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The Playbook - November 19, 2018

November 16, 2018 • Playbook


The Playbook

Weekly Commentary – November 19, 2018

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy

Richard Wylie’s podcast will return the week of November 26, 2018.

Economic Calendar

Date Release Period Consensus Previous
November 21 Durable Goods Orders October 18 -1.2% 0.8%
November 21 Existing Home Sales October 18 -0.3% -3.4%
November 23 Markit Manufacturing PMI Flash November 18 53.0 55.7
November 23 Inflation Rate Y/Y October 18 2.6% 2.2%
November 23 Retail Sales Y/Y September 18 3.77% 3.60%

Key Earnings:
November 19: Burlington Stores Inc., Caleres Inc., Jack in the Box Inc.
November 20: Best Buy Inc., Medtronic PLC, Sea Ltd., Target Corp.
November 21: AstroNova Inc., Cheetah Mobile Inc., Deere & Co., Daktronics Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian crude falls to record lows
The Canadian crude oil industry has declared a national emergency after heavy Western Canadian Select (WCS) crude prices fell to record lows. On November 15, WCS fell to a record low of US$13.46, down US$2.29 from the previous session’s close and was its lowest price recorded since 2008. The price collapse comes as pipeline bottlenecks in Western Canada constrain exports just as West Texas Intermediate (WTI) experienced a record losing streak amid rising U.S. stockpiles and projections for reduced demand. Meantime, U.S. light, sweet crude WTI snapped its record twelve-day losing streak on November 13, closing the session at a near one-year low of US$55.69 per barrel. The near 20.0% decline in oil prices comes on the heels of record high levels of U.S. output, rising to 11.6 million barrels a day in early November, which is expected to offset Saudi Arabia’s plan to unilaterally slash its net exports next month by 500,000 barrels a day. Moreover, given the decline in crude oil prices, WCS traded at a US$43 per barrel discount to WTI on November 15, US$2.50 wider than the previous session. As a result, companies such as Canadian Natural Resources Ltd. and Cenovus Energy Inc. will be curtailing nearly 140,000 barrels per day for the Canadian oil-sands benchmark to recover to standardized price levels.

U.S. retail sales surge in October
Consumer spending jumped higher in October as the U.S. Census Bureau reported that retail and food services sales were up 0.8% during the month. The advance follows back-to-back 0.1% declines in both August and September and leaves annual growth at 4.6%. While the influence of Hurricanes Florence and Michael affected the data, underlying strength in consumer expenditure is expected to lead overall economic growth in the final quarter of 2018. Still, this influence is expected to taper off over the near term, as tighter monetary policy eventually reins in consumer spending to match the apparent moderation seen in business spending. This report serves to reinforce analyst expectations for another 0.25% rate hike following the Federal Reserve’s next policy meeting scheduled for December 18 to 19.

Stronger U.K. job market is not a clear signal for rate hikes
The U.K. Office for National Statistics announced a 23,000 pickup in employment during the three months to September. Within this total, full-time jobs rose 82,000 to a record high of 23.9 million. Job vacancies climbed by 14,000 to a record high of 845,000 and annual growth in average weekly earnings (ex-bonuses) stood at 3.2%, its strongest reading since December 2008. However, the report also revealed a 21,000 increase in joblessness, which raised the unemployment rate to 4.1% following three consecutive readings of 4.0%. Despite the apparently robust job market, the Bank of England’s next policy move does not appear quite as clearcut. The draft of the U.K.-EU Brexit agreement has taken some uncertainty off the table. Still, the practical execution of any agreement and the economic implications are unclear. The bank’s next policy meeting is scheduled for December 20.

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

November 13
The U.K. Office for National Statistics announced that employment in the U.K. increased by 23,000 in Q3 2018. However, the labour market report revealed that the number of unemployed increased by 21,000, increasing the unemployment rate by 0.1 percentage points to 4.1%. This was the first increase in the unemployment rate since December 2017 and was above market consensus. With this, wages were positive as average weekly earnings increased by 3.0% from 12 months earlier and were in line with market consensus.

November 14
The U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) increased 0.3% (seasonally adjusted basis) in October. Over the last 12 months, the index increased 2.5%. Annual growth in CPI has been in a 2.3% to 2.9% range since March. These results matched consensus expectations. These figures are consistent with the U.S. Federal Reserve's expectations of steady to modestly higher inflationary pressures.

The U.K. Office for National Statistics reported that consumer prices were unchanged at 0.1% (seasonally adjusted, monthly basis) in October, matching CPI growth levels recorded in September. On a year-over-year basis, CPI remained stable at 2.4%, continuing within the 2.4% to 2.7% range seen since February. With the market looking for a decline in the annual inflation rate, the annualized figures were a tick below the 2.5% forecast set out in the Bank of England November Quarterly Inflation Report. The 1.9% core inflation reading for October should ease fears of any immediate price increases. Future interest rate hikes are likely; however, the November 13 draft text of the U.K.-EU Brexit agreement has taken some uncertainty off the table.

November 15
The U.S. Department of Labor announced that initial jobless claims totalled 216,000 (seasonally adjusted) in the week ending November 10, an increase of 2,000 from the previous week's unrevised level of 214,000. The four-week moving average was 215,250, an increase of 1,500 from the previous week's unrevised average of 213,750. These results are in line with consensus estimates.

The U.S. Census Bureau announced that retail and food services sales were up 0.8% (seasonally adjusted) for the month of October and were 4.6% above October 2017 levels. Excluding autos, sales were up 0.7% for the month and up 5.9% on a year-over-year basis. These figures are stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in November but at a less robust pace. The Philly Fed general business conditions index tumbled to 12.9 from 22.2 in October. These results are below market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The Australian Bureau of Statistics announced that the labour market recorded a 32,800 (seasonally adjusted) increase in employment in October. At the same time, participation edged higher by 0.2 percentage points to 65.6%, gripping near record highs, and the unemployment rate held steady at 5.0%. The unemployment rate remained at its lowest level since April 2012 and beat market expectations by 0.1 percentage points. Full-time employment gains totalled 42,300 jobs in October, following an upwardly revised 24,600 recorded in September. These levels bolstered estimates and marked a fifth month of consecutive gains. The Reserve Bank of Australia forecast further declines in the unemployment rate in the near term, which will likely result in stronger wage rate growth and, therefore, a pickup in inflation. The gains in the report rallied the Australian dollar up to a one-day high of US$0.7277.

November 16
The U.S. Federal Reserve announced that industrial production edged up 0.1% in October, following a downwardly revised 0.2% advance in September. The release did indicate that Hurricane Florence lowered the level of industrial production in both September and October, but the effects appear to be near 0.1 % per month. Capacity utilization for the total industry increased to 78.4%, up from 76.6% a year earlier. These results are nominally weaker than expected. The slight improvement in production may be reflected as a gain in 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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