The Playbook – March 26, 2018

March 23, 2018 • Playbook



Weekly Commentary – March 26, 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 28 Corporate Profits Q/Q Q4 17 -1.5% 5.7%
March 28 GDP Growth Rate Q/Q Final Q4 17 2.4% 3.2%
March 28 Wholesale Inventories Advanced February 18 0.74% 0.80%
March 29 Personal Income February 18 0.44% 0.40%
March 30 Budget Balance January 18 -$1.60B $0.57B

Key Earnings:
March 26: Eltek Ltd., OHA Investment Corp., ReneSola Ltd., Verint Systems Inc.
March 27: HB Fuller Co., IHS Markit Ltd., Lululemon Athletica Inc., Sonic Corp.
March 28: Biocept Inc., Gevo Inc., Oxford Industries Inc., Sigma Labs Inc.
March 29: CASI Pharmaceuticals Inc., SYNNEX Corp., Titan Machinery Inc.
March 30: Cogentix Medical Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian inflation rises as consumer spending disappoints
Updated figures from Statistics Canada revealed a modest 0.3% advance in retail sales during January. The gain failed to fully reverse the 0.7% decline (originally reported as 0.8%) seen in December 2017. Nevertheless, revisions to each month of the final quarter of 2017 pushed annualized growth for the fourth quarter as a whole to 6.3% (originally reported as 6.0%). However, the data does raise questions with respect to the momentum in consumer spending, particularly as prices appear to be rising. In a separate report, Statistics Canada announced that the consumer price index (CPI) overall rose 2.2% (year-over-year) in February, the largest annual gain since October 2014 (2.4%). At the same time, CPI common, which the Bank of Canada bank says is most closely correlated with the output gap, edged higher to 1.9%. While inflation at this level is very close to the bank’s 2.0% target, there are concerns that the weaker currency and ongoing trade uncertainties may boost inflation further.

U.S. Federal Reserve hikes rates and raises forecast
Following its latest policy deliberations, the U.S. Federal Reserve raised administered interest rates by 25 basis points (a basis point is 1/100th of one per cent) pushing the target range for the federal funds rate to 1.50% to 1.75%. This was the sixth move since the Fed began tightening on December 16, 2015 and federal funds are now at their highest rate since April 30, 2008. At the same time, the Fed updated its economic forecast. The official forecast for final 2017 GDP growth was raised to 2.7% from 2.5% in the December report. Expectations for 2018 GDP were also bumped up to 2.4% (from 2.1%). On the inflation front, the Fed anticipates core personal consumption expenditure inflation of 1.8% in 2018, unchanged from the December forecast. However, this measure is expected to rise to 2.1% in both 2019 (2.0%) and 2020 (2.0%). More importantly for the markets, the published data suggests that the baseline estimate for 2018 remains three 25 basis point rate hikes. The committee pushed 2019 from two and a half to three rate increases, and 2020 from one and a half to two rate increases. Either way, the tightening cycle is expected to continue for the foreseeable future.

U.K. inflation eases to new low
The U.K. Office for National Statistics announced that the inflation rate in the U.K. stood at 2.7% (year-over-year) in February, down from the 3.0% figure posted in the previous month (on the same basis). This reading is the lowest rate since July 2017. The largest downward contributions to the change came from transport and food prices. The decline was also a result of the easing pressure from the Brexit “price squeeze”. The associated weakening in the pound had been responsible for driving import prices sharply higher. Despite the move down in inflation, it is unlikely to be sufficient to alter expectations that the Bank of England will hike rates in the near term. Of greater concern to the bank is the current state of the labour market and the potential for wage-driven inflation.

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 19
The European Commission stated that construction output in the Eurozone decreased 2.2% in January (month-over-month), after an upwardly revised 0.7% rise in December 2017. The January loss was the largest in 12 months. However, on a year-over-year basis, output was up 3.7% following an upwardly revised 1.4% growth pace in the previous month. This reading was the strongest annual gain in construction since June 2017.

