The Playbook – March 12, 2018

March 09, 2018 • Playbook



Weekly Commentary – March 12, 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
March 13 Inflation Rate February 18 0.33% 0.50%
March 14 Retail Sales Y/Y February 18 3.84% 3.60%
March 15 Foreign Bond Investment January 18 -$6.3B -$16.0B 
March 16 Manufacturing Production Y/Y February 18 1.7% 1.8%
March 16 Foreign Securities Purchases January 18 -$1.97B $9.00B

Key Earnings:
March 12: Coupa Software Inc., Infinity Pharmaceuticals Inc., Resolute Energy Corp.
March 13: HD Supply Holdings Inc., Northstar Realty Europe Corp., Williams-Sonoma Inc.
March 14: Five Oaks Investment Corp., Luna Innovations Inc., New York & Company Inc.
March 15: Adobe Systems Inc., Broadcom Ltd., Gulf Resources Inc., OpGen Inc.
March 16: Citi Trends Inc., Hibbett Sports Inc., Kirkland’s Inc., Tiffany & Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada shifts to “on hold”
The Bank of Canada raised interest rates in January citing the then-recent economic data, which had been stronger than expected. However, at the conclusion of its most recent policy meeting, the bank announced that it was leaving interest rates unchanged. The press release that accompanied the announcement mentioned the strong economic results of 2017, but also indicated that GDP growth in the final quarter was below expectations. Looking forward, the bank noted its concerns explicitly stating “However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.” As well, the statement indicated that the inflationary impact of the changes to minimum wages and energy prices were not yet fully understood. Given the uncertainty, the bank, quite clearly, left the door open for future rate hikes.

U.S. job market heats up
The latest data from the U.S. Bureau of Labor Statistics revealed a 313,00 advance in non-farm payrolls during February. This is the largest single-month gain since July 2016. Construction jobs led the way with 61,000 new positions, followed by retail, and professional and business services (50,000 each). Even though the unemployment rate remained at its 17-year low of 4.1%, it did so mainly due to an 806,000 surge in the labour force, the largest in more than 15 years. Wage growth, which had raised some inflationary fears in the previous report, came in at +2.6% (year-over-year). This was down from the revised 2.8% now reported for January, which is a downward revision from the 2.9% pace originally reported. News of solid U.S. job growth, without inflationary wage growth, has been well received by the markets.

South African GDP expands more than expected
South Africa’s National Bureau of Statistics announced that the nation’s GDP grew 3.1% (annualized) in the final quarter of 2017, following an upwardly revised 2.3% expansion in the previous period (on the same basis). On a year-over-year basis, the GDP reading advanced 1.5% in the fourth quarter, 0.2% higher than the third quarter reading. This report shows South Africa with its strongest economic growth since 2016. The improved quarterly performance came as agricultural output rallied 38.0% from the prior three months. Fixed capital formation improved 7.4%, the first expansion in a year. Trade recovered in the fourth quarter to expand 4.8% after falling 0.1% in the prior quarter, while manufacturing grew 4.3% from 3.7% in the third quarter. Running counter to these sectors, mining production fell 4.4% during the quarter. Regardless, these results confirm the country’s eighth consecutive year of growth.

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 5
The European Commission stated that retail sales experienced a slight 0.1% decline in January, following a 1.0% decrease in December 2017. On a year-over-year basis, sales are up 2.3% following an upwardly revised 2.1% increase (on the same basis) during the prior month. Even though the monthly result was below the consensus estimate, the annual growth rate was slightly stronger than the market expectation. Eurozone retail sales increased more than expected year-over-year in January thanks to the sales of non-food products, especially over the internet.

The U.S. Institute for Supply Management announced that its Non-manufacturing Index recorded a 59.5 reading in February. It was down 0.4 points from the 59.9 level registered in January, but remained above the key 50.0 (generally expanding) level for a 97th consecutive month. With the market looking for a larger decline, this figure is above consensus expectations. This result indicates continued growth, but at a slightly slower rate, in the non-manufacturing sector.

March 6
South Africa’s National Bureau of Statistics announced that the nation’s GDP grew 3.1% (annualized) in the final quarter of 2017, following an upwardly revised 2.3% expansion in the previous period (on the same basis). This result was dramatically stronger than the market expectation. On a year-over-year basis, the GDP reading advanced 1.5% in the fourth quarter, 0.2% higher than the third quarter reading. This reading was slightly above the consensus forecast. South Africa shows the strongest economic growth since 2016, largely driven by a recovery in agriculture and trade.

