The Playbook - August 6, 2018

August 03, 2018 • Playbook

 


 

Weekly Commentary – August 6, 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 7 Consumer Credit Change  June 18 $17.2B $24.6B
August 8 MBA Mortgate Applications August 18 0.6% -2.6%
August 8 EIA Crude Oil Stocks Change August 18 -1.4 M 3.8 M
August 9 PPI  Y/Y July 18 3.2% 3.4%
Canada        
August 9 Housing Starts July 18 229.4 k 248.1 k
August 10 Unemployment Rate July 18 5.8% 6.0%

Key Earnings:
August 6: American States Water Co., EP Energy Corp., Lifetime Brands Inc.
August 7: Avis Budget Group Inc., Crocs Inc., Horizon Global Corp., Tribune Media Co.
August 8: Coca-Cola Bottling Co., CVS Health Corp., Twenty-First Century Fox Inc.
August 9: Ceridien HCM Holding Inc., Dropbox Inc., Veritiv Corp., Vervex Energy Inc.
August 10: Ampco-Pittsburgh Corp., Revlon Inc., Ruth's Hospitality Group Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian GDP bounces back
Statistics Canada reported a surprise 0.5% advance in GDP by industry during May. The monthly gain was the strongest since July 2016 and took the nation’s economic output to a new all-time high. The advance was widespread with 19 of 20 industrial sectors registering increases. Arts, entertainment and recreation (+2.8%) led gainers while utilities (-2.4%) was the lone decliner. Despite ongoing worries over international trade, growth appeared to be balanced, as a 0.6% advance in goods production accompanied a 0.5% gain in services. On a year-over-year basis, GDP growth now stands at 2.6%. However, after a disappointing first quarter result and, even with the possibility of flat results in June, the second quarter results will likely be the strongest in a year.

Fed eyes future rate hikes
The U.S. Federal Reserve surprised no one by holding interest rates steady at the conclusion of its latest two-day monetary policy meeting. However, the intent to further raise interest rates appears to be well established. The text of the press release that accompanies a policy announcement is always examined for even the slightest change in tone. This time out, it specifically stated that economic activity has been rising at a strong rate. In fact, the word “strong” appears five times in the text. This is hardly surprising given that GDP growth was reported at an annualized rate of 4.1% during the second quarter of 2018. As four policy meetings have now taken place under Chairman Jerome Powell with an alternating tightening/no-change pattern, market watchers have begun to speculate that two more 25 basis point rate hikes will take place following the September 25 - 26 and the December 18 - 19 meetings with a pause in between, at the November 7 - 8 meeting.

European economy slows
The latest figures from Eurostat revealed that the Eurozone economy grew by 0.3% (quarter-over-quarter) in the second quarter, the slowest pace since an identical increase was posted in Q2 2016. The figure marked a mild slowdown from the 0.4% pace recorded in the first quarter, which in turn had followed five consecutive quarters of GDP growth at 0.7%. Trade concerns remain a primary focus, as they do in most regions. As well, despite the slower pace of activity, overall inflation in the area increased to 2.1%. Most of the move was attributed to energy prices and core inflation edged up to a modest 1.1%. At this juncture, pundits suggest there is little reason for the European Central Bank to do anything on the interest rate front.

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

July 31
EuroStat announced that real gross domestic product (GDP) grew 0.3% (quarter-over-quarter) in the second quarter of 2018, down marginally from the 0.4% figure recorded in the first quarter and the slowest pace in two years. The annual growth rate also slipped lower, dropping to 2.1% from 2.5%. This is the “advance estimate” prepared with preliminary data and is often subject to substantial revision. These results are weaker than expected as the market was looking for a repeat of the first quarter’s 0.4% pace.

Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.5% in May, after edging 0.1% higher in April. The growth in May was widespread with 19 of 20 industrial sectors having registered increases. Arts, entertainment and recreation (+2.8%) led gainers while utilities (-2.4%) was the lone decliner. On a year-over-year basis, GDP growth stands at 2.6%. These results are stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada also reported that both its Industrial Product Price Index and its Raw Materials Price Index rose an identical 0.5% in June. On a year-over-year basis, the indexes are up 5.1% and 20.1%, respectively. Higher prices for vehicles and animal products were seen during the month. These figures are somewhat higher than expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

The Institute for Supply Management reported that its Chicago Purchasing Managers Index climbed to a 65.5 reading in July. This is up from October's 64.1 reading and well above the key 50.0 (generally expanding) level. The reading is well above consensus expectations for a decline in the index and indicates an acceleration in manufacturing activity within the region.

The U.S. Conference Board announced that its Consumer Confidence Index rose in July from June’s upwardly revised level. The index now stands at 127.4, up from 127.1 in June (previously reported as 126.4). The Present Situation Index improved from 161.7 to 165.9, while the Expectations Index declined from 104.0 last month to 101.7 this month. With the upward revisions, these results are broadly in line with expectations. Consumer confidence is an indicator of spending patterns.

August 1
The Institute for Supply Management reported that its Purchasing Managers Index edged lower to a 58.1 reading in July. This is a 2.1-point loss from June's 60.2 figure, but remains above the key 50.0 (generally expanding) level for a 23rd consecutive month. The reading is below expectations and indicates a mild deceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending fell 1.1% in June, following an upwardly revised 1.3% advance in May (originally reported as +0.4%). On a year-over-year basis, construction was up 6.1%. Given the magnitude of the May revisions, the June figure is only marginally weaker than consensus estimates. This result indicates continued volatility in the construction sector.

The Fed left interest rates unchanged following its latest two-day policy meeting. The target range for the federal funds was left at 1.75% to 2.00%. The Fed last raised interest rates by 0.25% on June 13. The press release that accompanied the announcement highlighted the continued strengthening of the broader economy and, more specifically, the labour market. The Fed left the door open for additional tightening of policy over the balance of 2018 by stating that further gradual increases are expected. The announcement of unchanged interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policymakers in other countries.

August 2
The U.S. Department of Labor announced that initial jobless claims totalled 218,000 (seasonally adjusted) in the week ending July 28, an increase of 1,000 from the previous week's unrevised level of 217,000. The four-week moving average was 214,500, a decrease of 3,500 from the previous week's unrevised average of 218,000. These results are in line with consensus estimates.

The U.S. Census Bureau reported that factory orders increased 0.7% in June. This followed a 0.4% increase in May. Excluding transportation, new orders rose 0.4% in June. Given the expectations for an even stronger June gain, these results were weaker than the market consensus. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

August 3
The U.S. Bureau of Labor Statistics reported that the unemployment rate edged down to 3.9% in July, and non-farm payroll employment rose by 157,000. May’s advance in non-farm payrolls was revised to 248,000 from 213,000. Employment continued to trend up in professional and business services, in manufacturing, and in health care and social assistance. With the revision, the employment figures are in line with expectations, but the improvement in the unemployment rate was not anticipated. This is the most closely followed set of U.S. statistics, as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to US$46.3 billion in June from a revised US$43.2 billion in May. June exports were $213.8 billion, $1.5 billion less than May exports. June imports were $260.2 billion, $1.6 billion more than May imports. The trade deficit was larger than expected. The weaker trade results may reduce estimates of overall GDP growth for the quarter in the first set of revisions.

Statistics Canada announced that Canada's merchandise trade deficit with the world narrowed from $2.7 billion in May to $626 million in June, the smallest deficit since January 2017. Total exports increased 4.1%, mainly on higher exports of energy products and aircraft. Total imports edged down 0.2%. Since the market was looking for little change in the deficit during the month, these results are considerably stronger than expected. They are a positive sign for overall GDP growth.

 

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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