March 20
Statistics Canada reported that wholesale sales edged up 0.1% to $63.3 billion in January. Increases in the food, beverage and tobacco, and the machinery, equipment and supplies subsectors were almost completely offset by declines in the building material and supplies, and the motor vehicle and parts subsectors. At the same time, inventories rose a larger 1.1% to $83.5 billion during the month. On a year-over-year basis, overall wholesale sales are up 6.4%, while inventories are up 8.5%. The monthly sales advance matched market expectations. Activity at the wholesale level can be an indicator of future consumer trends.

The U.K. Office for National Statistics announced that the inflation rate in the U.K. stood at 2.7% (year-over-year) in February, down from the 3.0% figure posted in the previous month (on the same basis). This reading is the lowest since July 2017 and is somewhat weaker than the market expectation. The largest downward contributions to the change came from transport and food prices, which rose at a softer pace. Despite the move down in inflation, it is unlikely to be sufficient to alter expectations that the Bank of England will hike rates in the near term.

The Centre for European Economic Research’s ZEW Indicator of Economic Sentiment for Germany decreased sharply to a 5.1 reading in March, 12.7 points lower than the level recorded in February. This reading was the lowest since September 2016 and was well below the consensus forecast. The index measures the level of optimism that analysts have with respect to both the current situation and the expected (six months) economic situation. The strong euro and concerns over the U.S.-led global trade conflict are hampering the economic outlook for Germany as an export-oriented nation, but the long-term outlook for the nation’s economy is still largely positive.

March 21
The U.S. Federal Reserve raised interest rates following its latest two-day policy meeting. This was the first meeting under new Federal Reserve Chair Jerome Powell. The target range for the federal funds is now set at 1.50% to 1.75%, an increase of 0.25%. The Fed last raised interest rates (also by 0.25%) on December 13, 2017. The press release that accompanied the announcement acknowledged the recent moderation in consumer and business spending, but also pointed out that inflation was expected to move up. The Fed left the door open for additional rate hikes over the balance of 2018. The announcement of a 0.25% interest rate hike was in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policymakers in other countries.

March 22
The U.S. Department of Labor announced that initial jobless claims totalled 229,000 (seasonally adjusted) in the week ending March 17, an increase of 3,000 from the previous week's unrevised level of 226,000. The four-week moving average was 223,750, an increase of 2,250 from the previous week's unrevised average of 221,500. These results are in line with consensus estimates.

Markit Economics reported that Germany’s Manufacturing PMI fell to 58.4 in March from February's 60.6 level. This reading was also the lowest expansion in factory activity since July 2017 and was somewhat lower than consensus estimates. Services business activity also decreased in March, with the sector’s sub-index reading falling to 54.2 from 55.3 in February. Concerns about U.S. President Donald Trump’s decision to impose import tariffs on steel and aluminium as well as the recent appreciation of the euro were clouding the outlook for exporters in Germany.

March 23
Statistics Canada reported that consumer prices rose 0.2% (seasonally adjusted, monthly basis) in February, following a 0.5% increase in January. Six of eight major components increased, while the clothing and footwear index declined (-0.2%) and the food index was unchanged. On a year-over-year basis, the consumer price index (CPI) was up 2.2%, the largest annual gain since October 2014 (2.4%). All three new measures of core inflation, established by the Bank of Canada in 2016, moved higher ranging from 1.9% to 2.1%. CPI common, which the central bank says is most closely correlated with the output gap, edged higher to 1.9%. The overall figures are above market expectations.

Statistics Canada reported that retail sales gained 0.3% (seasonally adjusted) in January. Sales were up in seven of 11 subsectors, representing 63% of retail trade. Excluding sales at motor vehicle and parts dealers, retail sales increased 0.9%. Year-over-year sales stood at 3.6%. With the market looking for a much greater gain, these results are below consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

The Singapore Department of Statistics reported that its CPI increased 0.5% (year-over-year) in February, after flatlining (0%) in January (on the same basis). This reading was the highest inflation rate since November 2017 and was above consensus estimates. Sharp rises in both service and food prices during the month were the primary drivers. Core inflation, which excludes the costs of accommodation and private road transport, rose to 1.7% from 1.4% in the previous month. This again reflected higher services and food inflation.


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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