The Playbook - October 29, 2018

October 29, 2018 • Playbook


The Playbook

Weekly Commentary – October 29, 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 29 Personal Spending September 18 0.4% 0.3%
October 31 ADP Employment Change October 18 200 k 230 k
November 1 Construction Spending September 18 0.41% 0.10%
November 2 Imports September 18 $263.70B $262.67B
October 31 PPI Y/Y September 18 6.1% 5.8%
November 2 Balance of Trade September 18 $0.40B $0.53B

Key Earnings:
October 29: Ceridian HCM Holding Inc., Dana Inc., Edison International
October 30: 3D Systems Corp., Aegion Corp., Aetna Inc., Dun & Bradstreet Corp.
October 31: Allstate Corp., Apache Corp., Estee Lauder Companies Inc., Kellogg Co.
November 1: Apple Inc., Avon Products Inc., Domtar Corp., Pitney Bowes Inc.
November 2: Exxon Mobil Corp., ITT Inc., Terex Corp., Titan International Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada hikes rates again
Following its latest policy meeting, the Bank of Canada (BoC) raised administered rates by 25 basis points (a basis point is 1/100th of one per cent), increasing the target range for overnight lending to 1.50% to 2.00%. This was the fifth hike since the bank began tightening on July 12, 2017 and returns rates to their highest levels since December 9, 2008. At the same time, the bank updated its economic forecast. The official forecast for GDP growth, for the current year, was raised (2.1% from 2.0% in the July forecast), while expectations for 2019 were lowered (2.1% from 2.2%) and left unchanged for 2020 (1.9%). The forecast for inflation was left unchanged at 2.4% for 2018 but reduced for both 2019 (2.0% from 2.2%) and 2020 (2.0% from 2.1%), aligning it with the bank’s inflation target. Consumer spending is now likely to provide less support to the broader economy, as rising interest rates slow household credit and reduce the number of new mortgages at the margin. The bank signaled that further rate hikes should be anticipated.

U.S. new home sales near two-year low
The U.S. Census Bureau reported that new-home sales dropped 5.5% to 553,000 units (seasonally adjusted annual rate) in September. This marks the fourth consecutive monthly drop in new-home sales and is now the lowest level recorded since December 2016 (546,000 units). On a year-over-year basis, new-home sales are down 13.2% while the median price of a new home is now off 3.5%, over the same period. The report also indicated that supply was not a constraint. The unsold inventory of new homes stood at 7.1 months’ supply, the first reading above 7 since March 2011. The results in this report came on the heels of declines in homebuilding, permits and housing completions in September. Though housing accounts for a small share of U.S. GDP, it has wide-ranging economic influence. The recent data raise concerns that an interest rate driven slowdown in the housing market may eventually spill over to the broader economy.

U.S. economy remains firm
Fresh figures from the U.S. Bureau of Economic Analysis revealed that GDP grew 3.5% (annualized, seasonally adjusted) in the third quarter. While this was a slower pace than the second quarter surge of 4.2%, the back-to-back quarterly growth figures are the best since Q2 and Q3 2014. In addition, year-over-year growth now stands at 3.0%, the strongest since the second quarter of 2015. Consumer spending (4.0%) was the primary driver, while nonresidential business investment (0.8%) proved to be a weak point. However, the drag from the politically sensitive international trade account was the greatest in 33 years with imports jumping 9.1% and exports tumbling 3.5%. Despite the growth in the broader economy, price pressures remained in check, as growth in the Federal Reserve’s key inflation measure slipped to 1.6% from 2.0% in the second quarter. Nevertheless, with capacity constraints still a concern, the tightening of monetary policy is expected to continue.

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 22
Statistics Canada reported that wholesale sales edged down 0.1% to $63.6 billion (seasonally adjusted) in August, following the 1.5% jump in July. Sales were down in four of seven subsectors, representing 65% of total wholesale sales. Meanwhile, wholesale inventories decreased 0.5% to $86.8 billion, the first decline in five months. On a year-over-year basis, overall wholesale sales are up 3.5%, while total inventories are up 8.5%. The stagnant monthly sales were in line with analyst expectations. Activity at the wholesale level can be an indicator of future consumer trends.

The Federal Reserve Bank of Chicago reported that the Chicago Fed National Activity Index (CFNAI) decreased to +0.17 in September from an upwardly-revised +0.27 reading in August. This marks the fourth month of positive measures, with a -0.49 recorded in May. The CFNAI three-month moving average, which represents a more consistent measure of national economic growth, declined to +21 in September, following an upwardly-revised +27 measure in August. The contributions from both the production-related indicators and the sales, orders and inventories category declined in September from the previous month. The contributions from the consumption and housing category ticked up +1 to -0.05 over the month. Although the negative drag from consumption and housing may be of concern, the CFNAI results may indicate potential strength in Friday’s GDP growth report. The CFNAI gauges overall economic activity and related inflationary pressure.

