The Playbook – March 19, 2018

March 16, 2018 • Playbook



Weekly Commentary – March 19, 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
March 21 Current Account Q4 2017 -$116.8B -$100.6B
March 21 Existing Home Sales February 18 5.47M 5.38M
March 23 Durable Goods Orders February 18 -2.0% -3.7%
March 23 New Home Sales February 18 0.611M 0.593M
March 23 Inflation Rate Y/Y February 18 1.4% 1.7%
March 23 Retail Sales January 18 0.2% -0.8%

Key Earnings:
March 19: Oracle Corp., Canadian Solar Inc., Ditech Holding Corp.
March 20: Children's Place Inc., FedEx Corp., Micron Solutions Inc.
March 21: Arcos Dorados Holdings Inc., General Mills Inc., United-Guardian Inc.
March 22: Micron Technology Inc., Nike Inc., Oxford Industries Inc.
March 23: Destination XL Group Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian manufacturing activity slows
Updated figures from Statistics Canada revealed a substantial 1.0% decline in manufacturing sales during January. In addition, data going back to October 2017 was revised in the current report. As a result, annualized growth in manufacturing sales for the fourth quarter of 2017 was revised down from 11.6% to 11.4%. Even though this is still a robust pace, back-to-back declines in December and January suggest that the sector lost momentum heading into 2018. Declines were broadly based, with half of the 10 provinces reporting lower levels and 14 of 21 main industry sub-groups recording losses during the month. Not surprisingly, inventories of unsold goods accumulated in January. The report stated that inventory levels rose 0.9% to $76.1 billion in January, the fourth consecutive monthly gain, and their highest level since the current data series began in 1992. So, despite some commentary that Canada’s economy is running at full capacity, some sectors continue to lag.

Loonie plunges to new low
The Canadian dollar fell to its lowest level against the U.S. dollar in 10 months on March 15, 2018. Heavy selling pressure pushed the loonie to US$0.766, the weakest point since June 2017. Divergent economic momentum and expectations with respect to administered interest rates in the U.S. and Canada are critical factors that have fuelled ongoing currency weakness. However, more recently, traders have focused on heightened worries over the future of NAFTA and the sudden escalation in protectionist actions toward the rest of the world from the United States. Recent announcements of U.S. tariffs on foreign aluminum and steel have deepened these concerns, even though Canada may see an exemption. The unpredictable nature of these announcements has left less appetite for currency risk for some market participants.

U.S. consumers ease back
Despite clear strength in the February jobs report, the improving labour market has not translated into brisk gains for retailers. Updated figures from the U.S. Census Bureau revealed a 0.1% decline in retail and food services sales during February. In addition, revisions to prior data show that sales have now fallen by an identical 0.1% for three consecutive months. This is the first string of three straight declines since the December 2014 to February 2015 period. Following a strong fourth quarter, softer overall consumer spending is expected to be reflected in the first quarter GDP data for 2018. Once again, analysts point to consumer debt levels and wage increases that fail to show material gains above inflation as the rationale for the string of soft spending results.

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

March 12
India’s Central Statistics Office announced that its consumer price index (CPI) experienced a 4.4% increase (year over year) in February, following a 5.1% increase in January (on the same basis). This reading is somewhat below the consensus forecast. It is the lowest inflation rate in four months but remains above the 4% medium-term target of the Reserve Bank of India (RBI), strengthening views the bank will hold rates steady at its April meeting.

March 13
The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.2% (seasonally adjusted basis) in February. Over the last 12 months, the index increased 2.2%, up slightly from the 2.1% figure reported for January. These results matched consensus estimates and suggest some leveling off in inflation which may also take some pressure off the U.S. Federal Reserve with respect to tightening monetary policy.

March 14
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.2% (seasonally adjusted) in February. The index increased 2.8% for the 12 months ended February 2018, up slightly from the 2.7% figure posted for January. These figures match consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.S. Census Bureau announced that retail and food services sales were down 0.1% (seasonally adjusted) for the month of February but were 4.0% above February 2017 levels. Excluding autos, sales were up 0.2% during the month and up 4.4% on a year-over-year basis. These figures are weaker than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

March 15
The U.S. Department of Labor announced that initial jobless claims totalled 226,000 (seasonally adjusted) in the week ending March 10, a decrease of 4,000 from the previous week’s revised level. The previous week’s level was revised down by 1,000 from 231,000 to 230,000. The four-week moving average was 221,500, a decrease of 750 from the previous week’s revised average. The previous week’s average was revised down by 250 from 222,500 to 222,250. These results are in line with consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in March but at a less robust pace. The Philly Fed general business conditions index eased to 22.3 from 25.8 in February. These results are somewhat lower than market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

Ireland’s Central Statistics Office announced that the nation’s GDP grew by 3.2% (annualized) in the final quarter of 2017, following an upwardly revised 4.8% increase in the previous quarter (on the same basis). This reading is well above consensus estimates. Gross fixed capital formation rebounded sharply while household consumption rose at a softer pace during the quarter. GDP grew 7.8% in the 2017 calendar year, leaving Ireland as the fastest-growing economy in the Eurozone for a fourth straight year.

Statistics Poland reported that the Polish consumer price index (CPI) increased 1.4% (year-over-year) in February 2018, down from a 1.9% rise in the previous month (on the same basis). This reading is somewhat below the consensus forecast. It is also the lowest inflation rate since December 2016. This result strengthens the proponents of a stabilization in interest rates and signals slightly lower inflation ahead.

March 16
The U.S. Census Bureau announced that housing starts in February were at a seasonally adjusted annual rate of 1,236,000. This is 7.0% below the revised January estimate of 1,329,000, and is 4.0% below the February 2017 rate of 1,288,000. At the same time, the number of building permits issued in February was at a seasonally adjusted annual rate of 1,298,000. This is 5.7% below the revised January rate of 1,377,000 but is 6.5% above the February 2017 figure of 1,219,000. These figures are weaker than market expectations. Activity in the housing market has a significant “ripple” effect on the broader economy.

Statistics Canada announced that foreign investors added $5.7 billion to their holdings in January. Meanwhile, Canadian investment in foreign securities totalled $13.3 billion, a second consecutive month of strong acquisitions. The foreign acquisition of Canadian securities is above expectations. Foreign investment flows can significantly influence the relative strength of the Canadian dollar.

Statistics Canada reported that manufacturing sales fell 1.0% in January, a second consecutive loss. Declines in the motor vehicles, aerospace product and parts, as well as primary metal industries were responsible for the overall drop. In line with the decline, sales growth on a year-over-year basis fell to 2.9%. This report is weaker than the market consensus. This data is closely watched as manufacturing can create high-value employment and it has been one of the slowest sectors to recover from the recession.

The U.S. Federal Reserve announced that industrial production expanded 1.1% in February after declining 0.3% in January. On a year-over-year basis, industrial production was reported to have gained 4.4%. Capacity utilization for total industry rose to 78.1% from 77.4% in January and 75.8% a year earlier. These results are stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

The Thomson Reuters/University of Michigan index of consumer sentiment rose to 102.0 in the mid-month reading for March. This is significantly stronger than the 99.7 level recorded for February. With the market looking for this indicator to ease back, this reading is significantly stronger than market expectations. This is another indicator of the likely pattern of consumer spending.


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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