The Playbook - September 24, 2018

September 24, 2018 • Playbook

The Playbook


The Playbook

Weekly Commentary – September 24, 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
U.S.        
September 26 New Home Sales August 18 0.2% -1.7%
September 27 Durable Goods Orders August 18 0.97% -1.70%
September 27 Corporate Profits Q2 18 2.4% 8.7%
September 28 Personal Income August 18 0.34% 0.30%
Canada        
September 28 PPI (Y/Y) August 18 5.2% 6.6%

Key Earnings:
September 24: Ascena Retail Group Inc., Natuzzi S.p.A., Rave Restaurant Group Inc.
September 25: Cintas Corp., KB Home, Pier 1 Imports Inc., Nike Inc.
September 26: Arsenal Holdings PLC, Bed Bath & Beyond Inc., NanoViricides Inc.
September 27: Ferrellgas Partners LP, iKang Healthcare Group Inc., Rite Aid Corp.
September 28: Aceto Corp., Carnival Corp., HB Fuller Co., Vail Resorts Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian consumers step back in
The latest figures from Statistics Canada revealed a 0.3% improvement in retail sales during July. Coupled with revisions to prior data, July’s overall sales figure of $50.9 billion now stands as a new all-time high. The data revisions raised estimates of retail spending in the second quarter to a 4.6% annualized pace (previously reported as 4.2%). The July gain suggests some continued momentum into the third quarter. Interestingly, from the market’s perspective, sales volumes slipped 0.1% lower during the month, meaning that the gains in sales were attributed to higher prices. While overall inflation (released in a separate report) edged lower to 2.8% in August from 3.0%, the evidence of continued price gains suggest that the Bank of Canada will continue to tighten monetary policy.

U.S. housing firms in August
Following four straight months of decline, the U.S. National Association of Realtors (NAR) reported that existing home sales had stabilized in August at a seasonally adjusted annual rate of 5.34 million units. However, sales still stood 1.5% below the pace reported in August 2017. Nevertheless, the NAR indicated that prices were up 4.6% (on a year-over-year basis) and a recent improvement in inventories would provide further support over the coming months. This information coincided with the report from the U.S. Census Bureau, which indicated that housing starts rose 9.2% in August, following two months of weak results. It appears that the summer slowdown may have ended, and some improvement may emerge in future releases.

U.K. inflation hits new high
The U.K. Office for National Statistics announced a surprise 0.7% advance in its consumer prices index (CPI) during August. This was the largest monthly gain since April 2011 (1.0%) and pushed annual CPI growth to 2.7%, a new six-month high. The rise in inflation in August represents a setback to the recovery of wage growth, in real terms, that has helped support economic stimulus this year. If the trend continues, rising inflation may also represent a dilemma for the Bank of England. With the October 17-18 European Union Summit (seen as the deadline for setting out the final terms for Brexit) now fast approaching, markets are expected to reflect a heightened sense of uncertainty. At the same time, if CPI growth (the bank’s mandated inflation benchmark) moves back above 3.0%, Governor Mark Carney will be required to write to Philip Hammond, the Chancellor of the Exchequer, to explain why inflation has moved away from target (2.0%) and what action is being taken to rein it back in.

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

September 17
Statistics Canada reported that foreign investors added $12.7 billion of Canadian securities to their holdings in July, led by acquisitions of federal government bonds. Canadian investment in foreign securities totalled $13.1 billion in July, following an $11.2 billion investment in June. Purchases of debt instruments were moderated by sales of equities in the month, an investment pattern generally observed since March. Foreign investment was well above consensus expectations. Strong foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

September 18
Statistics Canada reported that manufacturing sales climbed 0.9% in July, the third consecutive monthly gain. In line with the recent improvement, sales on a year-over-year basis are up 10.5%. This report is considerably stronger than the market consensus. This data is closely watched as manufacturing can create high-value employment and has been one of the slowest sectors to recover from the recession.

