The Playbook - October 22, 2018

October 19, 2018 • Playbook


The Playbook

Weekly Commentary – October 22, 2018

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

Richard Wylie’s podcast will return the week of October 29, 2018.

Economic Calendar

Date Release Period Consensus Previous
October 22 Chicago Fed National Activity Index September 18 0.15 0.18
October 24 Markit Manufacturing PMI Flash   October 18 53.3 55.6
October 25 Wholesale Inventories Adv September 18 0.5% 1.0%
October 26 GDP Growth Rate Q/Q Adv Q3 18 2.6% 4.2%
October 25 Budget Balance August 18 -$0.97B $0.14B

Key Earnings:
October 22: Kimberly-Clark Corp., Hasbro Inc., TD Ameritrade Holding Corp.
October 23: 3M Co., JetBlue Airways Corp., iRobot Corp., McDonald’s Corp.
October 24: Aflac Inc., AT&T Inc., Boeing Co., Tupperware Brands Corp.
October 25: Alphabet Inc., Intel Corp., Sherwin-Williams Co., Stryker Corp.
October 26: Aon PLC, Barnes Group Inc., Colgate-Palmolive Co., Moody’s Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

TSX sees heightened volatility
The S&P/TSX Composite, Canada’s main equity index, recently experienced a spike in volatility. On October 10, the index plunged 336.7 points (-2.1%), which was followed the next day by a drop of 200.3 points (-1.3%). The downdraft was followed by a 97.2-point gain on October 12 and a 170.2 point (1.1%) jump on October 16, the best single-day advance in six months. Much of this volatility can be traced to Canada’s legalization of recreational cannabis on October 17, after 95 years of prohibition. The speculative-natured trading trends of cannabis stocks seen prior to legalization appeared to be unfinished, as the S&P/TSX Composite lost 49.8 points (-0.3%) on Wednesday, led by losses in cannabis shares. With the industry clearly in its infancy, even professional investment managers are having difficulty assessing stock values. As four cannabis-related companies are within the composite, passive investments such as index-linked ETFs must hold positions in these firms and adjust their weights, accordingly, on a daily basis. This extra trading serves to heighten the directional momentum and can exaggerate volatility. Investors can expect this to continue as the market evaluates which firms will be the winners and which will be the losers in this industry.

U.S. retail spending cools
The U.S. Census Bureau reported a modest 0.1% advance in retail sales during September. At the same time, both July and August figures were revised downward. As a result, annual growth, which originally stood at 6.7% in July, has now fallen to 4.7%. September saw a rebound in motor vehicle purchases offset by the biggest drop in spending at restaurants and bars in nearly two years. Still, for the quarter, sales were 1.3% higher than in the second quarter. Analysts suggest that the boost in retail spending, provided by tax cuts earlier in the year, is beginning to fade. Nevertheless, a resilient U.S. labour market should continue to underpin overall consumer spending heading into the holiday season.

China’s GDP growth lags to levels seen during global financial crisis
The National Bureau of Statistics of China announced that, on a year-over-year basis, real GDP grew by 6.5% in the third quarter of the year, down from the 6.7% pace recorded in the previous three quarters, and slightly below market expectations of 6.6%. The data show that it was China’s lowest measure of GDP growth since the first quarter of 2009, the midst of the global financial crisis. Economic growth is being hamstrung by continuing efforts to deleverage debt, as the off-balance-sheet debt by Chinese local governments is approaching nearly 40 trillion yuan (US$7.95 trillion). Trade tariffs slapped on China by the White House have continued to place downward pressures on China’s industrial production and manufacturing output. Industrial production rose 5.8% in September, following a 6.1% gain in the previous month. It was the weakest reading since February 2016, primarily triggered by slowing in manufacturing output, which decreased to 5.7% from 6.1% in the previous month. Amidst the trade tensions with the U.S., the nine-month trade surplus with the U.S. was reported at US$225.8 billion, an increase of 15% from the same period of last year. GDP growth will likely continue to slow until President Xi Jinping and President Donald Trump reach a trade agreement from a more vulnerable protectionist perspective.

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

October 15
The U.S. Census Bureau announced that retail and food services sales were up 0.1% (seasonally adjusted) for the month of September and were 4.7% above September 2017 levels. Excluding autos, sales were down 0.1% during the month but up 5.7% on a year-over-year basis. These figures are considerably weaker than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

India’s Office of the Economic Adviser announced that its Wholesale Price Index (WPI) advanced 0.7% in September. The index increased by 5.1% for the 12 months ended September 2018, rising from the 4.5% year-over-year gain registered in August. These figures came in above consensus expectations. The WPI data are closely watched as they indicate relative inflationary pressures at the industry level and the index acts as a loose, leading indicator of consumer price inflation as targeted by the Reserve Bank of India (medium term target of 2% - 6%).

The U.S. Census Bureau announced that business sales rose 0.5% in August and were up 7.8% from August 2017 levels. At the same time, inventories climbed an identical 0.5% during the month and were up 4.2% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of August was 1.34. The August 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.

