What Monday’s stock sell-off means for mortgage rates

To call it a sell-off would be an understatement. The US $6.4-trillion “stock wipeout” that took place yesterday has greatly amped up fears of an impending global recession – and has significant implications for both fixed and variable mortgage rates.

The market malaise kicked off on Friday with the latest American jobs report, which showed the labour market fell by a greater-than-expected margin in July. The US unemployment rate rose to 4.3%, and the economy added just 114,000 jobs – compared to the previous consensus of 4.1% growth and anticipated 175,000 new positions. 

The sluggish report raised fears that the labour market is weakening at too-fast a pace, and perhaps outside of the US Federal Reserve’s control. Investors are increasingly concerned that the American central bank has held its benchmark borrowing rate too high for too long, and has missed its “soft landing” – the ability to lower interest rates without destabilizing the economy and jobs market.

The timing of the report also coincided with a downturn in big tech stocks and currency fears in Japan, causing global markets to plummet on Monday: the Dow Jones index dove by more than 1,000 points while the S&P dropped 3%, and the Nasdaq Composite fell by 3.4%, marking its largest one-day drop since September 2022. 

10-year US treasury values – which act as the general benchmark for fixed-rate borrowing in the US – fell from 3.99 to 3.78% between August 1st and 5th – its lowest since June 2023, and about 50 basis points lower than they were a month ago. Meanwhile, the two-year treasury sat at 3.875% by the end of the day, further deepening the yield curve inversion between short and long-term debt – a traditional indicator of an impending recession. 

A yield curve is supposed to trend upward, as longer-term debt typically has a higher yield, or payout. A curve that steepens quickly can indicate expectations of higher interest rates and a stronger economy. When short-term debt is more expensive than long-term, however, it shows investors expect economic volatility over a longer horizon, hence the growing recession worries.

What does this mean for both Canadian and American interest rates?

Softer jobs, combined with the drop in treasuries and growing negative investor sentiment, further cements the likelihood that the US Federal Reserve will indeed cut its benchmark rate in September, with more to come before the end of the year. 

In his speech following last week’s Federal Reserve rate announcement, Chair Powell heavily underscored the importance of labour market stability, with the goal of slowing economic growth without significantly stoking unemployment. He stated that the Fed would be “ready to respond” if the jobs market were to weaken unexpectedly, as it now has.

“This rapid slowdown in employment growth in the United States comes just two days after the Federal Reserve (Fed) held its key rate at 5.5%. With wage growth also slowing—albeit not as quickly—the US job market’s recent resilience seems to be fading,” writes Desjardins Senior Economist Marc-Antoine Dumont. “As such, we expect the Fed to start cutting rates in September.” 

Canadian bond yields – and fixed mortgage rates – are falling

While Canadian markets were closed due to the long weekend, our bond markets have been reacting in kind since opening today, as anticipated cuts from the Fed further support more from the Bank of Canada, in particular on its next scheduled announcement on September 4th. Should this materialize, variable mortgage rates will lower for the third time since June 5th.

As of publish time, Canadian five-year government bond yields have dropped to 2.9%, a low not seen since June 2023, marking a decline of 27 basis points since July 30. Compared to one month ago, the yield has dropped by 60 basis points.

As bond yields set the floor for fixed mortgage rate pricing, that certainly paves the way for lower fixed mortgage rates – and we’ve already seen a number of discounts put into place over the past week. Currently, the lowest insured five-year mortgage rate is 4.29% – a low not seen since last May. That’s roughly 40 basis points cheaper than the five-year fixed rates available at the start of July.

Will fixed mortgage rates fall further?

Yes, it’s possible, if this slide in yields continues. While future rate cuts from the BoC are already well-baked in by markets, additional economic surprises could prompt yields to fall further. Keep in mind that the Canadian jobs numbers come out on Friday, with unemployment expected to tick up to 6.5% (from 6.4% in June). Should Canadian jobs surprise on the downside, markets will likely react in kind. The next Canadian Consumer Price Index (CPI) report, due out on August 20, could also move bond markets lower should inflation prove lower. 

Those currently shopping for new mortgage rates, or who are coming up to renew their mortgage, are wise to keep their eyes peeled on rate trends over the next week, and take action with a rate hold to secure today’s lows for up to 120 days. It’s also a great time to connect with a pro such as a mortgage broker, to discuss your options and potential strategy in a lower interest rate environment.

Also read:

• Understanding mortgage pre-qualification and rate holds
• Bank of Canada cuts target interest rate by 0.25%
• Canadian CPI lowers to 2.7% in June
• Canadian GDP grows by 0.2% in May, BoC still on track to cut rates