September 19
The U.K. Office for National Statistics reported that consumer prices jumped to 0.7% (seasonally adjusted) in August, following no change in July. This was the largest monthly gain since April 2011 (1.0%). On a year-over-year basis, the consumer price index (CPI) was up 2.7%, above the 2.5% figure recorded in July and a new six month high. With the market looking for a decline in the annual inflation rate, the overall figures were well above expectations. This news will raise speculation on a possible Bank of England response with a stronger pound as a result.

The U.S. Census Bureau announced that housing starts in August were at a seasonally-adjusted annual rate of 1,282,000. This is 9.2% above the revised July estimate of 1,174,000 and is 9.4% above the August 2017 rate of 1,172,000. At the same time, the number of building permits issued in August was at a seasonally-adjusted annual rate of 1,229,000. This is 5.7% below the revised July rate of 1,303,000 and is 5.5% below the August 2017 figure of 1,300,000. The starts figures are above market expectations, while the permits tally was weaker. Activity in the housing market has a significant "ripple" effect on the broader economy.

September 20
The U.S. Department of Labor announced that initial jobless claims totalled 201,000 (seasonally adjusted) in the week ending September 15, a decrease of 3,000 from the previous week's unrevised level of 204,000. This is the lowest level for initial claims since November 15, 1969 when it was 197,000. The four-week moving average was 205,750, a decrease of 2,250 from the previous week's unrevised average of 208,000. This is the lowest level for this average since December 6, 1969 when it was 204,500. These results are marginally stronger than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region accelerated in September, following a mild softening in August. The Philly Fed general business conditions index jumped back to 22.9 from 11.9 in the previous month. These results are above market expectations. This data release is seen as an indicator of broader manufacturing sector trends.

The The U.S. Conference Board announced that its Leading Economic Index (LEI) increased 0.4% in August to 111.2, following an upwardly-revised 0.7% gain in July (previously reported as 0.6%). The August result is now a new cyclical high and is well above the previous cycle’s peak (March 2006, 102.4). This figure is in line with market consensus. The report is consistent with a solid growth scenario in the second half of 2018.

According to the U.S. National Association of Realtors, existing-home sales were flat in August, a seasonally adjusted annual rate of 5.34 million units following four straight months of decline. However, sales are now 1.5% below pace in August 2017. These results are in line with consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.K. Office for National Statistics reported that, following an upwardly revised 0.9% increase in July, retail sales advanced 0.3% in August. Clothing stores sales (-1.9%) reported the largest monthly decline and household goods (+4.5%) recorded the largest gain. Year-over-year sales growth stood at 3.3%, down from 3.8% in July. As the market was braced for a decline, the August advance coupled with the revisions easily outperformed consensus estimates. Since consumer spending has been one of the driving forces of the U.K. recovery, it is critical for overall GDP results.

September 21
Statistics Canada reported that consumer prices rose 0.1% (seasonally adjusted, monthly basis) in August, after rising 0.5% in July. On a year-over-year basis, the CPI was up 2.8%, down from the 3.0% pace recorded in the previous month. Seven of the eight major sub-groups reported monthly gains. Alcoholic beverages and tobacco products (+0.4%) recorded the largest advance and clothing and footwear prices were unchanged. All three measures of core inflation, established by the Bank of Canada, revealed an increase, but remain near the 2.0% target. CPI common, which the central bank says is most closely correlated with the output gap, rose from 1.9% to 2.0%. The overall figures are in line with market expectations.

Statistics Canada reported that retail sales rose 0.3% (seasonally adjusted) in July. Excluding autos, sales jumped 0.9% during the month. Sales were down in eight of 11 subsectors, representing 55% of total retail sales, with electronics and appliance store sales (2.4%) reporting the largest monthly gain. Autos (-1.4%) recorded the largest decline. Year-over-year sales growth was reported as 3.7%. These results are marginally weaker than consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

 

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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