Market Focus Canadian economy resumes advance Updated figures from Statistics Canada are beginning to reveal an improving picture of the domestic economy. Overall GDP advanced by 0.3% in August, following a 0.6% gain in July. The strength of these back-to-back improvements sets the stage for the strongest quarterly performance since the final quarter of 2011. During the month, gains were widespread as 16 of the 20 major sub-sectors reported an advance. Mining (+1.9%) led the gainers while manufacturing (-0.3%) posted the largest drop. On a year-over-year basis, manufacturing also posted the largest (-2.1%) of three declines. Mining recorded the largest gain (7.6%) on an annual basis. U.S. Federal Reserve holds off on tapering The latest monetary policy deliberations in Washington produced no change as the Fed held both interest rates and quantitative easing steady once again. While the press release that accompanied the announcement limited its comments on the recent government shutdown and debt ceiling wrangling to a terse “fiscal policy is restraining economic growth” comment, the focus was on the diminished risks from higher interest rates. This appears to suggest a happy medium for the time being, as market rates, which appeared too low in April and too high in September, have moved to a more neutral level. Even though inflation has been running below the Fed’s longer-run objective, its longer term inflation expectations have remained stable. Analysts suggest little change should be expected through the balance of 2013. Rates rise again in India In an effort to stem rising inflationary pressures, the Reserve Bank of India boosted its benchmark repurchase rate to 7.75% from 7.50% at its latest policy announcement window. This is the second rate hike in as many months. At the press conference, Governor Raghuram Rajan stated, “we can’t live with close to double-digit CPI for an extended period of time.” Consumer prices climbed 9.8% in the 12 months ending in September, the fastest pace of inflation in the country. The bank’s forecast for economic growth in the 12 months ending in April 2014 was lowered to 5.0% from 5.5%. However, the bank also predicted that inflation would remain above 9.0% for some time. The market will anticipate additional rate hikes over the next quarter despite expectations for slower economic growth. 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. Also, we anticipate that after an extended period of declining yields in the bond market and therefore increasing bond prices, interest rates will likely rise, which would detract from bond performance. We continue to favour stocks over bonds as they have greater expected growth potential than bonds and are less sensitive to changes in interest rates. Having a professional advisor who can provide a diversified portfolio that takes into consideration your risk tolerance can help protect your investment returns from rising interest rates. Market Board – Weekly Summary October 28 ▲ The U.S. Federal Reserve announced that industrial production expanded 0.6% in September after gaining 0.4% in August. On a year-over-year basis, industrial production was reported to have gained 3.2%. Capacity utilization for total industry rose to 78.3% from 77.9% in August and 77.2% 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. October 29 ▼ The U.S. Census Bureau announced that retail and food services sales were down 0.1% in September but were 3.2% above September 2012 levels. Excluding autos, sales were up 0.4% during the month and up 2.8% 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. ▼ The U.S. Bureau of Labor Statistics reported that its Producer Price Index (PPI) declined 0.1% (seasonally adjusted) in September. The index increased just 0.3% for the 12 months ended September 2013, the smallest year-over-year advance since a 2.0% decline in October 2009. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level. ▼ Statistics Canada reported that its Industrial Product Price Index declined 0.3% in September, mainly because of lower prices for primary metal products and petroleum and coal products. The Raw Materials Price Index fell 1.5%, led by mineral fuels and vegetable products. These figures are broadly 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. ▲ The U.S. Census Bureau announced that business sales rose 0.3% (seasonally adjusted) in August and were up 4.2% from August 2012. At the same time, inventories were up an identical 0.3% during the month. As a result, the total business inventories/sales ratio at the end of August was 1.29. The August 2012 ratio was 1.30. These results are in line with market expectations. Strong business sales suggest stable economic growth while diminishing inventories/sales ratios suggest a business need to replenish dwindling stockpiles. ▼ The U.S. Conference Board announced that its consumer confidence index fell sharply in October amid the U.S. government shutdown and debt ceiling debate. The index now stands at 71.2, down from 80.2 in September (previously reported as 79.7). The Present Situation Index decreased to 70.7 from 73.5. The Expectations Index fell to 71.5 from 84.7. These results are weaker than expectations. Consumer confidence is an indicator of spending patterns. October 30 ▲ The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.2% (seasonally adjusted basis) in October. Over the last 12 months, the index increased 1.2%. These results are in line with expectations. These figures are consistent with the U.S. Federal Reserves expectations of neutral inflationary pressures. ■ The U.S. Federal Reserve held interest rates steady following its latest policy meeting. The press release that accompanied the announcement reiterated that the U.S. economy was expanding at a moderate pace. At the same time it indicated that the $85 billion per month quantitative easing program would continue. The no-change policy is in line with expectations. U.S. 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. October 31 ▲ The U.S. Department of Labor announced that initial jobless claims totalled 340,000 (seasonally adjusted) in the week ending October 26, a decrease of 10,000 from the previous weeks unrevised figure of 350,000. The four-week moving average was 356,250, an increase of 8,000 from the previous weeks unrevised average of 348,250. These results are stronger than market consensus. ▲ Statistics Canada announced that real gross domestic product rose 0.3% in August, after increasing 0.6% in July and declining 0.5% in June. An increase in oil and gas extraction and widespread gains in service industries were the main contributors to the August growth. These results are stronger than expected. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy. ▲ Statistics Canada reported that weekly earnings of non-farm payroll employees were $918 in August, up 0.4% from the previous month. On a year-over-year basis, weekly earnings increased 1.3%. These results are well above expectations. As this indicator measures growth in income, it can reveal trends in consumer spending. ▲ The U.S. Institute for Supply Management reported that its Chicago Purchasing Managers Index jumped to a 65.9 reading in October. This is a dramatic gain from Septembers 55.7 reading and is now well above the key 50.0 (generally expanding) level. The reading is the strongest since March 2011 and is well above consensus expectations. The result indicates an acceleration in manufacturing activity within the region. November 1 ▲ The U.S. Institute for Supply Management reported that its Purchasing Managers Index rose to a 56.4 reading in October. This is a 0.2 point gain from Septembers 56.2 reading and remains above the key 50.0 (generally expanding) level for a fifth consecutive month. The reading is above expectations and indicates an acceleration in manufacturing activity. 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. CI Investments and the CI Investments design are registered 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. © 2013 CI Investments Inc.
Posted on: Mon, 04 Nov 2013 14:02:55 +0000
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