Recent economic data are reshaping expectations for interest rates in both the United States and Canada.
In the U.S., the case for further Fed rate hikes has weakened. A soft July jobs report, lower energy prices, and a less aggressive tone from Fed officials have all contributed to the shift. Bond yields fell, while the odds of a September rate hike dropped below 50 per cent. Equity markets welcomed the news, with the S&P 500 reaching a new record high and Canada’s TSX also hitting record levels.
U.S. inflation also appears to be easing. July’s headline inflation is expected to hold near 3.5 per cent, while core inflation, which excludes food and energy, is expected to fall to 2.5 per cent, matching a five-year low. Oil prices have also declined, while wage growth has slowed to levels last seen before the pandemic. Together, these trends support the case for fewer rate hikes.
At the same time, the U.S. labour market is showing clear signs of cooling. Payrolls fell in July, while hiring in previous months was revised lower. The unemployment rate edged down slightly, but largely because the labour force participation rate fell. Much of the decline reflects older workers retiring rather than a weakening job market for younger workers.
Canada’s labour market tells a different story. Employment jumped by 75,100 jobs in July, with job growth over the past year outpacing the United States. Gains were spread across trade, finance, professional services, and construction. The unemployment rate fell to 6.4 per cent, its lowest level in two years. Still, labour market conditions have not fully recovered. Wage growth remains soft, while youth unemployment, particularly among teenagers, remains well above pre-pandemic levels.
Stronger employment data have also lifted expectations for Canadian economic growth. Second-quarter GDP growth has been revised higher, while hours worked suggest momentum continued into the third quarter. Trade tensions with the United States remain the biggest risk to the economic outlook, particularly with new tariffs possible after August 19.
Looking ahead, the Bank of Canada is likely to hold interest rates steady through the end of the year. Inflation is moving closer to target, and the job market, while improving, is not showing signs of overheating. Soft wage growth and uneven job gains support a patient approach. The main risk is trade policy, as further tariff escalation could slow the recovery. For now, a stable rate path appears to be the most likely outcome.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Mortgage arrears are rising — but is a crisis looming?
Our latest Housing Affordability Watch examines the findings of a recent Desjardins report on the outlook for Canadian mortgage arrears. While arrears have increased from pandemic-era lows, the report suggests the rise reflects a return to more normal borrowing conditions rather than widespread financial distress among borrowers.
Read the full article: The Outlook for Mortgage Arrears in Canada
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