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The Playbook - December 10, 2018

December 10, 2018 • Playbook


The Playbook

Weekly Commentary – December 10, 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.

A PDF version of The Playbook is also available for download.

Economic Calendar

Date Release Period Consensus Previous
December 11 PPI Y/Y November 18 3.0% 2.9%
December 12 Inflation Rate Y/Y November 18 2.4% 2.5%
December 14 Retail Sales Ex Autos November 18 0.9% 0.7%
December 14 Industrial Production Y/Y November 18 3.2% 4.1%
December 10 Housing Starts November 18 200.2 k 205.9 k
December 12 Capacity Utilization November 18 85.7% 85.5%

Key Earnings:
December 10: Avid Bioservices Inc., Casey's General Stores Inc., Value Line Inc.
December 11: ABM Industries Inc., Construction Partners Inc., Powell Industries Inc.
December 12: Oracle Corp., Oxford Industries Inc., Photronics Inc., Sanderson Farms Inc.
December 13: Adobe Inc., Cherokee Inc., Costco Wholesale Corp., LRAD Corp.
December 14: Lee Enterprises Inc., Origen Financial Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada holds rates steady
At its latest monetary policy window, the Bank of Canada decided to leave the target for its key overnight borrowing rate unchanged at 1.75%. The press release that accompanied the announcement set a far more dovish tone than has recently been seen from the bank. The statement specifically points to international trade stating that “signs are emerging that trade conflicts are weighing more heavily on global demand.” Perhaps more importantly, the bank backtracked on prior comments suggesting that the Canadian economy was operating at full potential stating, “Downward historical revisions by Statistics Canada to GDP, together with recent macroeconomic developments, indicate there may be additional room for non-inflationary growth.” Still, they have left the door open for higher interest rates by adding, “The policy interest rate will need to rise into a neutral range to achieve the inflation target.” The next policy announcement is scheduled for January 9, 2019.

Canada posts record job gain
Statistics Canada announced that 94,100 jobs were added to the domestic economy in November, the largest total seen since consistent data were first gathered in 1976. Similarly, the unemployment rate fell to 5.6%, also the lowest seen over that same period. Fortunately, the bulk of the gains (89,900) were seen in full-time positions, with a much smaller advance (4,100) in part-time jobs. The broader November gains represent almost half of the entire (218,800) job tally over the past 12 months. However, despite the apparent strength of the job market, wage gains continued to slip. Average hourly earnings growth, for permanent employees, continued its decline in November, hitting a 1.5% annual growth rate, the weakest reading since July 2017. This has fallen steadily from 3.9% in May and has now dropped below the pace of inflation. Even though the headline figures would suggest material constraints in the Canadian job market, there does not yet appear to be significant wage pressure. This may allow greater leeway for the Bank of Canada to slow its tightening of monetary policy.

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

December 3
The IHS Markit/CIPS U.K. Markit Manufacturing Purchasing Managers’ Index (PMI) rose 2.0 points to 53.1 (seasonally adjusted) in November, following October’s 27-month low reading of 51.1. New orders returned to positive growth following a decline at the beginning of the quarter. Meanwhile, exports were down for a second successive month, their first back-to-back since early 2016. The reading came in well above market consensus, and manufacturing seems to have held up well given global market uncertainties. However, despite November’s positive reading, the outlook inevitably remains foggy, and increased short-term business activity may simply reflect efforts to forestall the fallout from any Brexit no-deal.

The Institute for Supply Management reported that its PMI moved higher to a 59.3 reading in November. This is a 1.6-point gain from October’s 57.7 figure and remains above the key 50.0 (generally expanding) level for a 27th consecutive month. The reading is above expectations and indicates an acceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending dipped 0.1% in October, following a downwardly revised 0.1% decline in September (originally reported as 0.0%). On a year-over-year basis, construction was up 4.9%. The monthly growth figure is below consensus estimates. This result indicates continued moderation in the construction sector.

