The Playbook - October 1, 2018

September 28, 2018 • Playbook

The Playbook

The Playbook

Weekly Commentary – October 1, 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
October 1 ISM Manufacturing PMI September 18 60.5 61.3
October 3 ADP Employment Change September 18 185 k 163 k
October 4 Factory Orders (M/M) August 18 0.9% -0.8%
October 5 Consumer Credit Change August 18 $15.00B $16.64B
October 4 Ivey PMI s.a.         September 18 61.4 61.9
October 5 Unemployment Rate September 18 5.9% 6.0%

Key Earnings:
October 1: Cal-Maine Foods Inc., IDT Corp., Stitch Fix Inc., Xcerra Corp.
October 2: Landec Corp., Lamb Weston Holdings Inc., Paychex Inc., PepsiCo Inc.
October 3: Lennar Corp., RPM International Inc., Pier 1 Imports Inc.
October 4: Constellation Brands Inc., Costco Wholesale Corp., Smart Global Holdings Inc.
October 5: Origen Financial Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy returns to growth
Updated figures from Statistics Canada showed that the economy grew by 0.2% in July, following a “no-change” result for June. This report revealed benchmark revisions going back to January 2017, that brought the monthly gross domestic product (GDP) results closer in line to the quarterly figures previously released. In July, goods production (+0.3%) and services output (+0.2%) were both in positive territory, even though overall growth was narrowly-based. Of the 20 main sub-sectors, just 12 reported gains. Utilities (+2.1%) reported the largest advance, while arts and entertainment (-1.9%) reported the largest decline. Despite the uneven growth, the rebound in economic activity raises the likelihood that the Bank of Canada will follow the U.S. Federal Reserve with an interest rate hike at their next policy meeting on October 24.

Fed extends tightening cycle
The U.S. Federal Reserve raised interest rates by 25 basis points (a basis point is 1/100th of one per cent) at the end of its latest two-day policy meeting. This was the third interest rate hike under new Federal Reserve Chair Jerome Powell and the eighth of the current tightening cycle. The mid-point of the target range (2.00% to 2.25%) for the federal funds rate is now the highest seen since April 29, 2008. The press release that accompanied the announcement highlighted the continued strength of the U.S. job market, and both household and business spending. In addition, the Fed updated its economic forecasts. Importantly, expectations for gross domestic product (GDP) growth for 2018 (3.1% from 2.8% in the June forecast) and 2019 (2.5% from 2.4%) were both raised. As well, the interest rate forecast shows the federal funds rate at 2.4% (median forecast) for 2018, 27.5 basis points above the current level. The final policy meetings of the year will take place on November 7 to 8 and December 18 to 19. Given the recent alternating pattern of a rate hike followed by no change, pundits are already focused on the probability of another 0.25% hike at the December meeting.

Brent hits new high
Brent crude oil achieved a new four-year high of US$82.68 per barrel on September 28, while West Texas Intermediate (WTI) broke above the US$72 mark as it looked to move back to the late-June high of US$74. Analysts attribute this latest run-up in energy prices to news of the latest U.S. sanctions on Iran, slated to go into effect on November 4. Further, the White House indicated that it would not open its strategic petroleum reserves to dampen the price increase. Here at home, markets are far less enamored with Canadian oil. Western Canadian Select’s (WCS) discount to WTI has widened to a five-year high of US$34.75 per barrel. Canadian oil appears to be missing out on the recent rally of global oil prices and is likely to remain heavily discounted if supply bottlenecks persist, and pipeline expansion plans remain on hold.

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 24
Statistics Canada reported that wholesale sales jumped 1.5% to $63.9 billion in July, the third gain in five months and more than sufficient to offset the 0.9% decline in June. At the same time, inventories rose 1.4% to $87.1 billion during the month, the fifth advance in seven months. On a year-over-year basis, overall wholesale sales are up 4.1%, while inventories are up 8.7%. The monthly sales advance was stronger than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

September 25
Prices for Brent crude oil rose to US$82.55 per barrel in early trading, establishing a new four-year high before profit taking saw it slip back below US$82. Energy markets, which have pushed prices broadly higher since early August, are now grappling with uncertainty over the potential impact of additional U.S. sanctions on Iran, the Organization of the Petroleum Exporting Countries’ (OPEC) third largest oil producer. Despite White House calls for OPEC action to stabilize prices, it appears likely that the cartel will leave output unchanged for the time being. Brent crude oil is a major international benchmark price.

September 26
The U.S. Census Bureau announced that new-home sales totalled 629,000 units (seasonally adjusted annual rate) in August 2018. This is 3.5% above the revised July rate of 608,000 units and 12.7% above the August 2017 level of 558,000 units. These results are considerably stronger than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.S. Federal Reserve raised interest rates following its latest two-day policy meeting. This is the third rate hike under new Federal Reserve Chair Jerome Powell, and the eighth of the current tightening cycle. The target range for the federal funds rate is now set at 2.00% to 2.25%, an increase of 0.25%. This is the highest level seen since April 29, 2008. The Fed last raised interest rates (also by 0.25%) on June 13, 2018. The press release that accompanied the announcement highlighted the continued strength of the U.S. job market, and both household and business spending. The Fed also left the door open for an additional rate hike before the end of 2018. The announcement of a 0.25% interest rate hike 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 policymakers in other countries.

September 27
The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 4.2% in the second quarter of 2018. This figure is the “third estimate” and matches the previous growth estimate. In the first quarter of 2018, real GDP increased 2.2% on the same basis. A downward revision to private inventory investment was offset by small upward revisions to most other GDP components. Imports, which are a subtraction in the calculation of GDP, were revised down slightly. These results were marginally lower than expectations as the market was looking for a nominal upward revision. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Department of Labor announced that initial jobless claims totalled 214,000 (seasonally adjusted) in the week ending September 22, an increase of 12,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 201,000 to 202,000. The four-week moving average was 206,250, an increase of 250 from the previous week's revised average. The previous week's average was revised up by 250 from 205,750 to 206,000. These results are in line with consensus estimates.

The U.S. Census Bureau announced that durable goods orders jumped 4.5% in August, following an upwardly-revised 1.2% decrease in July (originally reported as -1.7%). Excluding transportation, new orders increased 0.1% in August. Excluding defence, new orders increased 2.6%. With the revisions to the previous data, these figures are considerably stronger than market expectations. Orders for durable goods indicate how busy manufacturers will be in the months to come, as they work to fill those orders.

September 28
Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.2% in July, after essentially no change in June. This increase was concentrated as 12 of 20 sectors were up, led by growth in manufacturing. On a year-over-year basis, GDP growth stands at 2.4%. These results are somewhat stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that both its Industrial Product Price Index (IPPI) fell 0.5% and its Raw Materials Price Index (RMPI) dropped 4.6% in August. On a year-over-year basis, the indexes are up 5.8% and 15.5%, respectively. Lower prices for primary non-ferrous metal products dampened industry prices, while weaker crude energy products were the primary detractor in raw materials during the month. These figures tend to move in wide ranges and are broadly in line with expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.3% in August. Personal consumption expenditures (PCE) increased an identical 0.3%. Based on revised figures, personal income increased 0.3% and PCE increased 0.4% in July. While income figures for August were marginally lower than expectations, spending results matched the market consensus. Income and spending patterns of consumers are critical factors in the health of the broader economy.


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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