The Playbook - July 23, 2018

July 23, 2018 • Playbook



Weekly Commentary – July 23, 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
July 23 Existing Home Sales June 18 5.39 M 5.43 M
July 24 Markit Services PMI Flash July 18 54.2 56.5
July 25 New Home Sales June 18 -10.0% 6.7%
July 26 Durable Goods Orders June 18 0.7% -0.6%
July 27 Budget Balance  April 18 -$0.77B -$10.63B

Key Earnings:
July 23: Alphabet Inc., Halliburton Co., JA Solar Holdings Co. Ltd., Meridian Bancorp Inc.
July 24: Equifax Inc., Biogen Inc., Kimberly-Clark Corp., Verizon Communications Inc.
July 25: Boeing Co., Coca-Cola Co., First Bancorp, Ford Motor Co., New York Times Co.
July 26: Inc., Investors Bancorp, McDonald’s Corp., Southwest Airlines Co.
July 27: Colgate-Palmolive Co., LifePoint Health Inc., Moody’s Corp., Twitter Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian manufacturing rebounds, for now
Updated figures from Statistics Canada revealed a 1.4% advance in manufacturing sales during May. The rebound was sufficient to erase the 1.1% decline in sales witnessed in April and establish a new all-time high in manufacturing output of $57.1 billion. Sales rose in 14 of 21 main subsectors during the month. However, escalating trade tensions between the U.S. and virtually all of its trading partners represent a significant risk to Canada’s manufacturing sector. In addition to tariffs that the U.S. and Canada have added to their respective goods directly, concerns have been raised over U.S. tariffs aimed at China. U.S. customs agents have the broad power to declare anything with Chinese parts as a Chinese product, even if it was finally manufactured in Canada. Considerable uncertainty remains as retaliatory trade measures remain in vogue.

U.S. retail sales climb further
Consumer spending expanded again in June as retail and food services sales climbed 0.5% during the month. In addition, revised estimates show a 1.3% advance in May. For the quarter as a whole, retail spending grew at an annualized 7.9% pace, well above the 1.8% figure recorded in the first quarter. Given the resilience of the U.S. job market, the rebound in consumer spending is less of a surprise. As of the June data, non-farm payrolls have recorded 93 consecutive monthly gains. Over the same period, the U.S. unemployment rate has declined from 9.5% to 4.0% and wage growth has accelerated from 1.8% to 2.7%. The considerable momentum in the U.S. economy continues to argue for further monetary policy tightening from the Federal Reserve, despite what will likely be a moderating effect from international trade.

China’s GDP edges lower
The latest official figures from the National Bureau of Statistics of China showed that economic growth slipped to 6.7% (annualized) in the second quarter, down marginally from the 6.8% pace for GDP growth recorded in the first quarter. While the figures were in line with government forecasts, policymakers face a dilemma with at least some fallout from the ongoing trade dispute with the U.S. likely to emerge in third quarter economic data. China appears to remain committed to broadly-based financial deleveraging, which has already dampened economic growth. At the same time, however, the People’s Bank of China has reduced its reserve requirements three times this year. The added uncertainty, due to potential trade disruptions, may put the year’s official GDP forecast of “around 6.5%” at risk as the second half of 2018 unwinds.

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 16
China’s National Bureau of Statistics announced that real GDP grew at an annual rate of 6.7% in the second quarter of 2018. This is down slightly from the 6.8% pace recorded in the first quarter and comes amid escalating trade tensions with the U.S. Any impact from diminished exports are likely to appear in the data for the second half of the year. These results were in line with market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Census Bureau announced that retail and food services sales were up 0.5% (seasonally adjusted) for the month of June and were 6.6% above June 2017 levels. Excluding autos, sales were up 0.4% during the month and up 7.1% on a year-over-year basis. These figures are 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.

Statistics Canada reported that foreign investors added $2.2 billion of Canadian securities to their holdings in May, down from $9.1 billion in April. Canadian investment in foreign securities accelerated to $5.7 billion and was focused on foreign bonds. Foreign investment was below consensus expectations. Strong foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

July 17
Statistics Canada reported that manufacturing sales rebounded 1.4% in May, following a 1.1% decline in April. Following the recovery, sales on a year-over-year basis are up 3.7%. This report is stronger than market consensus. This data is closely watched as manufacturing can create high-value employment and continues to struggle in the face of escalating trade issues.

The U.S. Federal Reserve announced that industrial production expanded 0.6% in June after declining 0.5% in May. On a year-over-year basis, industrial production was reported to have gained 3.8%. Capacity utilization for total industry rose to 78.0% from 77.7% in May, and 76.2% a year earlier. These results are in line with market expectations. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

July 18
The U.S. Census Bureau announced that housing starts in June were at a seasonally adjusted annual rate of 1,173,000. This is 12.3% below the revised May estimate of 1,337,000, and is 4.2% below the June 2017 rate of 1,225,000. At the same time, the number of building permits issued in June was at a seasonally adjusted annual rate of 1,273,000. This is 2.2% below the revised May rate of 1,301,000 and is 3.0% below the June 2017 figure of 1,312,000. These figures are significantly weaker than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

July 19
The U.S. Department of Labor announced that initial jobless claims totalled 207,000 (seasonally adjusted) in the week ending July 14, a decrease of 8,000 from the previous week's revised level. This is the lowest level for initial claims since December 6, 1969 when it was 202,000. The previous week's level was revised up by 1,000 from 214,000 to 215,000. The four-week moving average was 220,500, a decrease of 2,750 from the previous week's revised average. The previous week's average was revised up by 250 from 223,000 to 223,250. These results are stronger than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in July and at a more robust pace. The Philly Fed general business conditions index rose to 27.5 from 19.9 in June. These results are above market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The U.S. Conference Board announced that its Leading Economic Index (LEI) increased 0.5% in June, following no change in May and a 0.4% increase in April. The monthly move was attributed to broad-based gains in the sub-indexes. This figure is marginally stronger than market consensus. The report suggests that the expansion in the U.S economy should continue for the remainder of the year.

July 20
Statistics Canada reported that consumer prices rose 0.1% (seasonally adjusted, monthly basis) in June, matching the May increase. On a year-over-year basis, the consumer price index (CPI) was up 2.5%, the largest annual gain since February 2012. Not surprisingly, energy prices, particularly for gasoline (+24.6%) were largely responsible for the overall growth in annual inflation. All three new measures of core inflation, established by the Bank of Canada in 2016, showed underlying inflation at or near their 2.0% target, ranging from 1.9% to 2.0%. 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 also announced that retail sales rebounded in May, gaining 2.0% (seasonally adjusted) following April’s 0.9% monthly increase. Sales were up in eight of 11 subsectors, representing 70% of total retail sales with building materials sales (5.4%) reporting the largest monthly advance. Food and beverage stores (-2.1%) recorded the largest gain. Year-over-year sales growth stood at 3.6%. These results are above consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.


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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