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The Playbook - December 17, 2018

December 17, 2018 • Playbook

 


The Playbook

Weekly Commentary – December 17, 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.

A happy holiday season and a prosperous new year to all of our readers.
Our next edition will be dated January 7, 2019.

Economic Calendar

Date Release Period Consensus Previous
U.S.        
December 17 NY Empire State Manufacturing Index December 18 21.0 23.3
December 21 Corporate profits Q/Q Q3 18 3.3% 2.1%
December 21 Durable Goods Orders Ex Transp November 18 0.27% 0.10%
December 21 GDP Growth Rate Q/Q Final Q3 18 3.5% 4.2%
Canada        
December 17 Foreign Securities Purchases October 18 C$10.5B C$7.7B
December 21 Retail Sales Ex Autos October 18 0.50% 0.10%

Key Earnings:
December 17: Calavo Growers Inc., Red Hat Inc., Steelcase Inc., WageWorks Inc.
December 18: FedEx Corp., iHeartMedia Inc., Jabil Inc., Micron Technology Inc.
December 19: Cintas Corp., Herman Miller Inc., Pier 1 Imports Inc., Rite Aid Corp.
December 20: CalAmp Corp., Conagra Brands Inc., Nike Inc., RF Industries Ltd.
December 21: Carmax Inc., Carnival Corp., Origen Financial Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian dollar breaks weaker
On December 6, the Canadian dollar broke weaker through the US$0.75 level for the first time since June 12, 2017. Since mid-2017, the Bank of Canada has raised interest rates four times. However, these moves have largely been a match for the tightening of monetary policy seen stateside and the Federal Reserve’s target range for overnight borrowing (2.00% to 2.25%) is slightly higher than the bank’s (1.50% to 2.00%). Perhaps more importantly, economic growth in the U.S. has averaged 3.3% (annualized) thus far in 2018, well above the 2.0% pace seen domestically. Despite Statistics Canada’s benchmark revisions, the 2.0% average recorded over the first three quarters of the year aligns almost identically with the bank’s 2.1% forecast provided in their latest Monetary Policy Report. Even though the bank, by stated policy, does not forecast the exchange rate, it is now below the US$0.77 figure used in their projection horizon.

U.S. consumers spend into the holiday season
The latest figures from the U.S. Census Bureau revealed a 0.2% advance in retail and food services sales during November. The gain came on the back of an upwardly revised 1.1% surge in October (originally reported as +0.8%). In addition, the closely watched “control group” (excludes car dealers, food services, gasoline and building materials) rose 0.9% during November, the strongest gain of the year. Unless there is an outright reversal in broader retail spending during December, quarterly growth is expected to top 4.0% (annualized) for the final quarter of 2018. The momentum shown in this report should alleviate some concerns that household spending has fallen off significantly in the U.S.

U.K. job market stands strong in face of Brexit uncertainty
The U.K. Office for National Statistics announced a 79,000 pickup in employment to an all-time high of 32.48 million in the three months to October. This is the highest registered figure since records began in 1971. Within this total, full-time workers rose 110,000 to a record high of 23.97 million. However, the report also revealed a 20,000 increase in joblessness, which held the unemployment rate near its lowest level since 1971 at 4.1%. Job vacancies were up by 10,000 on the quarter to a near-record high of 848,000, leaving the ratio of unemployed people per vacancy at a historical low of 1.6. As a result, annual growth in average weekly earnings (ex-bonuses) grew by 3.3%, its biggest rise since November 2008. Further, nominal wage growth has continued to rise above annual inflation (2.4%), however, growth in real wages remains below its pre-crisis peak. The latest labour market figures suggest that a recovery in real wage growth may commence and, as a result, GDP growth has the potential to rebound if a “no-deal” Brexit is avoided. With that, although Brexit uncertainty and political turmoil are holding back the broader economy, it seems that the labour market is proving to be more resilient.

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 10
The Canada Mortgage and Housing Corporation (CMHC) announced that housing starts totalled 215,941 units (seasonally adjusted annual rate) in November. This is up from the 206,753-unit level in October (originally reported as 205,925) and is the strongest level seen since March. The gain in housing starts was due to an increase in multiple urban starts. With the market braced for a decline, these results are stronger than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that municipalities issued $8.1 billion worth of building permits in October, edging down 0.2% from September. The decrease was mainly attributable to lower construction intentions for industrial and institutional buildings. On a year-over-year basis, permits are now down 4.0%. These results matched market estimates. Permits are an indicator of the future level of activity in the construction sector.

