The Playbook - May 14, 2018

May 11, 2018 • Playbook



Weekly Commentary – May 14, 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
May 15 Retail Sales April 18 0.2% 0.6%
May 15 Foreign Bond Investment March 18 -$1.1B $43.2B
May 16 Housing Starts April 18 0.4% 1.9%
May 16 Industrial Production April 18 0.6% 0.5%
May 17 Foreign Securities Purchases March 18 $20.60B $3.96B
May 18 Retail Sales Y/Y March 18 4.06% 3.50%
May 18 Inflation Rate  April 18 0.2% 0.3%

Key Earnings:
May 14: Evoke Pharma Inc., Manchester United PLC, OHA Investment Corp., Polar Power Inc.
May 15: Citi Trends Inc., Eltek Ltd., GSE Systems Inc., Home Depot Inc., Photronics Inc.
May 16: Canadian Solar Inc., DLH Holdings Corp., Progressive Corp., Inc.
May 17: Applied Materials Inc., Campbell Soup Co., J. C. Penney Company Inc., Nordstrom Inc.
May 18: Apollo Investment Corp., Deere & Co., Voxeljet AG
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian housing shows uneven results
The Canadian Mortgage and Housing Corporation announced that housing starts fell for a second consecutive month in April, dropping 4.9% to their lowest overall level (214,379) since June 2017. Interestingly, both Toronto (-6.6%) and Vancouver (-16.7%) saw significant declines during the month. In a separate report, Statistics Canada revealed that its New Housing Price Index showed cooling within Canada’s previously hot housing markets. New home prices fell 0.3% in Toronto in March, a third straight decline that left year-over-year price growth at 2.3%, well down from the 9.9% pace seen in April 2017. Vancouver prices were flat in April for the fourth time in five months. Even though Statistics Canada also reported a 2.3% increase in residential building permits in March, Toronto carded a 31.8% monthly decline, while Vancouver reported a 16.5% advance. Clearly, considerable uncertainty remains in these two markets.

U.S. inflation edges higher
Updated figures from the U.S. Bureau of Labor statistics revealed a 0.2% (seasonally adjusted) increase in the overall consumer price index (CPI) in April. While the monthly advance was not alarming, it was sufficient to drive annual CPI growth to 2.5%, the fastest pace since February 2017. In an earlier report, the Federal Reserve’s preferred measure of inflation (personal consumption expenditures excluding food and energy) was shown to have advanced to 1.9% (year-over-year), very close to its 2.0% target. In addition, with the unemployment rate sitting at an 18-year low of 3.9%, it seems that the Fed’s dual mandates have been largely achieved. The only missing piece appears to be wage-driven inflationary pressures. Nevertheless, it seems likely that the Fed will not wait for its appearance and will continue with its tightening cycle at the June 12-13 meeting.

China’s international trade rebounds
Buoyed by strong global economic activity, China’s trade surplus surged to US$28.8 billion in April, a dramatic turnaround from the US$5 billion deficit recorded in March. According to the nation’s customs administration, imports rose 12.9% in April (year-over-year, in U.S. dollar terms), and exports jumped 21.5% on the same basis. The politically sensitive trade surplus with the U.S. rose for the first time since November, reaching $22.2 billion. China's trade surplus with the U.S. totalled $80.4 billion in the January-April period, up from $50 billion in the same period in 2017. Analysts suggest that much of this increased activity is being prompted by fears of an extended trade war. Trade talks between the two nations continue. However, reducing China’s trade surplus with the U.S. remains a cornerstone of the current U.S. administration.

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

May 8
The Canada Mortgage and Housing Corporation announced that housing starts totalled 214,379 units (seasonally adjusted annual rate) in April. This is down from the 225,459-unit level in March (originally reported as 225,213) and is the first reading below 215,000 since June 2017. The decline in housing starts was due to a decline in both single-detached and multiple-urban starts. These results are weaker than market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

According to China’s customs administration, imports rose 12.9% in April (year-over-year, in U.S. dollar terms). On the same basis, exports surged 21.5% to produce a $28.8 billion trade surplus, a dramatic turnaround from the $5.0 billion deficit recorded in March. The politically sensitive trade surplus with the U.S. rose for the first time since November, reaching $22.2 billion. The overall trade results were above market expectations.

May 9
Statistics Canada reported that building permits issued by Canadian municipalities increased 3.1% to $8.4 billion in March, following a 2.8% decline in February. The rise was mainly the result of higher construction intentions for multi-family dwellings, particularly in Quebec and British Columbia, and (to a lesser extent) by the commercial component. On a year-over-year basis, permits are up 10.8%. These results are stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.1% (seasonally adjusted) in April. The index increased 2.6% for the 12 months ended April 2018, the smallest year-over-year advance since December of last year. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.S. Census Bureau announced that wholesale sales rose 0.3% in March from the revised February level and were up 7.3% from the March 2017 level. February’s preliminary estimate was revised upward by 0.1%. At the same time, wholesale inventories rose 0.3% for the month and were up 5.5% on a year-over-year basis. This report is stronger than expected. Activity at the wholesale level can be an indicator of future consumer trends.

May 10
The U.S. Department of Labor announced that initial jobless claims totalled 211,000 (seasonally adjusted) in the week ending May 5, unchanged from the previous week's unrevised level. The four-week moving average was 216,000, a decrease of 5,500 from the previous week's unrevised average of 221,500. This is the lowest level for this average since December 20, 1969 when it was 214,500. These results are somewhat stronger than consensus estimates.

The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.2% (seasonally adjusted basis) in April. Over the last 12 months, the index increased 2.5%. These results were nominally below expectations. These figures are consistent with the U.S. Federal Reserve's expectations of slowly rising inflationary pressures.

Statistics Canada announced that its New Housing Price Index (NHPI) was flat in March, reflecting mixed results across the country. Rising prices in 13 census metropolitan areas (CMAs) were offset by flat or declining prices in the other 14 surveyed CMAs. On a year-over-year basis, the index is up 2.4%. These results matched consensus expectations and suggest continued disparity among Canada’s main housing markets.


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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