The U.S. Census Bureau reported that factory orders decreased 1.4% in January, following five consecutive monthly increases. Excluding transportation, new orders rose 0.4% in January. These results are in line with expectations. The orders data indicates how busy factories will be in the coming months as manufacturers work to fill those orders.

March 7
Statistics Canada announced that Canada's merchandise trade deficit totalled $1.9 billion in January, narrowing from a $3.1 billion deficit in December. Imports decreased 4.3%, mainly due to lower imports of industrial machinery, equipment and parts. Exports fell 2.1%, primarily on fewer exports of passenger cars and light trucks. Even though the smaller deficit will help bolster the first quarter GDP figures, the decline in two-way trade is a negative economic development, particularly given the direction of current political rhetoric.

The U.S. Census Bureau announced that the nation’s international trade deficit in goods and services widened to US$56.6 billion in January from a revised US$53.9 billion in December. January exports were $200.9 billion, $2.7 billion less than December exports. January imports were $257.5 billion, down less than $0.1 billion from December imports. With the market looking for a larger decline in the trade gap, the January trade deficit was larger than expected. The small change in the trade results will have only a minor influence on overall GDP growth.

The Bank of Canada announced that it was maintaining the target for its key overnight interest rate at 1.25%. The bank rate was correspondingly left unchanged at 1.50% and the deposit rate at 1.00%. The press release that accompanied the announcement highlighted that growth in 2017 had been strong. At the same time, however, it also referenced the heightened uncertainties surrounding international trade. The decision to leave interest rates unchanged was in line with market expectations. The next policy announcement is scheduled for April 18. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

March 8
The U.S. Department of Labor announced that initial jobless claims totalled 231,000 (seasonally adjusted) in the week ending March 3, an increase of 21,000 from the previous week's unrevised level of 210,000. The four-week moving average was 222,500, an increase of 2,000 from the previous week's unrevised average of 220,500. These results are weaker than consensus estimates.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 229,737 units (seasonally adjusted annual rate) in February. This is up from the 215,260-unit level in January (originally reported as 216,200) and is the ninth consecutive reading over 200,000. The gain in housing starts was due to an increase in multiple urban starts. This result is above consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities rose 5.6% to $8.4 billion in January, following a 2.5% rise in December. The value of permits for three components rose, while industrial buildings (-18.6%) and single-family dwellings (-1.3%) declined. The January increase was largely due to higher construction intentions for multi-family dwellings in Ontario. These results are well above market expectations. Permits are an indicator of the future level of activity in the construction sector.

Statistics Canada announced that its New Housing Price Index was unchanged in January for a second consecutive month. Weakness in Toronto’s housing market continued in January as new home prices declined 0.1%. This was the location’s first decrease since July 2014. On a year-over-year basis, the Canada-wide index is up 3.2%. These results are slightly weaker than expected and suggest continued modest improvements in net worth for homeowners.

March 9
The U.S. Bureau of Labor Statistics reported that the unemployment rate was unchanged at 4.1% in February, but non-farm payroll employment rose by 313,000. In addition, the January payrolls gain was revised higher from 200,000 to 239,000. Employment rose in construction, retail trade, professional and business services, manufacturing, financial activities, and mining. The employment figures are significantly stronger than consensus expectations, while the unchanged unemployment rate was 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.

Statistics Canada announced that 15,400 jobs were added in February and the unemployment rate edged lower by 0.1 percentage points to 5.8% as the labour force rose by 6,300. Despite the slight rebound from the 88,000 drop in employment during January, annual job growth actually slipped from 1.6% to 1.5% in February. These results are somewhat weaker than market consensus. The employment data reflects the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

Statistics Canada also announced that Canadian industries operated at 86.0% of their production capacity in the fourth quarter, up from 85.1% in the previous quarter. This was the sixth consecutive quarterly increase. The mining, quarrying, and oil and gas extraction sector, as well as the construction sector were the main sources of the increase. These results are above expectations. In line with recent Bank of Canada commentary, the current level of utilization suggests that the Canadian economy is moving closer to closing its output gap.

The U.K. Office for National Statistics announced that the country’s trade deficit increased by £3.4 billion in the three months to January to £8.7 billion. The widening of the trade in goods deficit was mainly due to a £1.3 billion increase in imports (particularly fuels) from non-E.U. countries, combined with a £1.2 billion decrease in exports (including fuels) to non-E.U. countries. Comparing the three months to January 2018 with the same period in 2017, the U.K.’s total trade (goods and services) deficit widened by £0.4 billion. The trade deficit will continue to be closely watched in the lead-up to Brexit.


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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