The Playbook - October 8, 2018

October 08, 2018 • Playbook

The Playbook


The Playbook

Weekly Commentary – October 8, 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.        
October 9 IBD/TIPP Economic Optimism October 18 55.3 55.7
October 9 Consumer Inflation Expectations September 18 2.89% 3.00%
October 10 PPI Y/Y September 18 3.1% 2.8%
October 11 Core Inflation Rate Y/Y September 18 2.5% 2.2%
Canada        
October 9 Housing Starts September 18 230.5 k 201.0 k

Key Earnings:
October 8: RAIT Financial Trust
October 9: AZZ Inc., Delta Air Lines Inc., IDT Corp., Helen of Troy Inc.
October 10: Domino's Pizza Inc., Fastenal Co., Lindsay Corp., Royal Financial Inc.
October 11: First Horizon National Corp., Truett-Hurst Inc., Walgreens Boots Alliance Inc.
October 12: Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian merchandise trade posts a surplus
On the heels of the new USMCA trade agreement, Statistics Canada reported the country’s first merchandise trade surplus since December 2016. The August report showed a 2.5% decline in imports and a much smaller 1.1% drop in exports. Of note, the surplus with the U.S. was virtually unchanged at $5.35 billion, with the shift in the balance of trade distributed among several other countries. The simultaneous release of the U.S. international trade data revealed a deficit of US$53.2 billion, up from US$50.0 billion in July. Not surprisingly, the politically-sensitive trade deficit with China (US$38.6 billion) far outweighed the combined Mexico/Canada deficit (US$11.4 billion) in this report. The cumulative 2018 deficit of over US$570 billion will continue to drive uncertainty in international trade in the foreseeable future.

U.S. unemployment hits 49-year low
The latest data from the U.S. Bureau of Labor Statistics revealed a 134,000 gain in non-farm payrolls in September, following upwardly revised results for both July and August. The September report extended the string of consecutive monthly job gains to 96, the longest since the data were first collected in 1939. At the same time, the unemployment rate slipped lower to 3.7% during the month, the lowest since December 1969. On the domestic front, while the employment news was positive, it was far less dramatic. Statistics Canada announced a 63,300 gain in overall employment. However, this came on the back of a 51,600 loss in August. The unemployment rate slipped to 5.9% but remained above the 5.8% cyclical low. The reports reveal continued disparity between the two job markets.

Australian trade surplus on the rise
The Australian Bureau of Statistics announced that the country’s merchandise trade surplus widened to A$1.60 billion in August, a 13th surplus in the last 15 months. A larger than expected increase in exports stemmed from record two-way trade with China. Australia’s trade narrative remains positive based on rising commodity prices. However, concerns over the strengthening greenback are weighing on the Australian dollar, as it slipped towards 30-month lows. The move was driven by rising yields on the U.S. benchmark 10-year Treasuries, which reached 3.2% on October 4, its highest close since 2011. With Australia’s benchmark “cash rate” at record lows, and the U.S. Federal Reserve expected to hike interest rates further, the Australian dollar will come under additional pressure.

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

October 1
The IHS Markit/CIPS U.K. Manufacturing Purchasing Managers’ Index (PMI) unexpectedly climbed to 53.8 (seasonally adjusted) in September 2018 from an upwardly revised figure of 53.0 in August. While the overall index reading remained above the neutral 50.0 mark for the twenty-sixth consecutive month, manufacturing production rose for the twenty-sixth successive month in September, with the rate of increase rising to a four-month high. Output growth was linked to inflows of new business, resulting in the rebuilding of inventories and efforts to clear backlogs of orders. With markets expecting a decline, these results were stronger than expected.

The Institute for Supply Management reported that its PMI edged lower to a 59.8 reading in September. This is a 1.5-point loss from August’s 61.3 figure, but remains above the key 50.0 (generally expanding) level for a 25th consecutive month. The reading is in line with expectations and indicates continued strength in manufacturing activity.

The U.S. Census Bureau announced that construction spending edged 0.1% higher in August, following an upwardly revised 0.2% advance in July (originally reported as 0.1%). On a year-over-year basis, construction was up 6.5%. The monthly growth figure is below consensus estimates. This result indicates continued, moderate expansion in the construction sector.

October 2
At its latest policy meeting, the Reserve Bank of Australia (RBA) announced that it had decided to leave its benchmark “cash rate” unchanged at a record low of 1.5%. The decision prolonged its record period of policy stagnation beyond two years. Despite Australia’s recently strong economic growth figures, with annual GDP increasing by 3.4% in the second quarter of 2018, inflation is currently hovering around 2%, the bottom end of the RBA’s average 2-3% inflation target range. However, an ongoing downturn in the nation’s main housing markets may yet threaten consumer spending. The unchanged monetary policy is in line with market expectations.

