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The Playbook - June 11, 2018

June 08, 2018 • Playbook



Weekly Commentary – June 11, 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
June 12 NFIB Business Optimism Index May 18 105.4 104.8
June 12 Core Inflation Rate Y/Y May 18 1.9% 2.1%
June 13 PPI Y/Y May 18 2.8% 2.6%
June 15 Industrial Production May 18 0.1% 0.7%
June 15 Foreign Securities Purchases April 18 $14.6B $6.15B

Key Earnings:
June 11: BioPharmX Corp., Oil-Dri Corporation of America, RF Industries Ltd.
June 12: CSW Industrials Inc., Ecology and Environment Inc., H&R Block Inc.
June 13: Finisar Corp., Kroger Co., Progressive Corp., Nobility Homes Inc.
June 14: Adobe Systems Inc., Independence Holding Co., Michaels Companies Inc.
June 15: Tsakos Energy Navigation Ltd.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian job growth continues to soften
Updated figures from Statistics Canada revealed a second consecutive decline in overall employment during May. The 7,500-job loss came on the heels of the 1,100 lost in April and represents the first back-to-back declines since November and December 2014. Annual job growth quickly slipped to 1.3% from 2.3% in December. Even though the unemployment rate remained steady at 5.8% for a fourth consecutive month, the labour force shrank by 10,900 in May. Paradoxically, earnings growth accelerated as average hourly earnings climbed 3.9% (year-over-year), its fastest pace since July 2012. This last piece of data will be of concern to the Bank of Canada, which has been clearly focused on any signs of wage-driven inflation.

North American trade deficits improve
The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed from a downwardly revised US$47.2 billion in March to US$46.2 billion in April, a seven-month low. Exports rose to a record US$211.2 billion, while imports eased back to US$257.4 billion. The politically sensitive goods deficit with China decreased US$3.4 billion to US$30.8 billion in April. Meanwhile, the deficits with Mexico and Canada stood at US$6.0 billion and US$1.7 billion, respectively. Not surprisingly, Statistics Canada published similar data for the month. Canada’s merchandise trade deficit also narrowed from C$3.9 billion in March to C$1.9 billion in April on the back of record exports. Both of these reports represent positive moves with respect to overall GDP for the U.S. and Canada. However, the escalation of the ongoing trade conflict between the two nations suggests a deterioration in these results going forward.

China steps up U.S. imports
China’s General Administration of Customs announced that the nation’s imports rose 26.0% (year-over-year) to an all-time high of US$187.95 billion in May, after a 21.5% rise in April. Exports rose 12.6% during the month, following a revised 12.7% increase in April. As a result, China’s trade surplus narrowed sharply to US$24.92 billion in May 2018 from US$40.51 a year ago. Conversely, the country’s politically-sensitive trade gap with the United States widened by 12.0% to US$24.6 billion. Nevertheless, China appears quite willing to boost imports from the U.S. In particular, data showed that China bought 9.7 million tonnes of soybeans, a key U.S. export, in May. According to U.S. data, China had a US$375 billion surplus with the U.S. in 2017, but Beijing contends the surplus is about US$100 billion lower than that figure. In either case, an all-out trade war may yet be avoided as both sides appear to be making subtle concessions.

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

June 7
The U.S. Department of Labor announced that initial jobless claims totalled 222,000 (seasonally adjusted) in the week ending June 2, a decrease of 1,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 221,000 to 223,000. The four-week moving average was 225,500, an increase of 2,750 from the previous week's revised average. The previous week's average was revised up by 500 from 222,250 to 222,750. These results are in line with consensus estimates.

June 8
China’s General Administration of Customs announced that the nation’s imports rose 26.0% (year-over-year) to an all-time high of US$187.95 billion in May, after a 21.5% rise in April. Exports rose 12.6% during the month, following a revised 12.7% increase in April. As a result, China’s trade surplus narrowed sharply to US$24.92 billion in May from US$40.51 billion a year ago. However, the country’s politically sensitive trade gap with the United States widened by 12.0% to $24.6 billion. The overall results are weaker than expected and are a negative sign for overall GDP growth.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 195,613 units (seasonally adjusted annual rate) in May. This is down from the 216,775-unit level in April (originally reported as 214,379) and is the first reading below 200,000 since May 2017. The decline was due to a drop in multi-unit urban starts. These results are well below market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada announced that 7,500 jobs were lost in May. Meanwhile, the unemployment rate remained at 5.8% for a fourth consecutive month as the labour force declined by 10,900. Despite the monthly declines, employment was up 1.3% (+238,200) from 12 months earlier. These results are considerably weaker than market consensus. The employment data reflects the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

Statistics Canada also announced that Canadian industries operated at 86.1% of their production capacity in the first quarter, up from 85.6% in the previous quarter. Both the manufacturing and construction sectors contributed to the increase. These results are weaker than expected. The current level of utilization suggests some capacity constraints, but does not point to near-term risks of inflation.


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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