The U.K. Office for National Statistics announced that, on a month-over-month basis, the economy grew by 0.1% (seasonally adjusted) in October, following two consecutive months of stagnation. At the same time, the GDP growth rate declined 0.2 percentage points to 0.4% in the three months to October, its second successive fall and weakest three-month rolling growth rate since May. Rolling three-month growth in the services sector was 0.3% in October, contributing 0.23 percentage points to GDP growth. Despite the Bank of England (BoE) Monetary Policy Committee’s (MPC) tightening aura, these results likely strengthen the case for no further rate hikes until well into 2019. The latest MPC growth forecast was 0.3% for this quarter. The monthly and rolling three-months’ growth figures matched market consensus.

The U.K. Office for National Statistics announced that the country’s international total trade deficit in goods and services widened £3.1 billion (seasonally adjusted) to £10.3 billion in the three months to October, following an upwardly revised £9.8 billion in September. The trade in goods deficit widened £1.7 billion as imports increased by £3.6 billion coupled with a lesser £1.9 billion increase in exports. The U.K.’s trade in goods deficit with the EU narrowed over the last year by £2.8 billion, however, these figures were more than offset by a £3.2 billion increase in the deficit with non-EU countries. The trade deficit was somewhat larger than expected and the upward revision to the three months ended September results will most likely erase the positive contribution made to third-quarter GDP growth.

December 11
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) edged up 0.1% (seasonally adjusted) in November. The index increased 2.5% for the 12 months ended November 2018, the smallest year-over-year advance since December 2017. These figures are slightly 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 reported that the number of unemployed workers increased by 20,000 to 1.4 million in the three months to October. The unemployment rate remained steady at 4.1% in the three months to October, remaining close to a 43-year low of 4.0% and matching market expectations. Average weekly earnings in nominal terms increased by an annual 3.3%, both excluding and including bonuses, and constituted their highest marks since 2008. Adjusted for price inflation, earnings ex-bonuses and including bonuses rose by an annual 1.0% and 1.1%, respectively. These data signaled a strong labour market and will likely lead to the BoE MPC to retain a tightening bias heading into next week’s policy setting meeting.

December 12
The U.S. Bureau of Labor Statistics announced that the consumer price index (CPI) was unchanged (seasonally adjusted basis) in November. Over the last 12 months, the index increased 2.2%. These results matched expectations. These figures are consistent with the U.S. Federal Reserve's expectations of mild inflationary pressures.

Statistics Canada announced that Canadian industries operated at 82.6% of their production capacity in the third quarter, down from downwardly revised 84.1% in the previous quarter (previously reported as 85.5%). Significant declines were seen in manufacturing (-2.9%), construction (-2.0%) and forestry and logging (-1.0%). Gains were seen in electric power generation (+1.9%) and mining and oil extraction (+0.3%). These results are considerably weaker than expected. The current level of utilization does not suggest any material capacity constraints and does not represent a material risk to inflation.

Eurostat, the statistical office of the European Union, reported that industrial production in the euro area edged up 0.2% (seasonally adjusted) in October, following a downwardly revised 0.6% decline in September. Monthly, production of capital goods and durable consumer goods rose by 1.0% and 0.4%, respectively, while energy output declined by 1.7%, largely offsetting any gains that may have realized. Accordingly, annual growth, which stood at a downwardly revised 0.8% in September, has advanced to 1.2% in October. The monthly figures came in marginally below market consensus, however, the annual growth results were well above market consensus. The limited advance put industrial production in the euro area above its third quarter average and will likely boost the chances of the sector making more of a positive contribution to fourth quarter GDP growth relative to the non-existent impact it had in the three months to September. However, with new orders having significantly slowed in recent months, near-term prospects look relatively grim.

