There are weeks when the headline move in the stock market tells you most of what you need to know. Last week wasn’t one of them. The S&P/TSX Composite only lost 0.8%, but underneath that fairly ordinary number we saw global bond yields surge, the Canadian dollar sink to an 18-month low and a surprisingly weak U.S. jobs report suddenly change the interest-rate conversation again.
What caught my attention most was how quickly investors reacted whenever expectations for rates moved. For Canadian investors, I think that’s the bigger story heading into the new week. Oil, jobs, the dollar and even the TSX are all being pulled into the same debate: how high do borrowing costs need to stay, and how much pressure can the economy absorb?
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Bond Yields Became the Market’s Biggest Headwind
If I had to pick one development that mattered most last week, it would be the renewed selloff in government bonds. The U.S. 10-year Treasury yield climbed as high as 5.34% on Thursday, its highest level since 2002. Canada wasn’t immune. The Canadian 10-year government bond yield briefly reached 4.042% on Thursday, near a three-year high. Those moves matter because government bond yields become a reference point for borrowing costs and valuations throughout the economy.
For stock investors, the basic relationship is fairly straightforward. When investors can earn substantially higher yields from relatively low-risk government bonds, expensive stocks have to compete harder for capital. Higher long-term rates also raise financing costs for businesses, put pressure on real estate and mortgages, and can make heavily indebted companies less attractive. We saw some of that pressure on the TSX. The index fell for four consecutive sessions before rebounding Friday, eventually closing the week at 35,502.65.
Friday’s 0.99% gain softened the damage, but the TSX still finished the week down 0.8%. Earlier in the week, financials and materials were among the sectors feeling the pressure. What matters to me here isn’t whether the 10-year yield is 5.2%, 5.3% or 5.4% on any particular afternoon. It’s that long-term borrowing costs have moved high enough to become an important part of the valuation discussion again. That deserves more attention than trying to predict the TSX’s next 200-point move.
A Weak U.S. Jobs Report Changed the Rate Conversation
Then came Friday. The U.S. economy added just 29,000 nonfarm jobs in September, well below the roughly 90,000 economists surveyed by Reuters had expected. The unemployment rate increased to 4.2% from 4.1%, while payroll figures for July and August were revised down by a combined 60,000 jobs. Wage growth also slowed to 3.0% year over year. That report mattered because the Federal Reserve had only raised its target rate by 25 basis points in September, bringing the federal funds target range to 3.75%–4.00%. Inflation remains above the Fed’s target, so another increase had been a real possibility.
Friday’s employment report made an immediate October hike look considerably less likely. That was enough to give stocks some breathing room. Materials gained 1.8% on the TSX Friday, industrials rose 1.5%, and technology and energy each advanced 1.4%. There are two ways to look at weaker employment numbers. The positive interpretation is that a cooling labour market reduces some of the pressure on the Fed to keep raising rates.
The risk is that investors eventually get exactly what they’ve been asking for — slower economic activity — and discover that weaker growth isn’t automatically good for corporate earnings. I wouldn’t treat one employment report as proof that the U.S. economy is rolling over. Even the report itself showed relatively low layoffs and a labour market that looks more “low-hire, low-fire” than recessionary. But it added another reason for the Fed to be patient, and after the bond-market moves we’ve been seeing, patience from central banks matters.
Canada’s Economy Is Giving Mixed Signals
Canada added another piece to the puzzle last week. Statistics Canada reported that real GDP was essentially unchanged in July. Construction grew 1.3% and utilities increased 1.7%, but manufacturing fell 0.9%, mining, quarrying and oil and gas extraction declined 0.5%, and retail trade fell 1.0%. Overall, 10 of 20 industrial sectors expanded. There was at least some encouragement in the preliminary estimate for August, which pointed to approximately 0.2% growth.
That leaves Canada in an awkward position. Growth isn’t collapsing, but it isn’t particularly strong either. At the same time, elevated energy prices, tariffs and global inflation pressures give the Bank of Canada reasons to remain cautious. The Bank held its policy rate at 2.25% on September 2 and isn’t scheduled to make its next decision until October 28. This is where I think Canadian investors need to separate the economy from the stock market.
Slower Canadian growth doesn’t mean every Canadian company suddenly becomes unattractive. Plenty of TSX companies earn revenue internationally, and different industries respond very differently to interest rates, commodity prices and currency movements. The economic numbers are useful because they tell us something about the environment businesses are operating in. I wouldn’t use them as a reason to make an all-or-nothing portfolio decision.