October 3
The Institute for Supply Management announced that its Non-Manufacturing Index jumped to a 61.6 reading in September. It was up 3.1 points from the 58.5 level registered in August and remained above the key 50.0 (generally expanding) level for a 104th consecutive month. With the market looking for a decline, this figure is well above consensus expectations. This result indicates continued growth, and at a faster rate in the non-manufacturing sector.

The Dow Jones Industrial Average (DJIA) added 59 points (0.2%) at market opening to start today’s session at 26,833.47. The gain comes on the heels of a fourth consecutive advance and a new all-time high of 26,773.94, set just a day earlier. Tuesday’s high topped the previous high-water mark of 26,753.50 set on September 21 and, on a year-over-year basis, the Dow Industrials has now climbed by more than 18%. Despite ongoing uncertainty over Italy’s debt/deficit situation, the revamped North American trade pact between the U.S., Canada and Mexico, has helped spur the latest boost of the DJIA. Cyclical and secular tailwinds coupled with consumer confidence in the U.S. also appear to be bolstering market support.

October 4
The U.S. Department of Labor announced that initial jobless claims totalled 207,000 (seasonally adjusted) in the week ending September 29, a decrease of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 215,000. The four-week moving average was 207,000, an increase of 500 from the previous week's revised average. The previous week's average was revised up by 250 to 206,500. These results are marginally stronger than consensus estimates.

The U.S. Census Bureau reported that factory orders jumped 2.3% in August. This followed an upwardly revised 0.5% decline in July (originally reported as -0.8%). Excluding transportation, new orders edged 0.1% higher in August. Given the upward revisions to the previous data, these results are stronger than expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

The Australian Bureau of Statistics announced that the country’s trade surplus increased to A$1.60 billion (seasonally adjusted) in August from a downwardly revised A$1.55 billion in July. August exports increased to a near-record high of A$36.56 billion, A$185 million more than July exports. August imports posted a less impressive increase but still rose to a new all-time high of A$34.96 billion, A$130 million more than June imports. The trade surplus was considerably larger than expectations and appeared to be a result of an informal two-way trade deal with China. The stronger trade results will boost third quarter GDP results, but these figures have failed to provide material support for the Australian dollar in the face of higher U.S. Treasury yields.

October 5
Statistics Canada announced that 63,300 jobs were added in September, and the unemployment rate edged lower by 0.1 percentage points to 5.9%. The September job gains were more than sufficient to reverse the August losses and employment was up 1.2% (+222,000) from 12 months earlier. The employment results are considerably stronger 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.

The U.S. Bureau of Labor Statistics reported that the unemployment rate fell by 0.2 percentage points to 3.7% in September, its lowest level since December 1969. At the same time, non-farm payroll employment rose by 134,000 during the month and the August estimate was revised higher to 270,000 from 201,000. The report indicated that Hurricane Florence had affected parts of the East Coast during the September survey period. Given some uncertainty surrounding this regional data and the scale of the revisions, the overall report is stronger than market expectations. This is the most closely followed set of U.S. statistics, as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.

Statistics Canada reported that Canada's merchandise trade balance with the world was in a surplus position for the first time since December 2016. The $526 million surplus followed a $189 million deficit in July. Both imports and exports declined in August. Imports fell 2.5%, mainly on lower imports from non-U.S. countries, while exports were down 1.1%, mostly on decreased exports of passenger cars and light trucks. Since the market was looking for another deficit in August, these results are considerably stronger than expected. They are a positive sign for overall GDP growth.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to US$53.2 billion in August from a revised US$50.0 billion in July. August exports were $209.4 billion, $1.7 billion less than July exports. August imports were $262.7 billion, $1.5 billion more than July imports. The trade deficit was somewhat smaller than expected. The weaker trade results will dampen overall GDP growth.

At its latest policy meeting, the Reserve Bank of India announced that it had decided to leave its benchmark “repo rate” unchanged at 6.5%, following two previous rate hikes of 25 basis points each in June and August. The “reverse repo rate” was also left unchanged at 6.25%. The decision is consistent with generally tighter monetary policy that aims to achieve a 2% to 6% floating inflation target range, coupled with support for the Indian rupee. The unchanged monetary policy surprised the markets as analysts were looking for another rate hike of 25 basis points.

 

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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