The Westpac Melbourne Institute Index of Consumer Sentiment for Australia edged up 0.1% (seasonally adjusted) to 104.4 in December from a 104.3 reading in November. Although trivial, the index registered its third straight monthly gain after facing two consecutive monthly drops. These results exceeded analyst forecasts and the reading remained above the normalized level of 100.0. In contrast, consumers were slightly less optimistic around the economy, as the Economic conditions next 5yrs sub-index retraced 1.5%, paring back some of the 9.7% improvement in November. Notably, the Family finances vs a year ago sub-index recorded a 1.9% decline, reversing nearly half of last month’s surprisingly solid 4.9% gain because of signs that the housing downturn is beginning to undermine consumer views on their finances. The index is a significant measure of consumer sentiment based on household financial situations.

December 13
The U.S. Department of Labor announced that initial jobless claims totalled 206,000 (seasonally adjusted) in the week ending December 8, a decrease of 27,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 231,000 to 233,000. The four-week moving average was 224,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 500 from 228,000 to 228,500. These results are stronger than consensus estimates.

Statistics Canada announced that its New Housing Price Index (NHPI) was flat for a third month in a row during October. On a year-over-year basis, the index is up only 0.1%. These results match consensus expectations and suggest very little improvement in net worth for homeowners.

The European Central Bank (ECB) announced that it has left its benchmark “refinancing rate” unchanged at 0% in December. 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. The ECB confirmed that its planned net purchase of 15 billion euros of bonds this month will be the last under its current asset purchase program (APP) which, as previously signalled, will be terminated at the end of the year.

Destatis, the Federal Statistical Office of Germany, reported that consumer prices rose 0.1% (seasonally adjusted, monthly basis) in November, after rising 0.2% in October. On a year-over-year basis, the CPI was up 2.3% in November, following a 10-year high of 2.5% recorded in October and matched the preliminary CPI estimates. The year-over-year increase in prices of services (+1.5%) was notably smaller than the increase in goods prices in November and had a downward effect on the inflation rate. Prices of goods went up by 3.2% in November, the same pace as in October, boosted by prices in energy (+9.3%). Energy prices had a sizeable effect on the inflation rate and have continuously accelerated since March of this year. The overall CPI figures were in line with market expectations.

December 14
The U.S. Census Bureau announced that retail and food services sales were up 0.2% (seasonally adjusted) for the month of November and were 4.2% above November 2017 levels. Excluding autos, durable goods sales were also up 0.2% during the month and up 4.9% on a year-over-year basis. These figures are marginally stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

The U.S. Federal Reserve announced that industrial production expanded 0.6% in November after declining 0.2% in October. On a year-over-year basis, industrial production was reported to have gained 3.9%. Capacity utilization for total industry rose to 78.5% from 78.1% in October and 77.1% a year earlier. These results are stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

The U.K. Office for National Statistics announced a 79,000 pickup in employment to an all-time high of 32.48 million in the three months to October. This is the highest registered figure since records began in 1971. Within this total, full-time workers rose 110,000 to a record high of 23.97 million. However, the report also revealed a 20,000 increase in joblessness, which held the unemployment rate near its lowest level since 1971 at 4.1%. Job vacancies were up by 10,000 on the quarter to a near-record high of 848,000, leaving the ratio of unemployed people per vacancy at a historical low of 1.6. As a result, annual growth in average weekly earnings (ex-bonuses) grew by 3.3%, its biggest rise since November 2008. Further, nominal wage growth has continued to rise above annual inflation (2.4%), however, growth in real wages remains below its pre-crisis peak. The latest labour market figures suggest that a recovery in real wage growth may commence and, as a result, GDP growth has the potential to rebound if a “no-deal” Brexit is avoided. With that, although Brexit uncertainty and political turmoil are holding back the broader economy, it seems that the labour market is proving to be more resilient.

The National Bureau of Statistics of China reported that, on a year-over-year basis, total retail sales of consumer goods rose by 8.1% in November, easing from a revised 8.6% increase in October. The figure indicated that retail sales grew at their slowest pace in 15 years and was below market consensus of 8.8%. Automobile sales plunged 10% in November, suffering its steepest monthly decline in more than six years and is on track for its first annual sales decline since the 1990s. The results indicate that the slowdown in Chinese industries and the sharp escalation in U.S.-China trade tensions appear to have begun to heavily weigh on consumer sentiment.

 

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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