October 16
Statistics Canada reported that foreign investors added $2.8 billion of Canadian securities to their holdings in August, led by acquisitions of Canadian shares and money market instruments. Canadians reduced their foreign securities holdings by $194 million by selling foreign stocks more than offsetting acquisitions of 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.

The National Bureau of Statistics of China announced a 0.7% advance in its consumer price index (CPI) during September. This matched the 0.7% gain registered in August and pushed annual growth in CPI to 2.5%, a new seven-month high. The year-over-year increase was driven by surging prices in food items (+3.6%), a new seven-month high, and more modest increases in the prices of non-food items (+2.2%). The CPI figure matched market consensus. Amidst the trade fracas with the U.S., inflation remained well below the People’s Bank of China’s annual inflation target rate of around 3% for 2018 because of China’s excess capacity.

The U.S. Federal Reserve announced that industrial production expanded 0.3% in September after rising 0.4% in August. The release did indicate that production data were negatively influenced by Hurricane Florence. On a year-over-year basis, industrial production was reported to have gained 5.1%. Capacity utilization for total industry was stable at 78.1%, but up from 75.7% a year earlier. These results are nominally stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

October 17
Statistics Canada reported that manufacturing sales fell 0.4% in August, following three consecutive monthly increases. Despite the decline, sales on a year-over-year basis are now up 9.0%. With the market braced for an even larger decline, this report is stronger than the consensus estimates. This data is closely watched as manufacturing can create high-value employment and it has been one of the slowest sectors to recover from the recession.

The U.S. Census Bureau announced that housing starts in September were at a seasonally adjusted annual rate of 1,201,000. This is 5.3% below the revised August estimate of 1,268,000 but is 3.7% above the September 2017 rate of 1,158,000. At the same time, the number of building permits issued in September was at a seasonally adjusted annual rate of 1,241,000. This is 0.6% below the revised August rate of 1,249,000 and is 1.0% above the September 2017 figure of 1,254,000. These figures are weaker than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.K. Office for National Statistics reported that consumer prices advanced 0.1% during September. This was a surprisingly sharp deceleration, coming in well below the 0.7% (seasonally adjusted) gain registered in August. On a year-over-year basis, the increase in CPI slipped to 2.4% from the 2.7% figure recorded in August, a new three-month low. Even though the market was anticipating a decline in the annual inflation rate, the overall figures were still well below expectations. This news should ease concerns over inflationary pressures and assuage fears of a tightening response from the Bank of England.

October 18
The U.K. Office for National Statistics announced that retail sales decreased 0.8% (seasonally adjusted) in September, following an upwardly-revised 0.4% advance in August (originally reported as 0.3%). As a result, annual growth, which originally stood at 3.4% in August, has now fallen to 3.0%. The figures are considerably weaker than expected. These figures, coupled with September’s deceleration in the inflation rate, should ease concerns over inflationary pressures and appease fears of a tightening response from the Bank of England.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region decelerated in October, following a substantial increase in September. The Philly Fed general business conditions index marginally calmed to 22.2 from 22.9 in the previous month. These results are above market expectations. This data release is seen as an indicator of lessoning capacity constraints and strong manufacturing sector conditions heading into year end.

The U.S. Department of Labor announced that initial jobless claims totalled 210,000 (seasonally adjusted) for the week ending October 13, a decrease of 5,000 from the previous week’s upwardly-revised level of 215,000. The four-week moving average was 211,750, an increase of 2,000 from the previous week’s upwardly-revised average of 209,750. Surprisingly, the effects felt by Hurricane Michael in the labour market were significantly less than expected, as these results came in stronger than consensus estimates.

October 19
Statistics Canada reported that consumer prices declined 0.1% (seasonally adjusted, monthly basis) in September, after rising 0.1% in August. On year-over-year basis, the CPI was up 2.2%, down from the 2.8% pace recorded in the previous month. This was the lowest inflation rate logged since May 2018. Monthly, five of the eight major sub-groups reported monthly gains. Recreation, education and reading products (-0.7%) and transportation (-0.6%) recorded the largest declines, and household operations, furnishing and equipment (+0.2%) and shelter (+0.2%) posting the largest gains. All three measures of core inflation, established by the Bank of Canada, revealed a decline, but averaged together to match the 2.0% inflation target. CPI common, which the central bank says is most closely correlated with the output gap, decreased from 2.0% to 1.9%, indicating a marginally diminishing pace of inflation. The overall figures are well below market expectations.

According to the U.S. National Association of Realtors, existing-home sales fell 3.4% in September, a seasonally adjusted annual rate of 5.15 million units, following five consecutive months of decline. Sales are now down 4.1% relative to September 2017 and have reached the lowest levels since November 2015. These results are below consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that retail sales declined 0.1% (seasonally adjusted) to $50.8 billion for the month of August, following July’s 0.3% increase and all-time high of $50.9 billion. Excluding autos, sales were down 0.4% during the month, but up 4.6% on a year-over-year basis. These figures are considerably weaker than expected. While overall inflation (released in a separate report) fell strikingly lower to 2.2% in September from 2.8%, marking the eighth consecutive month that the overall inflation rate has exceeded the Bank of Canada’s 2.0% target, price gains still suggest that the central bank will continue to tighten monetary policy.


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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