The Playbook - July 16, 2018

July 20, 2018 • Playbook



Weekly Commentary – July 16, 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
July 16 Retail Sales June 18 0.1% 0.8%
July 17 Industrial Production Y/Y June 18 3.9% 3.5%
July 17 Foreign Bond Investment May 18 $2.0B -$4.8B
July 18 Building Permits June 18 0.7% -4.6%
July 16 Foreign Securities Purchases May 18 $12.90B $9.13B
July 20 Retail Sales Y/Y May 18 2.49% 1.60%

Key Earnings:
July 16: Bank of America Corp., JA Solar Holdings Co. Ltd., Netflix Inc., SuperCom Ltd.
July 17: Cohen & Steers Inc., Johnson & Johnson, Kinder Morgan Inc., UnitedHealth Group Inc.
July 18: American Express Co., Dover Corp., eBay Inc., Scholastic Corp., Trinity Biotech PLC
July 19: Insteel Industries Inc., Microsoft Corp., Union Pacific Corp., Western Alliance Bancorp.
July 20: Citizens Financial Group Inc., General Electric Co., Lombard Medical Inc., VF Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada hikes rates again
Following its latest policy meeting, the Bank of Canada raised administered interest rates by 25 basis points (a basis point is 1/100th of one per cent), increasing the target range for overnight lending to 1.25% to 1.75%. This was the fourth move since the bank began tightening on July 12, 2017 and returns it to the level that first prevailed on December 9, 2008. At the same time, the bank updated its economic forecast. The official forecast for 2018 GDP growth was left unchanged at 2.0%, while expectations for 2019 (2.2% from 2.1% in the April forecast) and 2020 (1.9% from 1.8%) were raised marginally. Meanwhile, the forecast for inflation was raised for 2018 (2.4% from 2.3%) and 2019 (2.2% from 2.1%), but was left unchanged for 2020 (2.1%). The bank explicitly stated that “higher interest rates will be warranted to keep inflation near target.” However, they also cautioned that “the possibility of more trade protectionism is the most important threat to global prospects.”

U.S. inflation hits new high
Updated data from the U.S. Bureau of Labor Statistics revealed a relatively modest 0.1% (seasonally adjusted) increase in the nation’s overall consumer price index (CPI) in June. However, even the small monthly advance was sufficient to push the annual growth rate of inflation to 2.9%, the fastest pace since February 2012. Even though CPI is not the Federal Reserve’s main inflation barometer, its actual benchmark measure (Personal Consumption Expenditures excluding food and energy) did move to the Fed’s targeted 2.0% level in May, the highest level since April 2012. Recent economic statistics suggest a pickup in consumer activity that appears to match the strength in the job market, and second quarter GDP is now expected to accelerate above the 3.0% level. Analysts suggest an increased likelihood of another tightening move at the Fed’s next meeting, scheduled for July 31 to August 1.

U.K. trade balance weakens
The latest figures from the U.K. Office for National Statistics showed that the total international trade deficit widened by £5.0 billion to £8.3 billion in the three months to May 2018. The previous month’s deficit was revised downward to £3.1 billion. Exports rose 2.8%, while imports increased at a slower 2.1% pace, but still hit an all-time high of £54.6 billion. However, in the first ever monthly reading of national GDP, the economy appeared to gain strength in May, expanding 0.3% during the month, up from 0.2% in April. Still, considerable uncertainty remains as political wrangling over the looming Brexit has resulted in two recent departures from Prime Minister Theresa May’s cabinet.

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

July 10
The U.K. Office for National Statistics announced that the total U.K. trade deficit widened by £5.0 billion to £8.3 billion in the three months to May 2018. The previous month’s deficit was revised downward to £3.1 billion. Exports rose 2.8%, while imports increased at a slower 2.1% pace, but still hit an all-time high of £54.6 billion. Since the market was looking for a narrower deficit in May, these results are weaker than expected. They are a negative sign for overall GDP growth.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 248,138 units (seasonally adjusted annual rate) in June. This is up from the 193,902-unit level in May (originally reported as 214,379) and represents a significant rebound. The gain in housing starts was due to an increase in multiple starts in urban centers. These results are well above market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities increased 4.7% to $8.2 billion in May. This followed a 4.7% drop in April, the only month this year where municipalities reported a total value below the $8.0 billion mark. Five provinces posted increases, led by Prince Edward Island and British Columbia. Nationally, construction intentions rose in residential (7.7%) and declined in non-residential (-0.7%). Despite the monthly gain, on a year-over-year basis, permits are down 0.4%. These results are stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

July 11
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.3% (seasonally adjusted) in June. The index increased 3.4% for the 12 months ended June 2018, the largest year-over-year advance since a 3.7% rise in November 2011. These figures are marginally higher than consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The Bank of Canada announced that it was raising the target for its key overnight interest rate by 25 basis points (a basis point is 1/100th of one per cent) to 1.50%. The bank rate was correspondingly increased to 1.75% and the deposit rate to 1.25%. The press release that accompanied the announcement highlighted that the U.S. economy had performed better than anticipated, but that significant uncertainty with respect to international trade remained. The bank also indicated that the Canadian economy was operating close to its capacity. Once again, the statement indicated that higher interest rates should be anticipated going forward. The decision to raise interest rates was in line with market expectations. The next policy announcement is scheduled for September 5. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

The U.S. Census Bureau announced that wholesale sales rose 2.5% in May from the revised April level, and were up 11.8% from the May 2017 level. The April preliminary estimate was revised upward to 1.4%. At the same time, wholesale inventories rose 0.6% for the month and were up 5.9% on a year-over-year basis. This report is stronger than expected. Activity at the wholesale level can be an indicator of future consumer trends.

July 12
The U.S. Department of Labor announced that initial jobless claims totalled 214,000 (seasonally adjusted) in the week ending July 7, a decrease of 18,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 231,000 to 232,000. The four-week moving average was 223,000, a decrease of 1,750 from the previous week's revised average. The previous week's average was revised up by 250 from 224,500 to 224,750. These results are somewhat stronger than consensus estimates.

The U.S. Bureau of Labor Statistics reported that the CPI increased 0.1% (seasonally adjusted basis) in June. Over the last 12 months, the index increased 2.9%. These results were in line with expectations. These figures are consistent with the U.S. Federal Reserve's expectations of gradually rinsing inflationary pressures.

Statistics Canada announced that its New Housing Price Index (NHPI) was flat for a third consecutive month in May. On a year-over-year basis, the index is up only 0.9%. These results are weaker than consensus expectations and suggest a slowdown in net worth growth for homeowners.


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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