The Playbook - October 15, 2018

October 12, 2018 • Playbook

The Playbook

The Playbook

Weekly Commentary – October 15, 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 15 Retail Sales Y/Y September 18 5.2% 6.6%
October 16 Industrial Production Y/Y September 18 3.5% 4.9%
October 17 Housing Starts September 18 1.250 M 1.282 M
October 19 Existing Home Sales September 18 5.31 M 5.34 M
October 18 ADP Employment Change September 18 37.3 k 13.6 k
October 19 Inflation Rate Y/Y September 18 2.6% 2.8%

Key Earnings:
October 15: Bank of America Corp., Charles Schwab Corp., The McClatchy Co.
October 16: Domino's Pizza Inc., eBay Inc., Johnson & Johnson, Netflix Inc.
October 17: athenahealth Inc., M&T Bank Corp., Northern Trust Corp., NVR Inc.
October 18: American Express Co., Dover Corp., PayPal Holdings Inc., Snap-on Inc.
October 19: Procter & Gamble Co., Schlumberger Ltd., Honeywell International Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian housing sees softer data
Updated information from the Canadian Mortgage and Housing Corporation revealed a 5.1% decline in housing starts during September. This was the sixth loss in seven months and pushed annual growth in the trend (six-month moving average) to -3.4%, the weakest since November 2016. Statistics Canada announced that residential building permits had also dropped 4.4% in August, enough to leave annual growth in negative territory (-1.2%) for the first time since November 2017. Similarly, Statistics Canada reported that its New Housing Price Index (NHPI) reported an annual gain of only 0.4% in August, the weakest result since the end of the recession in January 2010. As recently as June 2017, annual growth in new housing prices stood at a robust 3.9%. The interest rate increases seen recently, coupled with expectations of additional tightening of monetary policy do appear to have dampened activity in this sector.

U.S. inflation moves lower
Regardless of the apparent strength of the labour market, growth in business investment, and resilient consumer spending, U.S. inflation remains relatively tame. The latest figures from the U.S. Bureau of Labor Statistics revealed a modest 0.1% increase in the consumer price index during September. The small monthly advance allowed the annual growth rate to drop to 2.3% from 2.7% in August, now the slowest pace since February. A more modest increase in the cost of rent and falling energy prices held the index back during the month. Interestingly, the U.S. Federal Reserve’s key inflation measure (the personal consumption expenditures price index, excluding food and energy) stood with a 2.0% annual gain in the latest (August) reading and has been 1.9% or 2.0% since March. Despite the neutral inflation results, the Fed is expected to continue its policy of gradually raising interest rates.

Stocks drop on higher Treasury yields
Equity markets quickly turned a corner, as fresh highs gave way to significant selling pressure. As recently as October 3, the Dow Jones Industrial Average, closed at a new all-time high of 26,828. By the close on October 11, it had fallen 6.6%. Similarly, the S&P 500 and NASDAQ had been hit with losses of 6.9% and 9.6%, respectively, from their own recent highs. U.S. President Trump has fueled considerable uncertainty by stating that “the Fed is going wild,” referencing the ongoing tightening of monetary policy. As a result, yields on the benchmark 10-year Treasury note rose above the 3.25% level for the first time in seven years. Given the White House commentary, there has been some speculation that Fed independence may face challenges going forward and market rates could be pushed higher as a result.

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

October 9
The National Australia Bank (NAB) reported that its Business Confidence Index edged higher to a +6 reading in September. This is a one-point gain from August’s upwardly revised +5 figure and remains aligned with the index’s long-run average of +6 points. The results were driven primarily by positive figures in Australia’s employment index, which realized a three-point increase to reach a record high of +12, and by recent momentum captured in the country’s mining industry. These results were stronger than expected.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 188,683 units (seasonally adjusted annual rate) in September. This is down from the 198,843-unit level in August (originally reported as 200,986) and is the weakest level seen since November 2016. The decline in housing starts was due to a drop in multiple urban starts. With the market looking for a rebound, these results are well below market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

October 10
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) increased 0.2% (seasonally adjusted) in September. The index increased 2.6% for the 12 months ended September 2018, the smallest year-over-year advance since January (2.6%). These figures match consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.S. Census Bureau announced that wholesale sales rose 0.8% in August from the revised July level and were up 9.2% from the August 2017 level. The July preliminary estimate was revised upward by 0.2%. At the same time, wholesale inventories rose 1.0% for the month and were up 5.3% on a year-over-year basis. This report is marginally weaker than expected. Activity at the wholesale level can be an indicator of future consumer trends.

The U.K. Office for National Statistics announced the country’s international trade deficit widened to £1.27 billion (seasonally adjusted) in August from an upwardly revised £0.57 billion in July. August exports were £55.08 billion, £626 million more than July exports, and the largest total in the last 12 months. August imports were £56.35 billion, £1.33 billion more than July imports. The £700 million month-over-month trade gap was the largest since May, as imports (2.4%) advanced at a faster pace than exports (1.1%). The trade deficit was somewhat larger than expected. With the final terms of Brexit just around the corner, exports and imports to and from non-EU countries have been steadily rising. The weaker trade results will dampen third-quarter GDP results.

The U.K Office for National Statistics announced that, on a month-over-month basis, real gross domestic product growth was flat in August, following an upwardly revised 0.4% increase in July. Economic growth in August was held in check as a modest gain in industrial production was offset by weakness within the construction sector. At the same time, the rolling three-month GDP growth rate stood at 0.7% in August, following an upwardly revised 0.7% increase in July. Given the momentum, even a flat result for September would produce the strongest figure for a calendar quarter since Q4 2016. The rolling three-month GDP growth figure was above consensus expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

October 11
The U.S. Department of Labor announced that initial jobless claims totalled 214,000 (seasonally adjusted) in the week ending October 6, an increase of 7,000 from the previous week's unrevised level of 207,000. The four-week moving average was 209,500, an increase of 2,500 from the previous week's unrevised average of 207,000. These results are somewhat weaker than consensus estimates.

The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.1% (seasonally adjusted basis) in September. Over the last 12 months, the index increased 2.3%. These results were marginally lower than expectations. These figures are consistent with stable inflationary pressures. Still, it remains likely that the Federal Reserve will continue to tighten monetary policy.

Statistics Canada announced that its NHPI was unchanged in August, following a 0.1% increase in July. On a year-over-year basis, the index is up only 0.4%, the weakest result since the end of the recession in January 2010 and well off the 3.9% growth pace seen as recently as June 2017. These results are weaker than consensus expectations and suggest a stagnation in net worth for homeowners.

October 12
Eurostat, the statistical agency of the European Union, reported that industrial production in the euro area climbed 1.0% (seasonally adjusted) in August, following an upwardly-revised -0.7% advance in July (originally reported as -0.8%). This was the first gain since May and left year-over-year growth at 0.9%, following July’s upwardly-revised 0.3% increase (originally reported as -0.1%). Robust monthly gains were apparent across all the primary subsectors, led by a 1.9% advance in energy and a 1.5% increase in durable consumer goods. The overall results were well above consensus expectations. However, other recent statistics appear to paint a less optimistic picture of the economy for the fourth quarter.


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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