The Playbook - May 7, 2018

May 04, 2018 • Playbook



Weekly Commentary – May 7, 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 8 NFIB Business Optimism Index April 18 106.7 104.7
May 9 Wholesale Inventories March 18 0.5% 1.0%
May 10 Inflation Rate Y/Y April 18 2.1% 2.4%
May 8 Housing Starts April 18 217.2 k 225.2 k
May 11 Employment Change April 18 13.5 k 32.3 k

Key Earnings:
May 7: First United Corp., Genesis Healthcare Inc., Rosetta Stone Inc., Solar Capital Ltd.
May 8: Enbridge Energy Partners LP, GoDaddy Inc., Primerica Inc., Walt Disney Co.
May 9: CenturyLink Inc., Ideal Power Inc., Pinnacle Entertainment Inc., Synaptics Inc.
May 10: Dropbox Inc., Gulf Resources Inc., NI Holdings Inc., Ultra Petroleum Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy bounces back
Statistics Canada reported that following January’s 0.1% contraction, GDP by industry grew 0.4% in February as mining and energy rebounded from their slump. The announcement was accompanied by benchmark revisions that altered GDP data going back to January 2017. Sifting through the figures, even with the solid February improvement in economic growth, the weak start to 2018 will likely result in first-quarter growth that is the weakest since an outright decline was recorded in the second quarter of 2016 (-1.0%). Still, the quarterly results, due on May 31, are expected to actually beat the Bank of Canada’s latest forecast for 1.3% (annualized) growth. Either way, given inflationary concerns and the weak productivity that has led to diminished growth capacity, the bank is unlikely to alter its view on tightening monetary policy.

U.S. Federal Reserve shifts back to “on hold”
The second Federal Reserve meeting under new Chair Jerome Powell signalled a step back to “on hold” monetary policy, at least for now. The press release that accompanied the announcement acknowledged the moderation in economic activity in the first quarter of 2018, particularly within household spending. However, the bank also indicated that the move toward its 2.0% inflation target was sustainable. The no change announcement follows the March 21 rate hike of 25 basis points (a basis point is 1/100th of one per cent), which was the sixth in the current cycle. The Fed is forecasting another two rate hikes for this year, although policymakers see three as a possibility. Analysts suggest that the next rate hike should be anticipated at the Fed’s upcoming policy meeting on June 12-13.

Eurozone economy slows in Q1 2018
Eurostat announced that the 19-nation Eurozone economy expanded 0.4% (quarter-over-quarter) in the first quarter of 2018. This is well down from the 0.7% rate recorded for the three previous quarters and is the slowest pace since the second quarter of 2015. Despite the scale of the slowdown, it was widely anticipated as unseasonably cold weather influenced activity in much of the region. In addition, a number of strikes held back industrial production, which was already reflected in some earlier data. Analysts anticipate a rebound in the second quarter, however, given the broader uncertainty over international trade, the scale of any improvement is uncertain.

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

April 30
Destatis, Germany’s federal statistical office, announced that retail sales dropped 0.6% in March, the fourth consecutive monthly decline. On a year-over-year basis, sales were still up 1.3%. These results are below market expectations and will raise questions about the strength of the broader economy in the first quarter.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.3% in March and personal consumption expenditures (PCE) increased 0.4%. Based on revised figures, personal income increased 0.3% and PCE was largely unchanged in February. While income figures for March were marginally lower than expectations, spending results matched consensus estimates. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada reported that its Industrial Product Price Index (IPPI) rose 0.8% in March, while its Raw Materials Price Index (RMPI) climbed 2.1% during the month. On a year-over-year basis, the indexes are up 2.3% and 10.0%, respectively. Higher prices for energy products were seen during the month and were the primary drivers for both indexes. These figures are broadly in line with 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 edged up to a 57.6 reading in April. This is a slight gain from March’s 57.4 reading and remains above the key 50.0 (generally expanding) level. The reading is marginally lower than consensus expectations and indicates stability in manufacturing activity within the region.

