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The Playbook - April 16, 2018

April 16, 2018 • Playbook

 


 


Weekly Commentary – April 16, 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.        
April 16 Retail Sales March 18 0.4% -0.1%
April 16 Foreign Bond Investment February 18 -$3.6B $8.4B
April 17 Housing Starts March 18 1.27 M 1.24 M
April 17 Industrial Production Y/Y March 18 4.0% 4.4%
Canada        
April 17 Foreign Securities Purchases February 18 $26.70B $5.68B
April 20 Retail Sales Y/Y February 18 4.09% 3.60%

Key Earnings:
April 16: Bank of America Corp., Lombard Medical Inc., Netflix Inc., PrimeEnergy Corp.
April 17: Cohen & Steers Inc., Johnson & Johnson, Kinder Morgan Inc., Progressive Corp.
April 18: American Express Co., Imax Corp., Mattel Inc., RLI Corp., Steel Dynamics Inc.
April 19: First Financial Bancorp., NextEra Energy Partners LP, Pentair PLC, Syntel Inc.
April 20: General Electric Co., Procter & Gamble Co., State Street Corp., TransUnion
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian housing data shows some regional softening
Fresh data from Statistics Canada showed a 0.2% drop in its New Housing Price Index during February, the first nation-wide decline since July 2010. Toronto prices fell 0.6% in February, the second consecutive decline and the largest for this census metropolitan area in eight years. This drop was held out as the primary driver in the broader decline. In a separate report, Statistics Canada announced that building permits fell 2.6% in February. This drop was also led by a 13.6% decline in permits for single-family dwellings in Toronto. The Canada Mortgage and Housing Corporation reported that housing starts fell 2.5% in March, led by a 29.5% decline in Ontario. While this data is notoriously volatile, on a monthly basis, starts dropped an annualized 8.7% nationally during the first quarter of 2018.

U.S. inflation ticks higher
The U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) decreased 0.1% (seasonally adjusted basis) in March, the first outright decline since May 2017. The monthly decline came as a surprise to the market and, counter intuitively, annual growth in the CPI rose from 2.2% to 2.4%, the fastest pace since March 2017. Much of this was due to soft figures in the annual calculation and this anomaly is likely to be seen again from May to July. Even though the Federal Reserve’s main inflation measure (the PCE price index excluding food and energy) saw a 1.6% increase in the latest figures (February), upward pressure remains. Recent weakness in the currency, a tighter labour market, the anticipated tax-cut stimulus, rising government spending and increasing trade barriers are all expected to contribute to higher inflation rates. Given these factors, the Fed will be focused on any sign that they are translating into higher prices at the consumer level.

China’s exports fell unexpectedly in March
The National Bureau of Statistics of China announced that the nation’s trade deficit totalled US$4.98 billion in March, compared to a US$23.56 billion surplus in March 2017. This was the first trade deficit since February 2017. Exports declined 2.7% from a year earlier, after gaining a three-year high of 44.5% in February. For the first quarter as a whole, China’s exports grew 14.1% from the first quarter of 2017. Imports grew 14.4% (year-over-year) in March, following a 6.3% increase in February. This suggests that China’s domestic demand may still be solid enough to cushion the blow from any trade shocks. The politically sensitive bilateral U.S./China deficit narrowed to US$15.43 billion in March, the smallest monthly figure since February 2017. Interestingly, imports from the U.S. rose 8.9% in the quarter and 3.2% in March. Even though the escalating trade dispute between the U.S. and China is of serious concern, analysts pointed to seasonal factors as the main culprit for the March trade deficit. Nevertheless, the markets will be closely monitoring all developments in international trade.

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

April 9
Destatis, Germany’s federal statistical office, reported that the nation’s trade surplus decreased to €18.4 billion in February 2018 from €19.8 billion in February 2017. On a seasonally adjusted basis, the trade surplus fell to €19.2 billion in February, following a €21.3 billion figure in January. This is the weakest start to a calendar year since 2009 and may be a signal that Germany’s economy has peaked with some sentiment indicators weakening. In addition, this result was somewhat below market expectations. Going forward, Germany could be a major casualty in the escalating tariff battle between the U.S. and China as some of the largest auto manufacturing plants and exporters in the U.S. are German-domiciled.

April 10
The Canada Mortgage and Housing Corporation announced that housing starts totalled 225,213 units (seasonally adjusted annual rate) in March. This is down from the upwardly-revised 231,026-unit level in February (originally reported as 229,737). Housing starts have been above the 200,000 mark for 10 consecutive months. The March dip was due to a 7.3% drop in urban multiple-starts during the month. With the markets braced for a larger decline, these results are stronger than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.3% (seasonally adjusted) in March. The index increased 3.0% for the 12 months ended March 2018, up from the 2.8% figure reported for February. These figures are above consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada reported that building permits issued by Canadian municipalities fell 2.6% to $8.2 billion in February, following a 5.2% gain in January. Single-family homes, as well as the commercial and institutional components saw lower levels of construction intentions in February. On a year-over-year basis, permits are up 6.5%. These results are weaker than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

April 11
The U.S. Bureau of Labor Statistics reported that the consumer price index decreased 0.1% (seasonally adjusted basis) in March, the first outright decline since May 2017. Over the last 12 months, the index increased 2.4%, the fastest pace since March 2017. The energy sub-index fell sharply during the month, due mainly to a 4.9% decrease in gasoline prices. The monthly results were weaker than expectations. These figures are consistent with the U.S. Federal Reserve's expectations of broadly rising inflationary pressures.

The U.K. Office for National Statistics announced that the country’s international trade deficit narrowed sharply by £2 billion to £965 million in February, following a downwardly revised £2.95 billion deficit in January. The narrowing produced the smallest trade deficit since September 2017 as imports slumped -4.8% from a record high to £53.4 billion, and exports decreased -1.3% to £52.4 billion. This reading was well below the consensus forecast.

April 12
The U.S. Department of Labor announced that initial jobless claims totalled 233,000 (seasonally adjusted) in the week ending April 7, a decrease of 9,000 from the previous week's unrevised level of 242,000. The four-week moving average was 230,000, an increase of 1,750 from the previous week's unrevised average of 228,250. These results are in line with consensus estimates.

Statistics Canada announced that its New Housing Price Index fell 0.2% in February, following two consecutive months of no change. This was the first decrease at the nation-wide level since July 2010. Lower prices for new homes in Toronto were held out as the main reason for the national price decline during the month. On a year-over-year basis, the index is up 2.6%. With the market looking for a modest improvement, these results are considerably weaker than expected.

April 13
The National Bureau of Statistics of China announced that the nation’s trade deficit totalled US$4.98 billion in March, compared to a US$23.56 billion surplus in March 2017. This was the first trade deficit since February 2017. Exports declined 2.7% from a year earlier, after gaining a three-year high of 44.5% in February. Imports grew 14.4% on the same basis in March, following a 6.3% increase in February. The overall results were well below market expectations. The politically sensitive bilateral U.S./China deficit narrowed to US$15.43 billion in March, the smallest monthly figure since February 2017. Even though the escalating trade dispute between the U.S. and China is of serious concern, analysts pointed to seasonal factors as the main culprit for the March deficit.

The Thomson Reuters/University of Michigan index of consumer sentiment dropped to 97.8 in the mid-month reading for April. This is significantly lower than the 101.4 level recorded for March and is weaker than market expectations. This is another indicator of the likely pattern of U.S. 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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