The Playbook - August 20, 2018

August 17, 2018 • Playbook


 

Weekly Commentary – August 20, 2018

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy

Please click here to listen to Richard Wylie's audio version.

Economic Calendar

Date Release Period Consensus Previous
U.S.        
August 22 Existing Home Sales July 18 5.40 M 5.38 M
August 23 Initial Jobless Claims August 18 217 k 212 k
August 23 Markit Composite PMI Flash August 18 54.0 55.7
August 24 Durable Goods Orders Excluding Defence July 18 -0.5% 1.5%
Canada        
August 22 Retail Sales June 18 1.1% 2.0%
August 22 Retail Sales Excluding Autos June 18 0.7% 1.4%

Key Earnings:
August 20: Black Box Corp., DSW Inc., Estée Lauder Companies Inc.
August 21: American Eagle Outfitters Inc., Lannett Company Inc., La-Z-Boy Inc.
August 22: Corporación América Airports SA, iHeartMedia Inc., Target Corp.
August 23: Fuwei Films (Holdings) Co. Ltd., Golar LNG Ltd., HP Inc.
August 24: Guess? Inc., Lombard Medical Inc., Ubiquiti Networks Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian inflation approaches seven-year high
Statistics Canada reported that consumer prices jumped 0.5% (seasonally adjusted, monthly basis) in July, after rising 0.2% in June. On a year-over-year basis, the consumer price index (CPI) was up 3.0%, the largest annual gain since September 2011 (3.2%). Not surprisingly, energy prices (+14.2%), particularly for gasoline (+25.4%), were largely responsible for the overall annual advance. Geographically, Alberta (3.5%) led the provinces with the highest increase, while Quebec (2.4%) saw the smallest year-over-year advance. The report also revealed that the Bank of Canada’s three measures of core inflation were relatively stable in July and remained close to the bank’s 2.0% target. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.9%. Regardless, the bank will be monitoring the developments in the broader inflation measures very closely.

U.S. economy still has room to maneuver
Despite the age of the current U.S. business cycle, recent economic data show that there is still room for expansion. The Bureau of Labor Statistics reported a 2.9% (annualized) surge in non-farm productivity during the second quarter, the strongest gain in more than three years. At the same time, a 0.9% (on the same basis) decline was reported for unit labour costs, the softest figure in almost four years. In a separate report, the U.S. Federal Reserve announced that industrial production rose 0.1% in July to take annual growth to 4.2%, the fastest pace since February 2012. Capacity utilization was also reported at 78.1% during the month, below both the current cyclical high (79.6%, November 2014) and the previous business cycle high (81.6%, December 2007). Even though there are signs of rising inflation, this data suggests that acceleration in price pressures may be tempered.

German economy continues to expand
Updated figures from Destatis, Germany’s federal statistical office, showed that its economy expanded 0.5% (quarter-over-quarter) in the second quarter of 2018. This is an increase from the upwardly-revised 0.4% (on the same basis) growth in gross domestic product (GDP) seen in the first quarter. Adjusted for inflation and calendar day count, Europe’s largest economy is now growing at 2.0% compared to a year ago. The economy appeared to be firing on all cylinders as positive contributions came from consumer spending, government expenditure, fixed capital formation in machinery, and equipment and construction. Preliminary data also showed that both exports and imports increased over the period. Even though the impact of the pending Brexit and effects of the trade dispute with the U.S. are unclear, it appears that Germany carried positive momentum in its international trade into the third quarter.

Longer View

Following several years of a general expansion in the price-earnings ratio of equities, we believe returns from this asset class will moderate somewhat and become more closely tied to the rate of growth in company earnings. With equity market volatility increasing to at least the normal range, it's important to keep in mind that equities are best suited for long-term investing, and that the allocation in your portfolio should reflect your investment horizon and risk tolerance. Fixed-income investments, while generally providing limited income in today's low interest rate world, are an effective diversifier in a portfolio. When there is extreme pessimism in the equity market, fixed-income tends to outperform. There is no one asset class that looks better than others, in our view, as their current valuations accurately reflect their potential and risk. Talk to your professional advisor to ensure your portfolio is optimized and continues to meet your needs.

Weekly Summary

August 14
Destatis, Germany’s federal statistical office, announced that Germany’s real GDP grew 0.5% (quarter-over-quarter) in the second quarter of 2018. This is the “flash estimate” prepared with preliminary data and is often subject to substantial revision. In the first quarter, real GDP increased by an upwardly revised 0.4% on the same basis (originally reported as 0.3%). With the revisions, these results are stronger than expected as the market was looking for a less significant improvement. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

August 15
The U.S. Census Bureau announced that retail and food services sales were up 0.5% (seasonally adjusted) for the month of July and were 6.4% above June 2017 levels. Excluding autos, sales are up 0.6% during the month and up 7.2% on a year-over-year basis. The May gain in overall sales was revised down to 0.2% (originally reported as 0.5%). With the downward revisions, these figures are broadly in line with market expectations. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 2.9% (annualized) rate during the second quarter of 2018, while unit labour costs fell 0.9% on the same basis. These figures are stronger than market consensus. Productivity growth is important for longer-term economic stability, as it allows for higher wages and faster economic growth without inflationary pressures.

The U.S. Federal Reserve announced that industrial production expanded 0.1% in July, after gaining a revised 1.0% in June (previously reported as 0.6%). On a year-over-year basis, industrial production was reported to have gained 4.2%. Capacity utilization for total industry was unchanged at 78.1% in June and was up from 76.1% a year earlier. Given the scope of the revisions, these results are somewhat stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

The U.S. Census Bureau announced that business sales rose 0.3% in June and were up 8.2% from June 2017 levels. At the same time, inventories rose 0.1% and were up 4.0% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of June was 1.33. The June 2017 ratio was 1.39. These results matched consensus expectations. Strong business sales suggest stable economic growth, while diminishing inventories/sales ratios suggest a business need to replenish dwindling stockpiles.

August 17
Statistics Canada reported that consumer prices jumped 0.5% (seasonally adjusted, monthly basis) in July, after rising 0.2% in June. On a year-over-year basis, CPI was up 3.0%, the largest annual gain since September 2011 (3.2%). Not surprisingly, energy prices, particularly for gasoline, were largely responsible for the overall advance, but air transportation and travel also reported material gains. The Bank of Canada’s three measures of core inflation were relatively stable in July and were close to their 2.0% target, ranging from 1.9% to 2.1%. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.9%. The overall figures are above market expectations.

Statistics Canada announced that its foreign investors acquired $11.5 billion of Canadian securities in June, following a $3.0 billion investment during the previous month. Canadian investors' holdings of foreign securities increased $11.3 billion. The foreign acquisition of Canadian securities was well above expectations. Foreign investment flows can significantly influence the relative strength of the Canadian dollar.

 

Although the above information has been compiled from sources believed to be reliable, as at the date indicated, we cannot guarantee its accuracy or completeness. The information is provided solely for informational and educational purposes and is not to be construed as advice in respect of securities or as to the investing in or buying or selling of securities, whether express or implied. All data provided is subject to change without notice. The authors of this publication are employed by CI Investments Inc. or its affiliates. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc. Assante Wealth Management and/or Assante Wealth Management and design are trademarks of CI Investments Inc. Neither CI Investments Inc. nor any of its affiliates or their respective officers, directors, employees or advisors is responsible in any way for damages or losses of any kind whatsoever in respect of the use of this information. © 2018 CI Investments Inc.

 

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