The Playbook – April 2, 2018

March 29, 2018 • Playbook

 


 

Weekly Commentary – April 2, 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
U.S.        
April 3 ISM New York Index March 18 59.56 54.50
April 3 IBD/TIPP Economic Optimism April 18 56.59 55.60
April 4 Markit Services PMI Final March 18 54.1 55.9
April 6 Participation Rate March 18 62.8% 63.0%
Canada        
April 2 RBC Manufacturing PMI March 18 55.03 55.60
April 5 Balance of Trade February 18 -$2.80B -$1.91B

Key Earnings:
April 2: American Realty Investors Inc., Conn’s Inc., Milestone Scientific Inc.
April 3: Greenbrier Companies Inc., Landec Corp., Mitcham Industries Inc.
April 4: Acuity Brands Inc., Franklin Covey Co., Resources Connection Inc.
April 5: RPM International Inc., Schnitzer Steel Industries Inc., WD-40 Co.
April 6: Ditech Holding Corp., Jamba Inc., Monsanto Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy starts 2018 in negative territory
Fresh data from Statistics Canada revealed a 0.1% contraction in GDP by industry during January 2018, answering the question of how much momentum was carried into the new year. This is the weakest monthly result since May 2016 (-0.6%). During January, unscheduled maintenance slowed oil sands production and new mortgage qualification rules dampened real estate activity. While the decline in economic activity may prove to be a temporary setback, concerns remain. The Bank of Canada continues to warn over high household debt levels and consumer spending is expected to be weaker in 2018 as higher interest rates take hold. The slow start to the year, coupled with expectations for diminished consumer spending, may prove to be sufficient to slow the bank’s pace for its tightening of monetary policy.

U.S. growth revised higher while inflation remains stable
The U.S. Bureau of Economic Analysis announced that the economy expanded at a 2.9% rate (annualized) in the final quarter of 2017. The upward revision (the previous report indicated growth at 2.5%) was the result of stronger personal consumption and a reduction in the drag from inventories. As a result, overall economic growth for the 2017 calendar year was reported as 2.3%. This was considerably stronger than the 1.5% pace recorded in 2016. The data also revealed improvements in corporate profitability late in the year that should lay the foundation for another gain in overall economic growth for 2018. At the same time, the Federal Reserve’s preferred price index, which is tied to personal spending, rose at an unrevised 1.9% annualized rate.

South Korean GDP hits nine-year low
Statistics Korea announced that the nation’s GDP experienced a 2.8% (year-over-year) expansion in the fourth quarter, slowing from the 3.8% rise in the previous quarter (on the same basis). On a quarter-over-quarter basis, the economy contracted 0.2% in the final quarter of 2017, following a downwardly revised 1.4% increase in the third quarter. This reading was the first negative result since the fourth quarter of 2008, as weakness in car exports and construction overshadowed strength in consumption and public spending. The result also appears to contradict the Bank of Korea’s tightening. The central bank raised its base rate by 25 basis points (a basis point is 1/100th of one per cent) in November 2017, the first tightening move in six years. In addition, the Korean economy is one of the most vulnerable to any U.S.-led trade protectionism, both directly and indirectly if the U.S./China trade spat heats up.

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

March 26
France’s statistics gathering agency, Statista, reported that French GDP grew 0.7% (quarter-over-quarter) in the fourth quarter of 2017. This is an upward revision from the previously reported 0.6% pace and 0.2% higher than the third quarter reading. Exports rose faster than initially thought and were the main contributor to the estimate. On a year-over-year basis, GDP experienced a 2.5% increase, following a 2.3% expansion in the previous period. This reading was the highest growth rate since the first quarter of 2011. With the markets not looking for a change, these figures were marginally stronger than consensus estimates.

March 27
The European Commission announced that its Business Climate Indicator for the Eurozone decreased to 1.34 in March, 0.14 points lower than February. The March reading is the lowest since September 2017 and was somewhat below consensus estimates. Managers' assessment of past production, stocks of finished products, overall order books and production expectations worsened sharply. In addition, economic, industrial and services confidence all came down from February and below predicted levels.

The U.S. Conference Board announced that its consumer confidence index pulled back in March from February's downwardly revised level. The index now stands at 127.7, down from 130.0 in February (previously reported as 130.8). The Present Situation Index decreased from 161.2 to 159.9, while the sub-index increased to 51.0 from 46.4. The Expectations Index declined from 109.2 last month to 106.2 this month. While the overall level remains elevated, these results are weaker than expectations. Consumer confidence is an indicator of spending patterns.

March 28
The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 2.9% in the final quarter of 2017. This figure is the “third estimate,” while the previous growth estimate was 2.5%. In the third quarter of 2017, real GDP increased 3.2% on the same basis. Personal consumption expenditures and private inventory investment were revised up from the prior estimate. These results were stronger than expected as the market was looking for a smaller upward revision. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Korea announced that South Korea’s GDP experienced a 2.8% (year-over-year) expansion in the fourth quarter of 2017, slowing from the 3.8% rise in the previous quarter (on the same basis). This reading was somewhat below consensus estimates. On a quarter-over-quarter basis, the economy contracted 0.2% in the final quarter of 2017, following a downwardly revised 1.4% increase in the third quarter. This reading was the first negative result since the fourth quarter of 2008, as weakness in car exports and construction overshadowed strength in consumption and public spending.

March 29
The U.S. Department of Labor announced that initial jobless claims totalled 215,000 (seasonally adjusted) in the week ending March 24, a decrease of 12,000 from the previous week's revised level. This is the lowest level for initial claims since January 27, 1973 when it was 214,000. The previous week's level was revised down by 2,000 from 229,000 to 227,000. The four-week moving average was 224,500, a decrease of 500 from the previous week's revised average. The previous week's average was revised up by 1,250 from 223,750 to 225,000. These results are stronger than consensus estimates.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.4% in February and personal consumption expenditures (PCE) rose 0.2%. Based on revised figures, personal income rose 0.4% and PCE increased 0.2% in January. Both income and expenditure figures for February matched market expectations. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada announced that, on a monthly basis, real GDP by industry shrank 0.1% in January, after rising 0.2% in December. The decline in activity in January was mainly the result of lower output of non-conventional oil extraction and decreased activity in real estate. On a year-over-year basis, GDP growth stands at 2.7%. With the market anticipating continued growth in the economy, these results are weaker than expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that its Industrial Product Price Index (IPPI) edged up 0.1% in February. At the same time, its Raw Materials Price Index (RMPI) fell 0.3% during the month. On a year-over-year basis, the indexes are up 1.9% and 5.9%, respectively. Low prices for energy products were seen during the month, but exerted a great influence on the RMPI. These figures are weaker than expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

 

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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