The Playbook - November 12, 2018

November 12, 2018 • Playbook


Weekly Commentary – November 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
November 13 Consumer Inflation Expectations October 18 2.99% 3.00%
November 15 Retail sales Y/Y October 18 4.5% 4.7%
November 16 Industrial Production Y/Y October 18 3.0% 5.1%
November 16 Manufacturing Production Y/Y October 18 2.0% 3.5%
November 16 Foreign Securities Purchases September 18 $11.10B $2.82B

Key Earnings:
November 12: Eventbrite Inc., Fibrocell Science Inc., Pacific Drilling S.A., UGI Corp.
November 13: Hillenbrand Inc., Home Depot Inc., PetIQ Inc., Varex Imaging Corp.
November 14: Cisco Systems Inc., Gap Inc., Macy’s Inc., Perspecta Inc.
November 15: Energizer Holdings Inc., Manchester United PLC, Sonos Inc., Walmart Inc.
November 16: Ditech Holding Corp., Rockwell Collins Inc., Williams-Sonoma Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Rate hikes weigh on Canadian housing
New figures from the Canada Mortgage and Housing Corporation (CMHC) revealed an 8.5% rebound in housing starts during October and an upward revision to the September tally. Nevertheless, CMHC’s preferred measure (six-month moving average) dropped for a fourth consecutive month to 206,171 units, the lowest level since January 2017. At the same time, Statistics Canada reported that its New Housing Price Index (NHPI) was unchanged for a second consecutive month in September. Annual growth in the NHPI has now fallen steadily from +3.9% in July 2017 to just +0.2% in the latest report, the weakest since January 2010. StatsCan also announced that after falling a cumulative 11.2% between May and August, residential building permits finally stabilized, rising a modest 0.3% in September. Regardless, recent commentary from the Bank of Canada points directly to further rates hikes, possibly as early as the next policy announcement window on December 5, 2018.

Fed sets the stage for December rate hike
The emergent pattern for the U.S. Federal Reserve, to hike interest rates at one meeting and then pause at the next, remained intact with the central bank’s latest policy announcement. The target range for the federal funds rate was left unchanged at 2.00% to 2.25% at the latest meeting, after being raised by 0.25% on September 26. The press release that accompanied the most recent announcement highlighted the continued strength of both the labour market and consumer spending, while acknowledging a moderation in business investment. Even though inflation is expected to remain near the its 2.0% target, the Fed appears to be set to raise interest rates at their final meeting in 2018, scheduled for December 18 to 19, stating that “further gradual increases” are expected.

U.K. economic growth strongest since late 2016
According to preliminary estimates, the U.K. Office for National Statistics revealed a 0.6% advance in GDP during the three months to September, following a 0.4% expansion in the previous quarter. This was the strongest rolling three-month growth rate since the last quarter of 2016 and matched consensus expectations. On a year-over-year basis, economic growth stood at 1.5%, up from 1.2% in the previous period. The quarterly acceleration reflected a 0.5% increase in household spending and a 2.7% rebound in exports, their largest gain of the year. Business investment contracted 1.2%, the biggest drop since early 2016, signaling heightened caution among companies ahead of Brexit in March next year. Nevertheless, fast-paced economic growth may prove a high-water mark ahead of the U.K.’s departure from the European Union. While an interest rate hike remains unlikely in the near term, a monetary tightening after Brexit remains on the table. A U.K.-EU Brexit transitional deal may be in negotiations during the November 17 to 18 summit.

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

November 5
The IHS Markit/CIPS U.K. Markit Services PMI fell to 52.2 (seasonally adjusted) in October 2018. It was down 1.7 points from the 53.9 level registered in September, but remained above the key 50.0 (slowly converging) level for a 27th consecutive month. This was the index’s second weakest reading since July 2016 and pointed to the U.K.’s slowest expansion in factory activity since March 2018. The reading came in well below market consensus. New business growth, the leading attribute to the weakened measure, fell for the third time in four months and to its lowest rate in over two years. Brexit-related uncertainty and concerns about the global economy have reduced confidence about the outlook for business activity growth.

The Institute for Supply Management announced that its Non-Manufacturing Index recorded a 60.3 reading in October. It was down 1.3 points from the 61.6 level registered in September, but remained above the key 50.0 (generally expanding) level for a 105th consecutive month. With the market braced for a larger decline, this figure is above expectations. This result indicates continued growth, but at a slightly slower rate in the non-manufacturing sector.