October 23
The U.K. Confederation of British Industry (CBI) Business Optimism Index decreased to -16 in October, from -3 in the previous three-month period. This reading came in below expectations and was the lowest measure since July 2016, only a month after the U.K. voted to leave the European Union. Optimism surrounding exports dropped at the fastest pace since the Eurozone crisis in October 2011. The CBI Industrial Trends Orders Survey reported that the quarterly order book balance stood at -6 in the three months to October, a sharp decline following the +15-level recorded in July. This figure was below market estimates and the lowest balance registered since the quarter ending October 2015. As fears over a disorderly Brexit suppressed confidence in the manufacturing sector, output growth is expected to stall over the coming three months (-3) while new orders are expected to decline even further (-4). With manufacturing accounting for approximately 10% of total British economic output, overall economic growth will likely remain truncated, reflecting Brexit drag on investment and weak household income growth.

The European Commission (EC) reported that the Flash Consumer Confidence Index for the euro area increased to -2.7 in October. This was a 2-point climb from the -2.9 reading in September and beat analyst expectations of -3.2. The marginal increase broke a four-month string of consecutive declines in consumer confidence experienced in the euro area. Moreover, the flash consumer confidence indicator for the EU edged up 0.1 points to -2.7, following a -2.8 reading in August. Consumer sentiment remains at a high level, with the long-run average at -12.1 and the all-time high, set in August 2000, at 2.0. Despite mounting downside risks from the U.S.-China trade war and Brexit just around the corner, policymakers at the European Central Bank (ECB) are hoping to stop expanding its quantitative easing stimulus by the year’s end.

October 24
The U.S. Census Bureau announced that new-home sales totalled 553,000 units (seasonally adjusted annual rate) in September 2018. This is 5.5% below the revised August rate of 585,000 units and 13.2% below the September 2017 level of 637,000 units. These results are dramatically weaker than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

The BoC announced that it was raising the target for its key overnight interest rate by 0.25 basis points (a basis point is 1/100th of one percent) to 1.75%. The bank rate was correspondingly increased to 2.00% and the deposit rate to 1.50%. The press release that accompanied the announcement highlighted that the U.S. economy will continue to be robust, but the new U.S.-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America. The BoC also indicated that the Canadian economy was operating near its capacity and its growth has been more balanced. The statement indicated that gradual hikes in interest rates should be anticipated going forward to achieve the inflation target of 2.00%. The decision to raise interest rates was in line with market expectations. The next policy announcement is scheduled for December 5. Canadian monetary policy, as decided by the BoC, has significant influence on both the domestic economy and the value of the currency.

Volatility returned with a vengeance on major equity exchanges around the world during Tuesday’s trading session. The S&P/TSX Composite Index, Canada’s main index, closed the day down 127.5 points (-0.8%) to 15,285.17, but the index had plunged 318.0 points (-2.1%) in early trading en route to a six-month low of 15,094.66. The session’s loss comes on the heels of the 170.2-point (1.1%) jump on October 16, the best single-day advance in six months. Similarly, the Dow Jones Industrial Average (DJIA) plummeted 548.6 points (2.2%) before adding back 422.6 points (+1.7%) to close the session at 25,181.43. The NASDAQ Composite shed 31.1 points (-0.4%), while the S&P 500 fell 15.2 points (-0.6%) to 2,740.69, extending its losing streak to five consecutive sessions. The CBOE VIX Index (VIX), the measure of implied volatility of the S&P 500 options over the next 30-day period, increased 2.5 points (+12.9%) at the open to start yesterday’s session at 22.2, and climbed further to an intraday high of 24.7, before falling to 20.7 at market closing. Investors’ increasing anxiety due to slowing global markets and geopolitical tensions, coupled with U.S.-China protectionist trade policies, instability in emerging markets, and Saudi Arabia’s recent announcement to increase oil supplies, can be expected to fuel further uncertainty.

October 25
The U.S. Department of Labor announced that initial jobless claims totalled 215,000 (seasonally adjusted) in the week ending October 20, an increase of 5,000 from the previous week's unrevised level of 210,000. The four-week moving average was 211,750, unchanged from the previous week's unrevised average of 211,750. These results are in line with consensus estimates.

The U.S. Census Bureau announced that durable goods orders increased 0.8% in September, following an upwardly-revised 4.6% increase in August (originally reported as 4.5%). Excluding transportation, new orders increased 0.1% in September. Excluding defence, new orders decreased 0.6%. With the upward 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.

The ECB announced that it had decided to leave its benchmark “refinancing rate” unchanged at 0% in October. The marginal lending facility and the deposit facility interest rates were also left unchanged at 0.25% and -0.40%, respectively. These record-low rates are expected to remain at their present levels through mid-2019 to ensure the continued sustained convergence of inflation to levels that are just below 2% over the medium term. The decision to leave interest rates unchanged was in line with market expectations. Despite the dimming growth outlook and the political turmoil in Italy, the ECB decided to continue to claw back stimulus and make net purchases under the asset purchase program (APP) at the new monthly pace of 15 billion euros through December.

October 26
The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 3.5% in the third quarter of 2018. This is the “advanced estimate” prepared with preliminary data and is often subject to substantial revision. In the second quarter, real GDP increased 4.2% on the same basis. These results are somewhat stronger than expected as the market was looking for a more rapid slow-down following the second-quarter surge. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the 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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