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The Playbook - June 4, 2018

June 01, 2018 • Playbook

 


 

Weekly Commentary – June 4, 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.        
June 4 ISM New York Index May 18 58.3 64.3
June 5 Markit Composite PMI Final May 18 55.7 54.9
June 6 Exports April 18 $206.00B $208.53B
June 6 Imports April 18 $256.00B $257.48B
Canada        
June 6 Exports April 18 $45.90B $47.58B
June 6 Imports April 18 $48.00B $51.72B
June 7 Housing Starts May 18 210 k 214 k

Key Earnings:
June 4: Coupa Software Inc., IDT Corp., NCI Building Systems Inc., Sigma Designs Inc.
June 5: ABM Industries Inc., Capital Southwest Corp., Genesco Inc., Verint Systems Inc.
June 6: Dell Technologies Inc., FuelCell Energy Inc., Mitcham Industries., Okta Inc.
June 7: Broadcom Inc., KMG Chemicals Inc., Steel Connect Inc., Vail Resorts Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada holds steady
The Bank of Canada announced that administered interest rates would be held steady following its latest policy deliberations. Thus far, the bank’s current tightening cycle has consisted of three 25 basis point (a basis point is 1/100th of 1 per cent) rate hikes on July 12 and September 6, 2017, and on January 17, 2018. However, the bank faces a considerable dilemma. It suggests that current inflation is “consistent with an economy operating close to potential.” In addition, the text of the press release reaffirmed that higher interest rates will be warranted to keep inflation in check. At the same time, the bank has been vocal in expressing its very serious concerns over household debt. Bank of Canada Governor Stephen Poloz recently stated that “this debt still poses risks to the economy and financial stability, and its sheer size means that its risks will be with us for some time.” At this juncture, analysts are undecided as to when the bank will next raise rates. The next monetary policy window is on July 11.

U.S. job market extends gains
The latest data from the U.S. Bureau of Labor Statistics revealed a 3.8% national unemployment rate for May. This is the lowest since the same figure was posted in April 2000 and was accompanied by a 12,000 increase in the labour force during the month. Further, the last time it was actually lower was in October 1969 (3.7%). Meanwhile, non-farm payrolls rose by 223,000 in May, while April and March revisions added a net 15,000 jobs. Average hourly earnings gained $0.08 to $26.92 and stand with a 2.7% year-over-year advance. The clear strength in the U.S. job market serves to reaffirm market expectations that the Federal Reserve will continue to tighten monetary policy. The next meeting of the Federal Open Market Committee is scheduled for June 12-13.

Brazilian economy strengthens
Brazil’s statistics agency announced that real GDP grew 0.4% (quarter-over-quarter) in the first quarter of 2018. The gain follows advances of 0.1% in the previous quarter and 0.2% during the third quarter of 2017. On a year-over-year basis, overall growth stood at 1.2%. This was the fifth straight quarterly gain and eased fears of a return to negative growth. The deep recession of 2015-16 shaved nearly 8.0% off Brazil’s GDP and remains a clear memory. During the quarter, both consumer spending and capital investment continued to grow, fuelled by record-low interest rates. However, double-digit unemployment and the recent truckers’ protest will likely dampen economic growth over the short term.

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

May 29
The U.S. Conference Board announced that its consumer confidence index climbed in May from April’s downwardly revised level. The index stands at 128.0, up from 125.6 in April (previously reported as 128.7). The Present Situation sub-index increased to 161.7 from 157.5 and the Expectations sub-index rose to 105.6 from 104.3. With the downward revisions, these results are weaker than expectations. Consumer confidence is an indicator of spending patterns.

May 30
Brazil’s statistics agency announced that real GDP grew 0.4% in the first quarter of 2018. This is the preliminary estimate and is frequently subject to revision. The gain follows advances of 0.1% in the previous quarter and 0.2% during the third quarter of 2017, and suggests that an economic slowdown may have been avoided. These results match market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 2.2% in the first quarter of 2018. This figure is the “second estimate,” while the original growth estimate was 2.3%. In the final quarter of 2017, real GDP increased 2.9% on the same basis. Downward revisions to private inventory investment, residential fixed investment and exports were partly offset by an upward revision to non-residential fixed investment. These results matched expectations as the market was looking for a downward revision of this size. 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) rose 0.5% and its Raw Materials Price Index (RMPI) gained 0.7% in April. On a year-over-year basis, the indexes are up 2.4% and 8.9%, respectively. Higher prices for energy products were seen during the month. These figures are in line with expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

Statistics Canada also announced that Canada's overall current account deficit widened by $3.0 billion (on a seasonally adjusted basis) in the first quarter to $19.5 billion. Higher deficits on trade in goods and investment income were the main contributors to this increase. The deficit increase was larger than anticipated. Current account deficits must be funded by borrowing from foreign lenders.

The Bank of Canada announced that it was maintaining the target for its key overnight interest rate at 1.25%. The bank rate was correspondingly left unchanged at 1.50% and the deposit rate at 1.00%. The press release that accompanied the announcement highlighted that the U.S. economy performed better than anticipated, but that uncertainty with respect to international trade remained. The bank also indicated that higher gasoline prices applied upward pressure to broader inflation measures, but that this was expected to be temporary. Once again, the statement indicated that higher interest rates should be anticipated going forward. The decision to leave interest rates unchanged was in line with market expectations. The next policy announcement is scheduled for July 11. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

May 31
The U.S. Department of Labor announced that initial jobless claims totalled 221,000 (seasonally adjusted) in the week ending May 26, a decrease of 13,000 from the previous week's unrevised level of 234,000. The four-week moving average was 222,250, an increase of 2,500 from the previous week's unrevised average of 219,750. These results are stronger than consensus estimates.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.3% in April and personal consumption expenditures (PCE) increased 0.6%. Based on revised figures, personal income increased 0.2% and PCE increased 0.5% in March. While income figures for April matched expectations, spending results were stronger than anticipated. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada announced that real GDP grew 1.3% (annualized) in the first quarter of 2018, after gaining an upwardly revised 1.7% in each of the previous quarters. With this release, Statistics Canada produced revised quarterly data for 2017, but the changes were insufficient to alter the whole-year growth rate of 3.0%. Growth was moderated by a deceleration in household spending, lower exports of non-energy products and a decline in housing investment. On a monthly basis, real GDP by industry increased 0.3% in March, suggesting that the economy may have carried at least some positive momentum into the second quarter. Coupled with the revision, these results are somewhat weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

June 1
The U.S. Bureau of Labor Statistics reported that the unemployment rate fell by 0.1 percentage points to 3.8% in May, and non-farm payroll employment rose by 223,000. The unemployment rate is now the lowest since April 2000 and edged down despite a 12,000 gain in the labour force during the month. Employment continued to trend up in several industries, including retail trade, health care and construction. Both the growth in non-farm payrolls and the unemployment rate were stronger than anticipated. 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.

 

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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