Friday 25 September 2026

The Government of Canada 5-year yield stays above 3.5% through the 28 October decision, and fixed mortgage rates take at least one more step up before then, while the Bank of Canada holds at 2.25%.

Why we think so. The 5-year bond yieldBond yield The annual return an investor gets for lending to a government or company through a bond. Yields rise when bond prices fall. Fixed mortgage rates are priced from the 5-year Government of Canada yield., the benchmark behind fixed mortgage pricing, closed at 3.69% on Thursday 24 September, 15 basis points above Tuesday’s 3.54% and up from 3.35% in late August. Every maturity, from the 2-year at 3.39% to the long bond at 4.27%, closed at its high for the year. The pull is from the south. The US 10-year Treasury closed Wednesday at 5.11% and was near 5.22% by early Friday, with the 30-year near 5.50%. Fed Governor Michael Barr said further adjustments are likely to be needed, and US jobless claims of 197,000 give the Fed no reason to pause. The selloff rests on strong growth, a hawkish Fed and an unresolved oil shock. Canadian yields have followed US yields almost point for point this month, and there is no domestic reason for that link to break.

What the market is pricing. Futures put the odds of another quarter-point Fed increase at the 27 to 28 October meeting at about 71%. In Canada, the market expects the Bank to hold, and we agree. The Bank cannot cut into 3% inflation, 3.2% wage growth and a 70-cent dollar, and has no reason to hike while tariffs are cutting growth. So the policy rate stays put while the funding cost of fixed mortgages rises around it. A five-year fixed rate is the 5-year yield plus a spread, so this move is, in the ordinary course, worth another 20 to 30 basis points on posted rates. In mid-September, a similar move led major banks to lift fixed rates by 10 to 20 basis points within days.

What it means. Anyone with a renewal or a purchase closing in the next 120 days can ask for a written rate hold now; it costs nothing and caps the risk if lenders reprice. A variable rate follows the Bank’s policy rate through prime and only wins if the Bank cuts, and no cut is in view this autumn. Savers rolling a maturing GIC will find better one to five-year terms than a month ago, because the whole curve has moved up. At 70.74 US cents, the dollar makes US-dollar expenses dearer, so a known one can be bought in stages. The useful test is whether the budget works if the renewal rate is half a point higher than today’s.

What would change our mind. A signed Hormuz agreement that takes Brent below US$90 within two weeks, or the US 10-year back under 4.9%, either of which would mean the bond market judged the inflation scare temporary. A September CPI in mid-October with CPI ex-gasolineCPI ex-gasoline The Consumer Price Index with gasoline removed. When it sits well below the headline rate, the inflation is coming from fuel rather than from the broad economy. clearly falling would reopen the case for a cut. Any of those and we would say so.

What to watch. The University of Michigan sentiment survey today, with early reports of one-year inflation expectations at 4.6%; Canadian GDP by industry for July on 30 September; the Labour Force Survey for September on 9 October; September CPI in mid-October; the Federal Reserve meeting on 27 to 28 October; and the Bank of Canada decision on 28 October.

The market is right to price talks rather than a deal. Our base case for the next month is crude in the US$90 to US$105 range rather than a return to the US$70s, and diesel, and therefore food and freight, stays expensive into the new year whatever crude does.

Why we think so. Reuters reported that US and Iranian negotiators are working on a phased agreement under which Iran would allow shipping through the Strait of Hormuz in exchange for Washington lifting its blockade of Iranian ports. Foreign Minister Abbas Araghchi proposed reopening the strait and resuming nuclear talks within seven days if the US lifts the blockade, waives sanctions on Iranian oil exports and agrees to a ceasefire that includes Lebanon. Those conditions are wide, and the two sides remain apart on whether Iran can control navigation or collect tolls, which Washington rejects. A similar June arrangement collapsed after a 60-day interim period. The blockade, which by 23 September had turned back 115 commercial vessels, is the main leverage Washington has, so it will not be given up for a statement. Secretary of State Marco Rubio said the US would exchange ideas; the president said there was no urgency.