December 4
Statistics Canada announced that labour productivity of Canadian businesses rose 0.3% (quarter-over-quarter) in the third quarter of 2018, after increasing 0.7% the second quarter. This slower growth in productivity reflected the slowdown in business output, while hours worked rose after posting no change in the previous quarter. Unit labour costs rose 0.2% in the third quarter after falling 0.6% in the previous quarter. On a year-over-year basis, productivity rose 1.0% and unit labour costs increased 1.5%. These figures are broadly in line with expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

December 5
The IHS Markit/CIPS U.K. Services PMI fell to 50.4 (seasonally adjusted) in October 2018. It was down 1.8 points from the unrevised 52.2 level registered in September but remained marginally above the key 50.0 (slowly converging) level. This figure indicated the weakest pace of expansion in the service sector since July 2016 amid reduced business and consumer spending and Brexit concerns. New business growth diminished for the third consecutive month and reached its lowest levels in nearly two-and-a-half years. The pace of job creation was at its lowest level in four months amidst a softer demand growth and increasing wage rate environment. These results were well below market consensus.

Eurostat, the European Union statistical agency, reported that retail sales in the euro area increased 0.3% (seasonally adjusted) in October, rebounding from a downwardly revised -0.5% decline in September (originally reported as 0.0%). Accordingly, annual growth, which stood at a downwardly revised 0.3% in September, has accelerated to 1.7% in October. The monthly figures are marginally stronger than expected, while the year-over-year figures came in below market consensus. Discretionary spending has now contracted in three of the last four months. With that, stronger performance in the sector is likely necessary to give fourth quarter real GDP growth a slight boost.

The Bank of Canada announced that it was holding the target for its key overnight interest rate steady at 1.75%. The bank rate was left at 2.00% and the deposit rate remains at 1.50%. The press release that accompanied the announcement highlighted that the international trade issues continued to raise uncertainty over the scale of global economic growth. In addition, the bank specifically mentioned the domestic economy’s reduced momentum heading into the fourth quarter, and the recent dramatic declines in energy prices. The decision to leave interest rates unchanged was in line with market expectations. The next policy announcement is scheduled for January 9, 2019. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

December 6
The U.S. Department of Labor announced that initial jobless claims totalled 231,000 (seasonally adjusted) in the week ending December 1, a decrease of 4,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 235,000. The four-week moving average was 228,000, an increase of 4,250 from the previous week's revised average. The previous week's average was revised up by 500 to 223,750. These results are in line with consensus estimates.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 2.3% (annualized) rate during the third quarter of 2018 while unit labour costs rose 0.9% on the same basis. These figures are in line with market expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to $55.5 billion in October from a revised $54.6 billion in September. Exports increased $149.3 billion or 7.7 percent. Imports increased $200.6 billion or 8.4 percent. The trade deficit was somewhat larger than expected. The weaker trade results will hamper overall GDP growth.

Statistics Canada announced that Canada's merchandise exports were down 1.2% in October, principally on lower exports of crude oil. Imports were down 0.6%, mainly due to fewer imports of passenger cars and light trucks. As a result, Canada's merchandise trade deficit with the world widened from $891 million in September to $1.2 billion in October. Since the market was looking for another deficit in September, these results are considerably weaker than expected. They are a negative sign for overall GDP growth.

The U.S. Census Bureau reported that factory orders dropped 2.1% in October. This followed a downwardly revised 0.2% increase in September (originally reported as +0.7%). Excluding transportation, new orders increased 0.3% in October. Given the revisions to the previous data, these results are in line with expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 60.7 reading in November. It was up 0.4 points from the 60.3 level registered in October and remained above the key 50.0 (generally expanding) level for a 106th consecutive month. This figure is above consensus expectations. This result indicates continued growth, but at a slightly faster rate in the non-manufacturing sector.

December 7
Statistics Canada announced that 94,100 jobs were added in November, the largest monthly gain since consistent data were first gathered in 1976. Meanwhile, the unemployment rate dropped by 0.2 percentage points to 5.6%, also the lowest level recorded over the same period. On a year-over-year basis, employment is up 1.2% (+218,800). These results are considerably stronger than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

The U.S. Bureau of Labor Statistics reported that the unemployment rate remained unchanged at the cyclical low of 3.7% in November, and non-farm payroll employment rose by 155,000. Employment gains occurred in health care, manufacturing, and transportation and warehousing. The previous month’s advance was lowered to 237,000 from 250,000. With the revisions, the employment figures are weaker than expectations. This is the most closely followed set of U.S. statistics as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.

Eurostat, the statistical office of the European Union, reported that the euro area economy grew at 0.2% (seasonally adjusted) during the three months to September, unrevised from a second estimate and following a 0.4% expansion in the previous period. Accordingly, annual growth, which stood at 2.2% in the previous period, has now fallen to 1.6%. The quarterly results indicated the weakest growth rate since the second quarter of 2014 and were in line with market consensus.


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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