Oil fear is raising fixed rates even when the numbers say stop

You are looking at a fixed rate that rose on a worry, not a fact

The United States added about 29,000 jobs in September when the forecast called for 90,000. Earlier months also got revised down by another 60,000 on top of that. That is soft. Normally soft jobs data pulls the cost lenders borrow at lower, which pulls fixed rates down with it. This time the number got overruled.

What overruled it was oil. Prices kept climbing through the US and Iran war, and the rate that fixed mortgages are built on has been moving with the price of a barrel about 86% of the time over the past three months. So instead of easing on the weak jobs report, that rate edged higher again. The fixed rates lenders are offering followed.

If you have an offer in this week, that is the thing to understand. Today's fixed rates are rising on a worry about where inflation might go, not on where the economy actually is. The best insured five-year fixed sits at 4.34%. The question is whether that worry holds up.

The economy underneath that fear is cooling, not heating up

Here is why I do not fully buy the inflation worry driving fixed rates. For high oil to turn into runaway inflation, paycheques usually have to climb to keep pace. They are doing the opposite. Canadian wage growth slid from 3.3% in June to 2.8% in July to 2.0% in August. That is the slowest in nine years outside the pandemic.

The rest of the picture matches. Our economy flat-lined in July after a decent spring, and about four in ten businesses say they are not passing higher costs on to you at all. They are eating them. On top of that, expensive gas acts like a tax. Every extra dollar at the pump is a dollar you do not spend elsewhere, which cools consumer demand rather than stoking it.

So the fundamentals are soft while the fear is loud. Last week I said oil near triple digits was the whole story behind rising fixed rates, and that the bet built into them might be wrong. A week on, I am more convinced. The US jobs miss was the cleanest test yet, and the fear won anyway.

The variable discount just shrank for the first time in this run

Something shifted this week. For the past few weeks, the gap between fixed and variable rates held steady, which kept variable looking like a bargain. That gap narrowed for the first time. The first sign the hike worry is starting to leak into variable rates, not just fixed.

Here is the mechanic in plain terms. Fixed rates are set off the cost lenders borrow at, which moves daily on oil and inflation news. Variable rates move with the Bank of Canada, which has held its rate at 2.25% since last October. The best insured variable today is 3.45% versus 4.34% for the fixed. Still a real head start. But the people setting rates are now betting on roughly a full percentage point of Bank hikes over the next year, and that bet is what is starting to trim the discount.

I think that bet is an overshoot, given how soft wages and growth are. If I am right, variable still has the best shot at costing you less over a full five years. If I am wrong and oil fear becomes real inflation, the fixed buys you a quiet night's sleep. Neither is a math test. It is a sleep test, and only you know which payment you'll be able to sleep well at night with.

October 19th is the date that settles this argument

This whole standoff gets tested on October 19th when the inflation report comes out. If core prices stay tame, the variable rate holders who picked the discount get confirmation that the economy is too soft to need higher rates. If prices are creeping up, the hawks get their ammunition.

For you, that means the next three weeks carry real information. A tame inflation number could take some heat out of fixed rates. A hot one could push them up again. Nothing you need to panic about. But if you are about to make a move, it is worth knowing the signposts are right in front of us.

My take

I think the cost lenders borrow at is trading on a fear that the data keeps refusing to confirm. A jobs report that bad should have cooled fixed rates. Oil overrode it, and that tells me this is a sentiment move, not a fundamentals move. Sentiment reverses faster than fundamentals. So where do I land? If the gap between fixed and variable is still this wide, I still give variable the edge over a full five years. Wages are the slowest in nearly a decade, businesses are eating their own cost increases, and a soft economy does not usually need a string of rate hikes. I could be wrong. If this oil spike genuinely leaks into everything, fixed wins and you will have paid for peace of mind. That is a fair trade too. Just make it on purpose.

Insider tip

If you are selling to move up, ask your current lender for your port terms AND the exact penalty to break your mortgage, in writing before you list. Porting carries your old rate onto the old balance, and only the new money prices at today's rate. So with fixed rates climbing, this week's increases touch a smaller slice of your mortgage than you would fear. Get both numbers before you pick a closing date.

Go deeper: Porting Your Mortgage: How It Works and When It Beats Paying the Penalty