What the market is pricing. The November contract rose US$2.45 to close at US$94.61 in New York on Thursday, and early Friday quotes had Brent near US$105.60 and WTI near US$93. Those levels include a war premium; they do not price a settlement. We agree. Diesel is the more important price for households, and it is at a record because refining capacity in the region is damaged. A reopened strait would help crude before it helped diesel, so relief at the till would lag relief at the wellhead by months.

What it means. For a Canadian household the strait shows up at the pump, in the grocery bill and in the mortgage rate, since the energy shock has fed into inflation expectations and long yields. Higher oil should normally support the Canadian dollar, but the rate gap with the US is doing more work, so Canadians are getting the cost of the shock without the usual currency cushion. A household can budget fuel and food for the winter at today’s prices and treat any drop as a bonus. A business that moves or buys anything heavy can check that surcharges in its supplier contracts and customer pricing work in both directions, because a deal would cut costs as suddenly as the war raised them. For Alberta or Saskatchewan businesses, or a portfolio heavy in energy producers, a deal cuts the other way, and a large energy weighting is worth checking as a deliberate choice rather than an accident of returns.

What would change our mind. A signed text with a verified first phase of ship transits, which would take Brent below US$90 within days; or a breakdown followed by attacks on shipping, which would put it above US$115 as fast. The falsifier is the first ship through under an agreement, not another statement.

What to watch. Follow-up to the seven-day proposal made at the UN General Assembly; the US Navy’s enforcement of the blockade; and any change in the US position on tolls and navigation.

Wage growth stays near 3% into 2027, because the population slowdown is policy, not cycle. That keeps the Bank of Canada on hold rather than cutting, even if growth is soft.

Why we think so. Statistics Canada reported average weekly earnings of $1,347 in July, up 3.2% from a year earlier, with payroll employment up 26,100 in the month and 171,900 over the year. Job vacancies stood at 501,000, the seventh consecutive month with little change. The day before, the population estimate put Canada at 41.8 million on 1 July, with growth of 0.5%, the slowest since 1915 to 1916, as the number of non-permanent residents fell by 154,614 to 2.78 million. Put together, the labour market is tightening from the supply side: employers are not adding many jobs, but fewer new workers are arriving to fill the ones that exist. When the pool of available workers shrinks, employers compete for them with pay. The CFIB survey supports this: 41% of small firms name a shortage of skilled labour as a constraint and 60% name wage costs, and firms’ average price plans for the next year rose to 3.3% from 2.6%. Wages are being passed through to prices.

The bigger picture. For a central bank, wage growth above 3% with a shrinking labour force keeps service prices rising even when goods prices settle, because services are mostly labour. That is why 3% inflation and a weak retail number can coexist without a cut. The supply squeeze is the result of immigration policy, and it will not reverse before the immigration levels plan is revisited, so it is unlikely to fade on its own the way a cyclical squeeze would.

What it means. For employees, this is the best negotiating position in three years: vacancies are steady, new arrivals are fewer and 3.2% is the average raise, not the ceiling. Someone whose pay has not moved in a year can use that figure as a reference point, and weigh a raise against the after-tax value of benefits such as an employer pension match, which is often worth more. For employers, the choice is whether to compete on wages, hours, or training existing staff. For a household planning a return to work or a second income, the door is more open than the headlines suggest, though not in every region or trade. For borrowers, the same wage pressure is a reason not to expect a rate cut this autumn. A sound plan asks what a year without a raise would do to it.

What would change our mind. Vacancies falling below 450,000 for two consecutive months, or the Labour Force Survey in early October showing unemployment rising as layoffs spread beyond the tariffed sectors. Either would mean demand for labour was finally giving way, and a cut would be back in view.

What to watch. The Labour Force Survey for September on 9 October; September CPI in mid-October; the Bank of Canada decision on 28 October; and the next immigration levels plan.