The Playbook - September 17, 2018

September 14, 2018 • Playbook

The Playbook

The Playbook

Weekly Commentary – September 17, 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
September 17 NY Empire State Manufacturing Index September 18 23.6 25.6
September 19 Housing Starts August 18 1.23 M 1.17 M
September 20 Existing Home Sales August 18 5.34 M 5.34 M
September 20 Philadelphia Fed Manufacturing Index September 18 15.0 11.9

Key Earnings:
September 17: Cherokee Inc., FedEx Corp., Oracle Corp., USA Technologies Inc.
September 18: Apogee Enterprises Inc., Bluestem Group Inc., General Mills Inc.
September 19: Bon-Ton Stores Inc., Herman Miller Inc., Red Hat Inc.
September 20: Darden Restaurants Inc., Micron Technology Inc., Thor Industries Inc.
September 21: Steelcase Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian capacity utilization hits new high
Statistics Canada announced that industrial capacity utilization rose to 85.5% in the second quarter, the strongest level of the current business cycle and the highest figure since the second quarter of 2007 (86.0%). In this release, StatsCan provided extensive benchmark revisions that were applied to the data dating from 1987. The prior business cycle peak was reset to 86.6% during the fourth quarter of 2005. Previously, this peak was measured at 85.9% and occurred in the third quarter of 2002. The updated figures show that both forestry and logging (90.6%), and construction (93.0%, an 18-year high) industries are operating above 90% capacity. Even though the broader capacity utilization numbers do not point to a major shift in inflationary pressures, these results suggest some sector-specific imbalances may be emerging.

U.S. inflation eases back
The U.S. Bureau of Labor Statistics surprised market participants by announcing a 0.2% increase in its overall consumer price index (CPI) in August. This allowed the annual rate of inflation to slip lower to 2.7% from the 2.9% pace seen in both June and July. Increases in gasoline prices and rents were largely offset by declines in health care and apparel costs in August. As a result, the core CPI, which excludes volatile energy and food components, rose only 0.1% during the month after three straight 0.2% advances. This annual pace slipped to 2.2% from 2.4%. It is important to note that these are not the key inflation measures used by the U.S. Federal Reserve in setting policy, and while there may be signs of some diminishing price pressures, it is likely that the Fed will continue to raise interest rates.

Australian job market heats up
The Australian Bureau of Statistics reported that national employment rose by 44,000 (seasonally adjusted) in August. This was more than sufficient to offset the 4,300-decline recorded in July. This report revealed broad improvement in the labour market. Most of the monthly job gains (33,700) were in full-time positions, which shows annual growth of 2.4% that is approaching the 2.7% figure for part-time jobs. At the same time, participation edged higher by 0.2 percentage points to 65.7%, and the unemployment rate held steady at 5.3%. This combination left the underutilization rate (the sum of underemployment plus the unemployment rate) down 0.4 percentage points at a five-year low of 13.4%. The data suggest continued strength and a gradual move in wage growth that will eventually push inflation into the Reserve Bank of Australia’s target range of 2% to 3%.

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

September 12
The European Union’s statistical agency announced that industrial production in the Eurozone contracted by 0.8% in July after declining an identical 0.8% in June. On a year-over-year basis, industrial production was reported to have fallen 0.1%. This is the first year-over-year decline since January 2017. These results are considerably weaker than expected. The weakening in production should be reflected in softer real economic output in the quarterly GDP figures.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) declined 0.1% (seasonally adjusted) in August. The index increased 2.8% for the 12 months ended August 2018, the smallest year-over-year advance since a 2.7% rise in April. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada announced that Canadian industries operated at 85.5% of their production capacity in the second quarter, up from 83.7% in the first quarter. This follows a slight decrease in capacity utilization in the first quarter of 2018 from the fourth quarter of 2017. The increase in the second quarter of 2018 was led by the mining, quarrying, and oil and gas extraction sector, and to a lesser extent, the manufacturing sector. Previous data were subject to significant revision. The current level of utilization suggests some sector-specific capacity constraints and may represent a risk to inflation.

September 13
The Australian Bureau of Statistics reported that employment rose by 44,000 (seasonally adjusted) in August. At the same time, participation edged higher by 0.2 percentage points to 65.7% and the unemployment rate held steady at 5.3%. The overall employment report is considerably stronger than expectations and suggests some material tightening in the labour market. These data reflect the relative health of the various sectors of the Australian economy and are suggestive of consumer spending.

The U.S. Department of Labor announced that initial jobless claims totalled 204,000 (seasonally adjusted) in the week ending September 8, a decrease of 1,000 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 2,000 to 205,000. The four-week moving average was 208,000, a decrease of 2,000 from the previous week's revised average. This is the lowest level for this average since December 6, 1969 when it was 204,500. The previous week's average was revised up by 500 to 210,000. These results are in line with consensus estimates.

The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.2% (seasonally adjusted basis) in August. Over the last 12 months, the index increased 2.7%. These results were somewhat lower than expectations. These figures may raise questions with respect to the timing of the U.S. Federal Reserve's next interest rate move.

September 14
The U.S. Census Bureau announced that retail and food services sales were up 0.1% (seasonally adjusted) for the month of August and were 6.6% above August 2017 levels. Excluding autos, sales were up 0.3% during the month and up 7.3% on a year-over-year basis. These figures are weaker than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

The U.S. Federal Reserve announced that industrial production expanded 0.4% in August, matching the upwardly-revised July advance (originally reported as 0.1%). On a year-over-year basis, industrial production was reported to have gained 4.9%. Capacity utilization for total industry rose to 78.1% from 77.9% in July and 75.7% a year earlier. Given the revisions, these results are somewhat stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.


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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