The Canadian Dollar Is Sending Its Own Message
The loonie quietly became one of the more interesting stories of the week. The Canadian dollar finished Friday around C$1.4257 per U.S. dollar, or roughly 70.14 U.S. cents. It had briefly touched C$1.4263 on Thursday, its weakest level in about 18 months, and ended down roughly 0.8% for the week — its fourth consecutive weekly decline.
Part of the issue is the gap between Canadian and U.S. interest rates. The Canadian two-year government bond yield finished roughly 157 basis points below its U.S. equivalent Friday, the widest spread since February 2025. When investors can receive substantially higher short-term yields in the United States, that can increase demand for U.S. dollars relative to Canadian dollars.
Oil normally provides some support to the loonie because Canada is a major energy exporter, but even that relationship has been complicated. U.S. crude settled Friday at US$91.11 per barrel after falling 1.9%, as emergency reserve releases helped take some pressure out of energy prices. Earlier concerns about high oil and diesel prices had contributed to the inflation fears pushing bond yields higher in the first place.
For Canadians who own U.S. investments, currency moves are worth understanding rather than fearing. A weaker Canadian dollar increases the Canadian-dollar value of U.S.-dollar assets, all else being equal, while also making new U.S. purchases more expensive. It can also increase the cost of imported goods here at home. That’s why I pay attention to the loonie, but I don’t try to trade around every currency move.
My Take
The part of this week I wouldn’t ignore is the bond market. A 0.8% weekly decline in the TSX doesn’t concern me very much on its own. Markets move around. What interests me more is that long-term yields have climbed to levels capable of changing the economics for businesses, homeowners, governments and investors at the same time. Friday’s U.S. employment report provided some relief, but I think it would be premature to assume the rate story is finished.
Inflation is still elevated in the United States, energy markets remain volatile and central banks are balancing slower growth against price pressures that haven’t completely disappeared. For my own long-term investing, none of that makes me want to dramatically change direction. It does make valuation more important. When bonds offer investors more competition for their money, I think paying almost any price for a good company becomes harder to justify.
I’m also watching the Canadian dollar more closely. The widening Canada-U.S. rate gap tells us something about how differently the two economies are being priced right now. There’s plenty happening, but I don’t think the answer is to react to all of it. I’d rather understand which pressures are temporary and which ones could actually change the earnings outlook for the businesses I own.
What I’m Watching This Week
Monday, October 5 — U.S. ISM Services PMI
The September ISM Services report will give investors an early look at activity in the largest part of the U.S. economy. After Friday’s weak employment numbers, I’ll be paying particular attention to whether the services sector still looks resilient. A strong report could revive some concerns about inflation and rates, while a weaker reading would add to the evidence that the U.S. economy is cooling.
Tuesday, October 6 — Canadian International Merchandise Trade
Statistics Canada releases August merchandise-trade data Tuesday. This report is more important than usual because August covers a period when new U.S. tariffs and Canadian countermeasures were beginning to affect the economy. I’ll be watching exports and imports for early evidence of whether the trade dispute is changing Canadian business activity.
Wednesday, October 7 — Federal Reserve Minutes
The Federal Reserve will release minutes from its September 15–16 meeting, when policymakers raised their target rate to 3.75%–4.00%. Investors will be looking for more detail on how worried Fed officials are about inflation and how willing they are to keep tightening if the economy remains resilient. After Friday’s jobs report, the discussion inside the Fed may be even more interesting than the decision itself.
Friday, October 9 — Canadian Labour Force Survey
This is the Canadian release I’ll be watching most closely. Employment fell by 42,000 in August while the unemployment rate remained at 6.4%, so September’s report will help show whether that weakness continued or was just a monthly setback. Labour-market strength matters for consumer spending, housing and ultimately the Bank of Canada’s rate outlook.
Heading Into Monday
Last week was a reminder that sometimes the biggest market story isn’t coming from the stock market at all. Bond yields pushed borrowing costs higher, pressured equity valuations and helped strengthen the U.S. dollar. Then one weak employment report was enough to reverse part of that pressure and send the TSX sharply higher on Friday. That tells me investors are still extremely sensitive to anything that changes the interest-rate outlook.
Heading into the new week, I’m less interested in guessing whether Friday’s rebound continues. I’m watching whether bond yields settle down, whether Canada’s labour market shows resilience and whether economic data gives central banks room to be patient. Those developments will tell us much more about the investing environment than one good or bad trading day.
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