The Playbook - September 3, 2018

August 31, 2018 • Playbook

The Playbook


The Playbook

Weekly Commentary – September 3, 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 4 Construction Spending July 18 0.6% -1.1%
September 5 Balance of Trade July 18 -$47.1B -$46.3B
September 6 ADP Employment Change  August 18 189 k 219 k
September 7 Nonfarm Payrolls August 18 189 k 157 k
Canada        
September 5 Balance of Trade July 18 -$2.30B -$0.63B
September 7 Unemployment Rate August 18 5.9% 5.8%

Key Earnings:
September 3: China Online Education Group, Manchester United PLC
September 4: American Software Inc., Caleres Inc., Dave & Buster's Entertainment Inc.
September 5: CM Finance Inc., Misonix Inc., REV Group Inc., Verifone Systems Inc.
September 6: Barnes & Noble Inc., Broadcom Inc., Dell Technologies Inc.
September 7: Evolution Petroleum Corp., Genesco Inc., Tsakos Energy Navigation Ltd.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian GDP accelerates on trade
Statistics Canada reported that the economy grew an annualized 2.9% during the second quarter of 2018, the strongest pace since Q2 2017 (4.6%) and the first move above the 2% mark in a year. International trade was the primary driver, as exports surged by an annualized 12.3%, the largest gain since the second quarter of 2014 (28.9%). Meanwhile, imports rose by a modest 6.5%. Household consumption improved (2.6%) but both government spending (1.6%) and business investment (1.5%) softened. In addition, the monthly GDP figures revealed a gain of less than 0.1% (month-over-month) during June, well off from the 0.5% increase seen in May. The combined results suggest that the economy remains stable but may have lost some momentum heading into the third quarter. As a result, analysts are suggesting that even though the Bank of Canada’s next policy announcement is scheduled for September 5, it will likely push its next rate hike out to the following meeting, on October 24, which will coincide with the publication of the bank’s updated economic forecast.

Key U.S. Federal Reserve inflation gauge stays steady
Updated figures from the U.S. Bureau of Economic Analysis revealed steady increases in both personal income (0.3%) and consumption expenditure (0.4%) during July. At the same time, the U.S. Federal Reserve’s key inflation measure (personal consumption expenditures excluding food and energy chain-type price index) recorded a 0.2% increase during the month, sufficient to raise the annual pace from 1.9% to 2.0% (2.0% is the Fed’s stated target). However, growth in this index has been range-bound between 1.9% and 2.0% since March of this year. This stands in contrast to the broader consumer price index which has accelerated from 1.6% in June 2017 to 2.9% in the July 2018 reading. Either way, the market consensus is that the Fed will hike rates by an additional 0.25% at their next meeting, scheduled for September 25 to 26.

India’s economy shifts into high gear
India’s Ministry of Statistics and Programme Implementation announced that the nation’s economy grew at an 8.2% rate (year-over-year) in the second quarter of 2018, after rising 7.7% in the previous quarter. The second quarter result was the strongest since Q1 2016 (9.2%). The economy has now accelerated steadily from a low of 5.6% growth in Q2 2017. India's US$2.6 trillion economy surpassed France's in 2017 to become the world's sixth largest. The U.K. economy (approximately US$2.8 trillion) is the fifth largest. The report came at an opportune time for Prime Minister Narendra Modi as campaigning ahead of the general election, slated for April or May, gets underway. Despite the improved growth, inflation has seen some softening with annual growth at 4.2% in July. Nevertheless, recent rate hikes from the Reserve Bank of India are expected to continue as their projections show inflation at 4.8% for the balance of 2018.

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

August 30
The U.S. Department of Labor announced that initial jobless claims totalled 213,000 (seasonally adjusted) in the week ending August 25, an increase of 3,000 from the previous week's unrevised level of 210,000. The four-week moving average was 212,250, a decrease of 1,500 from the previous week's unrevised average of 213,750. This is the lowest level for this average since December 13, 1969 when it was 210,750. These results are in line with consensus estimates.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.3% in July. Personal consumption expenditures (PCE) increased 0.4%. Based on revised figures, personal income increased 0.4% and PCE increased 0.4% in June. Both the income and expenditure figures for July matched market expectations. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada announced that real GDP expanded 2.9% (on an annualized basis) in the second quarter of 2018, after growing an upwardly revised 1.4% in the first quarter (originally reported as 1.3%). The advance was driven primarily by stronger trade results. However, business investment slowed, and inventories accumulated. On a monthly basis, real GDP by industry was virtually flat in June, following a 0.5% advance in May. This suggests that the economy may have lost some of its momentum heading into the third quarter. Coupled with the revisions, these results are marginally weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

August 31
India’s ministry of statistics announced that the nation’s economy grew at an 8.2% rate (year-over-year) in the second quarter of 2018, after rising 7.7% in the previous quarter. The second quarter result was the strongest since Q1 2016 (9.2%) and continues the acceleration that began in Q2 2017. Despite the improved growth, inflation has seen some softening with annual growth at 4.1% in July. Nevertheless, recent rate hikes from the Reserve Bank of India are expected to continue. These results are stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that its Industrial Product Price Index (IPPI) edged down 0.2%, while its Raw Materials Price Index (RMPI) rose 0.7% in July. On a year-over-year basis, the indexes are up 6.6% and 22.0%, respectively. Lower prices for primary non-ferrous metal products led the IPPI lower and higher energy prices lead the RMPI for the month. IPPI figures were in line with expectations, but the RMPI was stronger than anticipated. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

 

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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