Forget Fed hike – oil prices are real concern

It didn’t come as a shock when the U.S. Federal Reserve hiked its key policy rate – but instead of focusing on rate, advisors should be looking at the price of oil, says one economist

The stock market seems to like it – but a lot of other elements are going to drive the markets more than just what the Fed did, says Dominion Lending Centres chief economist Dr. Sherry Cooper, and the biggest concern right now should be oil prices.

“Oil prices continue to flounder, and for Canada that is a huge deal,” says Dr. Cooper. “In the U.S. it is probably not bad news, but it certainly is bad news for Canada and the Canadian dollar.”

For the first time in nine years, the U.S. Federal Reserve hiked their key policy rate – the overnight federal funds rate – by one-quarter-of-a-percentage point (25 basis points) to a range of 1/4 to 1/2 per cent. The policy-making Federal Open Market Committee (FOMC) said that the stance of monetary policy remains accommodative, thereby supporting further improvement in the labour market and a return to 2% inflation.

Oil tumbled after U.S. crude inventories climbed to the highest level for this time of year since 1930.

Crude supplies rose to 490.7 million barrels, leaving stockpiles more than 120 million barrels above the five-year seasonal average, government data showed. The discount of crude in New York to global marker Brent earlier dropped to an 11-month low amid expectations that a 40-year-old ban on most American crude exports will be lifted. Futures maintained losses after the Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move.

“We will see a lot of debate over how many times the Fed will raise rates in 2016, but clearly they expect to raise rates about four times,” says Dr. Cooper. “But that will be dependent on data and how the economy, inflation and employment evolve in the next year.”

Dr. Cooper has stated in an earlier article hat mortgage rates have bottomed out in Canada, and doesn’t expect the overnight rate to change for a year, while market rates will increase slightly.

“Banks and lenders are really pressed because of interest spread compression,” she says, “and for those reasons the Bank of Canada doesn’t need to do anything, and mortgage rates will edge upwards.”

For the mortgage and real estate sectors, the noises coming from Ottawa to further minimize risk by increasing banks’ capital retention requirements or removing the securitization aspect of their mortgages, should begin to cool Canada’s hottest markets.

“Despite the weakness in Canada, the government seems pretty determined to slow housing,” says Dr. Cooper, “particularly in Toronto and Vancouver, and that should precipitate a slowdown in housing in 2017.”