Recent weeks have seen oil prices take another leg down, with the benchmark West Texas Intermediate (WTI) contract falling more than $5 since the beginning of November – a decline of more than 10%. This decline has not been confined to oil, as prices for nearly all major metals have also fallen, alongside a number of agricultural commodities such as corn and wheat.
While not the whole story, falling prices reflect the fact that these commodities are generally priced in U.S. dollars, and the greenback has seen marked strength in recent days, which translates into downward pressure on commodity prices. The reason for increased U.S. dollar strength is clear: last week’s employment numbers have cemented the case for a December rate hike. Hiring growth was strong, at 271K net new positions, but just as important, wage growth also appears to have turned a corner. Average hourly earnings rose 2.5% year-on-year in October, reaching a six year high and delivering the kind of figure that policymakers had been looking for.
- The week was dominated by Federal Reserve communications. Remarks by several regional presidents helped cement market expectations for a December hike, with the odds remaining near 70%. Alongside slumping commodity prices, the looming reality of a December liftoff weighed on equity markets.
- Falling oil prices and strengthening dollar continue to hold back inflation. The import price index was down 10.5% in October relative to a year ago. Signs of falling commodity and import prices could also be found in retail sales, which edged up by a modest 0.1% m/m, disappointing expectations.
- Despite the disinflationary pressures, the forward-looking Fed is unlikely to wait to see “the whites of inflation’s eyes” before raising interest rates. That being said, soft inflation and remaining slack in the labor market argue for a “gradual pace” of tightening.
- Commodity prices have fallen sharply, with crude oil down more than 10 per cent since the beginning of November. At least part of this decline is the result of U.S. dollar strength in anticipation of a December Federal Reserve interest rate hike.
- Rising U.S. interest rates will create a more negative spread versus Canada, placing downward pressure on the Loonie. The Canadian dollar is now expected to drop to as low as 71.4 cents U.S. by early next year, and only recover slowly thereafter.
- Looking ahead to 2016 and 2017, a weaker currency will likely boost exports, but the additional impact is not expected to be large. Real GDP growth of around 2% per year continues to be the most likely scenario