still balances at a rate one full point above today’s.

What would change our mind. A Fed hold on 16 September, or the 5-year Canada yield falling back below 3.2% within a month. Either would mean the bond market has decided the energy shock is temporary, and we would reopen the case for a Bank of Canada cut before year-end. A Canadian August CPI print above 3% next week would instead put a Canadian hike back on the table.

What to watch. Today’s University of Michigan one-year inflation expectations, Statistics Canada’s August CPI next week, the Fed’s decision and the Bank of Canada’s summary of deliberations on 16 September, and the Bank’s 28 October decision and Monetary Policy Report.

This is a repricing of interest rates, not of earnings. A 5% to 10% drawdown in a year still up double digits is the cost of holding equities, not a reason to sell, and the Fed on 16 September will show whether a hike is one-and-done or the start of a cycle.

Why we think so. The pattern of the selling points to bonds, not profits. The S&P/TSX Composite fell 400.28 points, or 1.11%, to 35,506.28 on Thursday, a one-month low and its fourth straight loss. The sectors that behave most like bonds fell first: utilities lost 1.75%, and materials 3.54% as gold fell 2.28% to about US$4,359 an ounce. Financials was the only sector to close higher. When a U.S. government bond pays 4.91%, the highest since 2023, stocks have to earn more to compete, and their valuations adjust. The European Central Bank added to the pressure by raising its deposit rate to 2.50% after euro-area inflation rose to 3.3% in August. Gold falling with stocks is a reminder that it is not a reliable hedge when the problem is rising real yields.

How this has played out before. Pullbacks caused by rising yields and pullbacks caused by falling profits look similar in the first week but behave differently. A rate-driven decline usually stops once yields stabilise, because company earnings are intact. An earnings-driven decline tends to run longer, because the thing that justifies prices is shrinking. The context here is a strong year: the S&P 500 is down 1.6% for the week and the Dow 2.5%, but the S&P 500 is still up 10.9% for the year and the Nasdaq 12.2%. Four down days after that kind of run is a normal pullback, not a signal.

What it means. For investors, the first check is that any money needed in the next 12 months, a tax bill, a tuition payment or a down payment, is not sitting in equities. The second is drift: after a strong year, if the asset mix has moved more than 5 percentage points from its target, that is a rebalancing decision rather than a market call, and the account it sits in, RRSP, TFSA or taxable, decides whether it costs tax to make. Most Canadian portfolios are now more foreign than domestic, so a bad week in New York matters more to a Canadian RRSP than a bad week on Bay Street. A target mix chosen with a 10% drawdown in mind is one that does not have to be redesigned at the bottom.

What would change our mind. Corporate credit spreads widening sharply, or a run of guidance cuts in the coming earnings season. Either would make this an earnings story rather than a rates story and change our position.

What to watch. ECB President Lagarde’s remarks and the University of Michigan consumer sentiment reading today (consensus 51.0), the Federal Reserve on 16 September, the coming earnings season and the Bank of Canada on 28 October.

The soft patch in Canadian housing is cyclical and the shortage is structural, and the two can coexist for another year or two. We expect prices in Toronto and Vancouver to stay flat to lower through 2027 while fixed rates sit in the low-4% range, then for the shortage to reassert itself.

Why we think so. CMHC’s Fall 2026 Housing Supply Report puts the gap in plain numbers. To return housing costs to 2019 levels of affordability by 2036, Canada needs 187,000 to 238,000 homes a year beyond what it would build anyway, or 417,000 to 469,000 total starts a year, roughly 4.69 million homes over the decade. Actual starts through July 2026 were 131,851, down 4% from a year earlier, a pace of about 231,000 a year: roughly half what is needed. The estimate is slightly below the July 2025 figure of 430,000 to 480,000 only because slower population growth has eased demand. Today’s prices reflect today’s rates and demand; tomorrow’s prices will reflect how many homes were actually built. The homes not started in 2026 are the homes not completed in 2028 and 2029.

The bigger picture. Housing cycles often work this way. When prices and rents soften, builders slow down, especially in condos, because projects are harder to finance and pre-sell. That reduces future supply just as demand is waiting to return. The city detail shows both sides. Toronto’s gap narrowed because prices fell, but condo construction there has weakened sharply. Calgary nearly halved its gap through record building, and Edmonton is the only major market with no measurable gap. Montréal has the largest gap, Ottawa’s widened and Vancouver’s was unchanged. CMHC’s deputy chief economist named the key risk: underbuilding in a soft market and finding the country further short when demand returns.

What it means. For a buyer, today’s softer market is a window rather than a new normal. Qualify the purchase at a rate at least 1.5 points above the contract rate and buy for a horizon of seven years or more, not for a quick rebound. A renter in a city where asking rents are falling can negotiate a longer lease now. An owner planning to downsize should note that the buyers for a family home are the households most squeezed by today’s rates. For a condo investor in Toronto, the thinning pipeline supports rents later but says nothing about the mortgage renewal now. In each case the decision rests on time horizon, cash flow at a stress-tested rate and what the down payment would otherwise earn.

What would change our mind. Starts running above 280,000 a year for two consecutive quarters, or population growth slowing further than the 2026 immigration targets imply. Either would close the gap faster than CMHC assumes.

What to watch. Statistics Canada’s August CPI next week, the Federal Reserve on 16 September, and the Bank of Canada’s 28 October decision and Monetary Policy Report, which will shape where fixed rates sit for buyers this winter.