Low oil prices, inflation and rates in 2016: report

The domestic economy faces headwinds and tailwinds, reflecting mixed patterns in the global economy, finds a report by Edward Jones. Meanwhile, the firm believes central bank policies, commodity prices and corporate profits will influence stocks and interest rates this year.

Here are some specific findings from the report.

Inflation, interest rates remain low

10-year government bond rates averaged 1.5% in 2015, compared to an average of 3.6% over the past 15 years. This reflects the recent sluggish economy along with low inflation. Edward Jones’ Canadian Investment strategist, Craig Fehr expects choppy job growth and tepid wage increases to lead to fairly low inflation pressures again in 2016. That will likely allow the BoC to maintain its stimulative monetary policies, including low rates.

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Oil can stay low for longer

From 2010 to 2014, oil prices averaged $92 per barrel compared to an average of roughly $49 in 2015. The waning growth in China and modest demand outlooks for slow-growing Europe and Japan partially explain the decline in oil prices. But the shift in global supply means a new lower range for oil could be maintained. OPEC has maintained production, and the U.S. has become a dominant producer.

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Overall, Fehr doubts oil prices in 2016 will return to their $80+ level from recent years, which limits some of the near-term upside for the Canadian market. But he thinks oil will stabilize this year, allowing consumers and businesses to continue to benefit from lower expenses, while also relieving some of the market pressure from falling energy sector profits.

U.S. economy leads the way

The world’s largest economy has not yet hit its stride in this recovery, but Edward Jones expects growth in 2016. U.S. GDP increased by roughly 2% in 2015. Fehr thinks this will be moderately topped this year, thanks to the improving labour market and business investment trends. Job growth averaged 210,000 per month last year. If sustained, it should provide solid support to consumer spending – the largest portion of U.S. GDP – particularly when combined with the boost from lower oil prices, he notes.