Potential for U.S. rate hike puts a chill in the air
As global rebound sees delays, first overall profit decline in past six years could trigger ‘earnings recession’ this year
Stock markets wobbled at the open Monday, but rebounded as investors assessed the impact of Friday’s terrorist attacks in Paris.
The major global moves were higher, though there were signs of a flight to safety in the U.S. dollar. The American currency rose against most others, including our dollar, which sank to 75.05 cents (U.S.). Gold was up; oil, which drifted down at the start of the day, recovered, too.
As Bloomberg noted, the history of terror incidents over the past 15 years shows market reactions are often sharp and short-lived. In this case, there was barely a ripple, though tomorrow is another day.
“Terrible as these events are on a human level, from a market perspective the impact tends to be transitory,” Richard McGuire, head of rates strategy at Rabobank International, told Bloomberg.
It’s the third major event to test financial markets his year. In July, they wobbled on fears of a slowdown in China. They wobbled again in early September on renewed talk the U.S. might raise interest rates for the first time in nine years.
The S&P/TSX index, the broadest measure of Canadian share prices, is down 9.8 per cent for the year and 4 per cent since mid-October. The S&P 500, which follows the shares of 500 largest American companies, is down almost 1 per cent since January.
Thomson Reuters, which tracks the profits of the S&P 500, reports that in the third quarter, overall profits declined year over year for the first retreat in six years. It expects more of the same in the fourth quarter, setting the stage for an “earnings recession,” signalling that even the U.S. recovery has weak spots.
More broadly, the global rebound has been delayed once again.
The focus is now on the meeting of the U.S. Federal Reserve on Dec. 16, which is the Americans’ next chance to raise interest rates. An index called the Fed fund futures, which gauges expectations of interest rates, jumped last week to a 70-per-cent probability of a December hike. What does this mean for you? TD Economics said Monday it expects to see the dollar go as low as 71.4 cents by early in the new year. That’s $1.40 Canadian to $1 (U.S.). A year ago, the loonie was worth 88 cents, or $1.12 to $1 (U.S.).
TD is among those that expect the Fed to pull the trigger in December. That will put the pressure on our dollar by widening the gap between Canadian and U.S. interest rates.
The consensus is that any Canadian interest-rate increase is at least a year, or more, away. A better read of that occurs in about two weeks, at the Bank of Canada’s Dec. 2 meeting.
Our weak dollar keeps increasing the price of travel to the U.S. and Caribbean. If you’re heading south, now will probably be a better time to convert your money than in the new year.
Be prepared for more sticker shock at the grocery store. Your bill has already gone up this year and will go up again this winter, whether you’re buying fresh fruit and vegetables or Florida orange juice.
Lower global growth means even less demand for commodities such as oil and gold, which are near multi-year lows. The good news is that low growth also means low inflation.
Falling oil is also good news for drivers. Gasoline was below $1 a litre this weekend and may go lower. Think of it as the equivalent of a tax cut.
We’ve had a wonderful stretch of warm weather through mid-November. It would seem some cooler days lie ahead. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Have a question? Reach him at amayers@thestar.ca.