November 6
Statistics Canada reported that building permits issued by Canadian municipalities rose 0.4% in September, following a 1.1% decline in August. Six provinces posted monthly increases, led by a sharp (+102.4%) gain in Newfoundland and Labrador. Nationally, on a year-over-year basis, permits are now down 0.6%. These results match consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

■ At its latest policy meeting, the Reserve Bank of Australia (RBA) announced that it had decided to leave its benchmark “cash rate” unchanged at a record low of 1.5% at its November meeting. The decision extended its record period of policy stagnation beyond two years and 25 policy meetings. Despite Australia’s recent upwardly revised economic growth figure projections, with annual GDP growth expected to average around 3.5% in 2018 and 2019, inflation is currently hovering around 1.9%, just below the RBA’s average 2-3% inflation target band. An ongoing downturn in the nation’s main housing markets may yet threaten consumer spending, however, the labour market remains strong with the unemployment rate falling to 5% in October, its lowest level since early 2012. The unemployment rate is forecasted to be near 4.75% in 2020, thus stimulating wage growth and potentially offsetting the loss in housing prices. The unchanged monetary policy is in line with market expectations.

November 7
■ Eurostat, the European Union statistical agency, reported that retail sales in the euro area were unchanged (seasonally adjusted) in September, following an upwardly revised 0.3% growth in August (originally reported as -0.2%). Accordingly, annual growth, which stood at an upwardly revised 2.2% in August, has now fallen to 0.8%. This was the smallest rise in retail sales since October 2017. The monthly figures are marginally weaker than expected, while the year-over-year figures stood in line with market consensus. With the trend of sales being a key indicator for consumption growth in the euro area, the weakened trend adds to a modest picture of GDP growth in the months ahead, with not much of a rebound to be expected after the dreary reading of 0.2% in Q3 2018.

November 8
The U.S. Department of Labor announced that initial jobless claims totalled 214,000 (seasonally adjusted) in the week ending November 3, a decrease of 1,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 215,000. The four-week moving average was 213,750, a decrease of 250 from the previous week's revised average. The previous week's average was revised up by 250 to 214,000. These results are in line with consensus estimates.

The CMHC reported that housing starts totalled 205,925 units (seasonally adjusted annual rate) in October. This is up 8.5% from the upwardly revised 189,730-unit level in September (originally reported as 188,683). These results are stronger than expected. Activity in the housing market has a significant "ripple" effect on the broader economy.

■ Statistics Canada announced that its NHPI was unchanged in September for a second consecutive month. On a year-over-year basis, the index is up 0.2%. These results are weaker than consensus expectations and suggest very modest improvements in net worth for homeowners.

■ The U.S. Federal Reserve left interest rates unchanged following its latest two-day policy meeting. The target range for the federal funds was left at 2.00% to 2.25%. The Fed last raised interest rates by 0.25% on September 26. The press release that accompanied the announcement highlighted the continued strengthening of both the labour market and household spending. The Fed clearly left the door open for additional tightening of policy over the near term. The announcement of unchanged interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policy-makers in other countries.

November 9
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.6% (seasonally adjusted) in October. The index increased 2.9% for the 12 months ended October 2018, down marginally from the 2.9% figure reported for September. These figures are well above consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

■ The U.K. Office for National Statistics announced that economic growth remained stagnant for a second successive month in September, following a downwardly revised 0.3% increase in July. At the same time, the GDP growth rate increased 0.6% in the three months to September, following an upwardly revised 0.7% expansion in Q2 2018. It was the strongest quarterly economic performance registered since the fourth quarter of 2016. The GDP growth figures matched consensus expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Census Bureau announced that wholesale sales rose 0.2% in September from the revised August level and were up 7.8% from September 2017. The August preliminary estimate was revised upward by 0.1%. At the same time, wholesale inventories rose 0.4% for the month and were up 5.2% on a year-over-year basis. This report is in line with expectations. Activity at the wholesale level can be an indicator of future consumer trends.

The Thomson Reuters/University of Michigan Consumer Sentiment Index slipped to 98.3 in the month-end reading for November. This is slightly lower than the 98.6 level recorded for October and is in line with market expectations. This is another indicator of the likely pattern of consumer spending.


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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