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The Playbook - June 18, 2018

June 15, 2018 • Playbook



Weekly Commentary – June 18, 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 19 Building Permits May 18 -0.6% -0.9%
June 20 Existing Home Sales May 18 1.5% -2.5%
June 21 House Price Index April 18 0.3% 0.1%
June 22 Markit Manufacturing PMI Flash June 18 52.9 56.4
June 21 ADP Employment Change May 18 -15.9 k 30.2 k
June 22 Retail Sales April 18 0.32% 0.60%

Key Earnings:
June 18: Azure Power Global Ltd., Command Security Corp., Lennar Corp.
June 19: Actuant Corp., FedEx Corp., La-Z-Boy Inc., Oracle Corp., JMU Ltd.
June 20: Barnes & Noble Inc., Commercial Metals Co., WSI Industries Inc.
June 21: Finish Line Inc.
June 22: Carmax Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Regional taxes dampen Canadian housing prices
Fresh data from Statistics Canada revealed another flat month for its New Housing Price Index (NHPI) during April. Annual growth in housing prices, which stood at 3.9% as recently as June 2017, has been reduced to 1.6%. In its report, Statistics Canada specifically mentioned the February increase of the foreign buyers’ tax from 15% to 20%, and the expansion of its coverage area in Vancouver. As well, it focused on Toronto where “the Ontario government introduced the Fair Housing Plan, which included the 15% Non-Resident Speculation Tax, as well as other measures aimed at cooling the housing market in Ontario.” The latest figures reveal that annual price growth in Vancouver has slowed from 9.1% in February to 7.1% in April. In Toronto, annual price gains had already begun to ease before the introduction of the tax. Annual price growth has slowed from a 27-year peak of 9.9% in April 2017 to -0.3% in this report, the first annual decline since the financial crisis in 2009.

U.S. Federal Reserve hikes rates and looks for more
Following its latest policy deliberations, the U.S. Federal Reserve raised administered interest rates by 25 basis points (a basis point is 1/100th of one per cent), raising the target range for the federal funds rate to 1.75% to 2.00%. This was the seventh move since the Fed began tightening on December 16, 2015. At the same time, the Fed fine-tuned its economic forecast. The official forecast for 2018 GDP growth was raised to 2.8% from 2.7%. At the same time, expectations for the unemployment rate were decreased to 3.6% from 3.8%. More importantly for the markets, the press release that accompanied the move highlighted that economic activity was "rising at a solid rate," a clear upgrade from the word "moderate" used in the May release. As well, the published data suggest two more 25 basis point rate hikes for 2018 and three in 2019. The market will immediately begin to weigh the chances of another hike at the next policy meeting, scheduled for July 31-August 1.

Australian unemployment dips
The Australian Bureau of Statistics announced that 12,000 jobs were created in May and the unemployment rate lowered from 5.6% to 5.4%, a new six-month low. However, the participation rate also edged lower in May, moving to 65.5%. Nevertheless, overall employment was up 2.5% from 12 months earlier, virtually double the Canadian growth rate. Despite this, most of the data suggest that significant slack remains in the Australian job market. Hours worked were weak as were the underutilisation figures and wage growth. Unlike the Bank of Canada, the Reserve Bank of Australia does not view its domestic economy as being close to capacity growth and has less incentive to raise interest rates.

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 11
The U.K. Office for National Statistics announced that industrial production declined 0.8% in April, more than reversing the 0.1% advance recorded in March. This was the first monthly decline in four months and the largest drop since October 2012 (-1.8%). On a year-over-year basis, industrial production was reported to have gained 1.8%, well down from the 2.9% figure seen in the previous month. These results are considerably weaker than expected. The decline in production should be reflected in weaker quarterly GDP figures.

June 13
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.5% (seasonally adjusted) in May. The index increased 3.1% for the 12 months ended May 2018, the largest year-over-year advance since an identical 3.1% rise in January 2012. These figures are above consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.S. Federal Reserve raised interest rates following its latest two-day policy meeting. This is the second rate hike under new Federal Reserve Chair Jerome Powell. The target range for the federal funds rate is now set at 1.75% to 2.00%, an increase of 0.25%. The Fed last raised interest rates (also by 0.25%) on March 21, 2018. The press release that accompanied the announcement highlighted both the continued strength of the U.S. job market and inflation’s move toward the Fed’s long-term target of 2%. The Fed left the door open for additional rate hikes over the balance of 2018. The announcement of a 0.25% interest rate hike is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policymakers in other countries.

June 14
The Australian Bureau of Statistics announced that 12,000 jobs were created in May and the unemployment rate lowered from 5.6% to 5.4%. However, the participation rate also edged lower in May, moving to 65.5%. Nevertheless, overall employment was up 2.5% from 12 months earlier, virtually double the Canadian growth rate. The job growth results are somewhat weaker than market consensus, but the drop in the unemployment rate was greater than anticipated. The employment data reflect the strength of the broader economy and individual sectors. As well, they are indicative of consumer spending trends.

The U.S. Department of Labor announced that initial jobless claims totalled 218,000 (seasonally adjusted) in the week ending June 9, a decrease of 4,000 from the previous week's unrevised level of 222,000. The four-week moving average was 224,250, a decrease of 1,250 from the previous week's unrevised average of 225,500. These results are somewhat stronger than consensus estimates.

The U.S. Census Bureau announced that retail and food services sales jumped 0.8% (seasonally adjusted) in May and were 5.9% above May 2017 levels. Excluding autos, sales were up 0.9% during the month and up 6.4% on a year-over-year basis. These figures are considerably stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

Statistics Canada announced that its NHPI was unchanged for a second consecutive month in April. On a year-over-year basis, the index is up 1.6%. The Toronto market (-0.5%) saw a fourth consecutive decline and stands with a year-over-year decline of -0.3%. These results are weaker than consensus expectations and suggest constrained improvements in net worth for homeowners.

June 15
Statistics Canada reported that foreign investors added $9.1 billion of Canadian securities to their holdings in April, led by acquisitions of fixed income instruments. At the same time, Canadian investors reduced their holdings of foreign securities by $652 million, on large sales of U.S. shares. Foreign investment was above consensus expectations. Strong foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

Statistics Canada reported that manufacturing sales fell 1.3% to $56.2 billion in April, following two consecutive monthly increases. The decline was mainly attributable to lower sales in the transportation equipment, and petroleum and coal product industries. On a year-over-year basis, manufacturing sales rose 3.6%. This is much weaker than market consensus. This data is closely watched as it can create high-value employment and remains one of the slowest to recover from the 2008-09 recession.

The U.S. Federal Reserve announced that industrial production edged down 0.1% in May after rising for three consecutive months. On a year-over-year basis, industrial production was reported to have gained 3.5%. Capacity utilization for total industry dropped to 77.9% from 78.1% in April, but was up from the 76.2% level posted a year earlier. These results are weaker than expected. The small change in production is unlikely to alter real economic output in the quarterly GDP figures.


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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