May 1
IHS Markit/CIPS announced that its U.K. Manufacturing PMI fell to 53.9 in April from 54.9 in March. This is the lowest reading since November 2016 as growth in output, new orders and employment eased, while business optimism dipped to a five-month low. These results were weaker than market expectations and signal a moderation in overall activity.

Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.4% in February after dropping 0.1% in January. The growth in February was led by a rebound in the mining, and oil and gas extraction sectors. The output of goods-producing industries grew 1.2%, while services-producing industries edged up 0.1%. On a year-over-year basis, overall GDP growth stands at 3.0%. These results are somewhat stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The Institute for Supply Management reported that its Purchasing Managers Index edged lower to a 57.3 reading in April. This is a 2.0-point loss from March’s 59.3 figure, but remains well above the key 50.0 (generally expanding) level for a 20th consecutive month. This reading is below expectations and indicates a deceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending fell 1.7% in March, following an upwardly revised 1.0% advance in February (originally reported as +0.1%). On a year-over-year basis, construction was up 3.6%. The monthly figure is below consensus estimates. This result indicates continued moderation in the construction sector.

May 2
Eurostat announced that real GDP in the 19-nation Eurozone grew 0.4% (quarter-over-quarter) in the first quarter of 2018. This is the “flash estimate” prepared with preliminary data and is often subject to substantial revision. In the fourth quarter of 2017, real GDP increased an upwardly revised 0.7% (on the same basis), which matches the pace seen in the second and third quarters of 2017. These results met consensus estimates as the market was looking for a deceleration in the first quarter. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Federal Reserve left interest rates unchanged following its latest two-day policy meeting. This was the second meeting under new Federal Reserve Chair Jerome Powell. The target range for the federal funds rate was left at 1.50% to 1.75%. The Fed last raised interest rates by 0.25% on March 21. The press release that accompanied the announcement highlighted the continued strengthening of the labour market. It also pointed out that consumer spending had moderated in the first quarter and that inflation had moved closer to 2.0%. Still, the Fed left the door open for additional policy tightening over the balance of 2018. The announcement of unchanged interest rates 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.

May 3
The U.S. Department of Labor announced that initial jobless claims totalled 211,000 (seasonally adjusted) in the week ending April 28, an increase of 2,000 from the previous week's unrevised level of 209,000. The four-week moving average was 221,500, a decrease of 7,750 from the previous week's unrevised average of 229,250. This is the lowest level for this average since March 3, 1973 when it was 221,250. These results are stronger than consensus estimates.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 0.7% (annualized) rate during the first quarter of 2018, while unit labour costs rose 2.7% on the same basis. These figures are mixed with the market looking for slightly stronger productivity. However, the lower growth in unit labour costs were better than expected. 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. Census Bureau announced that the country's international trade deficit in goods and services narrowed to US$49.0 billion in March from a revised US$57.7 billion in February. March exports were $208.5 billion, $4.2 billion more than February exports. March imports were $257.5 billion, $4.6 billion less than February imports. The trade deficit was smaller than expected. The stronger net trade results will bolster overall GDP growth.

Statistics Canada announced that the nation’s imports rose 6.0% to a record $51.7 billion in March. Exports also increased, up 3.7% to $47.6 billion. As a result, Canada's merchandise trade deficit with the world widened from $2.9 billion in February to a record $4.1 billion in March. Since the market was looking for a narrowing of the deficit, these results are considerably weaker than expected and are a negative sign for overall GDP growth.

May 4
The U.S. Bureau of Labor Statistics reported that the unemployment rate edged down to 3.9% in April, the lowest unemployment rate since December 2000. However, part of the drop in the unemployment rate can be traced to a 236,000 decline in the labour force, as non-farm payroll employment rose by a relatively modest 164,000. Job gains occurred in professional and business services, manufacturing, health care, and mining. The employment figures are below expectations, while the improvement in the unemployment rate was greater than 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.


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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