Gasoline prices across most of Canada and the US are down 20% since late June 2014 (refer to the chart below). A variety of factors have driven down prices, including lower crude oil prices and a relatively tame hurricane season in the refinery-laden Gulf of Mexico. The lower fuel prices come at an opportune time as it relates to cushioning the impact of the end of quantitative easing (QE) by the US Federal Reserve (Fed).
Consumers are likely to boost spending with their fuel savings. According to Macquarie Research, if gasoline prices stay at current levels it will be equivalent to $100 more in the pocket of each US consumer or a $40 billion boost in annualized real consumer spending. These fuel savings combined with a stronger employment market in the US have resulted in the highest consumer confidence figures since 2006 according to Nielsen. As a result, we expect consumers will push much of these savings into retail spending this holiday season.
Consumer spending to cushion impact of QE3 end. The US Federal Reserve ended its historic QE3 in October after purchasing US$1.66 trillion (yes, trillion) in Treasuries and mortgage-backed securities since September 2012. The last two times the Fed ended QE, the stock market plunged 10-20% shortly thereafter in Q2/2010 and Q2/2011. What is different this time? The key driving factor is the exact reason that the Fed is ending QE: US employment growth is expanding moderately, GDP growth has strengthened considerably, and as discussed earlier, US consumer spending will likely be a driving force in Q4/2014 and into 2015. In addition, the Fed is in no hurry to raise interest rates with its promise to keep rates low for a “considerable time,” which we believe to mean late 2015 as inflation expectations continue to be a tame and helped by factors such as lower gasoline prices.