|Weekly Commentary – April 10, 2017
Please click here to listen to Richard Wylie’s audio version.
Canadian job market marches on
U.S. employment report raises questions
Brazil’s trade surplus balloons despite meat scandal
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.
▲ According to IHS Markit, the final Markit Eurozone Manufacturing PMI jumped to 56.2 in March 2017, up from 55.4 in February. It was the highest reading since April 2011. Growth rates for production and new orders accelerated to near six-year highs in March, and companies reported a surge of orders from both domestic and export clients, fuelling faster job creation. The PMI data signalled that growth was centred in Germany, with its final Markit manufacturing reading moving to a 71-month high of 58.3 in March 2017 from 56.8 in February, boosted by a sharp increase in orders for intermediate goods. Both the Eurozone data and the German results are in line with expectations.
▼ The U.S. Institute for Supply Management reported that its Purchasing Managers Index edged lower to a 57.2 reading in March. This is a 0.5 point loss from February’s 57.7 figure but remains well above the key 50.0 (generally expanding) level for a seventh consecutive month. The reading is in line with expectations and indicates continued growth in manufacturing activity.
▲ The U.S. Census Bureau announced that construction spending rose 0.8% in February, following an upwardly revised 0.4% decline in January (originally reported as -1.0%). On a year-over-year basis construction was up 3.0%. With the revisions, the monthly growth figure is broadly in line with consensus estimates. This result indicates continued volatility in the construction sector.
▼ The U.S. Census Bureau announced that the country’s international trade deficit in goods and services narrowed to US$43.6 billion in February, down $4.6 billion from $48.2 billion in January (previously reported as $48.5 billion). February exports were $192.9 billion, $0.4 billion more than January exports. February imports were $236.4 billion, $4.3 billion less than January imports. The trade deficit was smaller than expected. The somewhat improved results will be less of a drag on overall GDP growth.
▲ According to Brazil’s statistics agency, the country logged a trade surplus of US$7.145 billion in March 2017, 61.1% higher than a $4.435 billion surplus a year earlier. It is the largest trade surplus since 1989 when the government first started compiling the data. Exports jumped 20.1% in March over the same month of 2016 to $20.085 billion, while imports edged up slightly by 7.1% to $12.94 billion. The ongoing meat scandal appears to have had less of an impact on export numbers than some had anticipated. The trade surplus is stronger than market expectations.
▲ According to the Australian Bureau of Statistics, the country’s trade surplus widened 138% to A$3.57 billion in February 2017 from an upwardly revised $1.50 billion surplus in January. It is the second-largest surplus on record. The surge appeared to be due less to exports, which rose 1% on the month to $32.4 billion (seasonally adjusted), and more to imports, which fell 5% on the month to $28.83 billion on the same basis. Although the trade surplus beat market expectations, analysts were not optimistic about what this result signalled for the economy as weakness in imports could suggest that there is some softening in momentum on domestic demand.
▲ The U.S. Census Bureau reported that factory orders increased 1.0% in February. This followed an upwardly revised 1.5% increase in January (originally reported as 1.2%). Excluding transportation, new orders increased 0.4% in February. Given the upward revisions to the previous data, these results are stronger than expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.
▼ According to surveys conducted by the U.S. Institute for Supply Management, the ISM Non-Manufacturing PMI Index in the U.S. fell unexpectedly to 55.2 in March 2017. It was down 2.4 points from the 16-month high of 57.6 in February, reaching the lowest reading since October of 2016. The loss of momentum is linked to weaker inflows of new work and slowed production and employment. The reading was below market expectation, although it still registered as an 87th consecutive month of growth.
▼ Statistics Canada reported municipalities issued $7.5 billion worth of building permits in February, down 2.5% from January. Ontario and Alberta led the five provinces that reported declines in February. The national decrease was mainly the result of lower construction intentions for single-family dwellings and institutional structures. On a year-over-year basis permits are up 3.9%. These results are weaker than expected. Permits are an indicator of the future level of activity in the construction sector.
▲ Germany’s federal statistical office announced that the country’s industrial orders bounced back, gaining 3.4% month-on-month in February 2017. This follows a downwardly revised drop of 6.8% in January, the biggest decline since January 2009. Domestic orders surged 8.1%, while foreign orders remained flat. Demand for intermediate goods advanced the most (8.5%), followed by consumer goods (2.7%) and capital goods (0.3%). Germany’s factory orders have become extremely volatile since the summer due to sensitivity to seasonal and weather changes, and although the February results are weaker than expected, the trend for order books is positive.
▼ The U.S. Bureau of Labor Statistics reported that the unemployment rate fell by 0.2 percentage points to 4.5% in March, a new post-recession low. The decline came despite a 145,000 gain in the labour force. At the same time, non-farm payroll employment edged higher by 98,000. Employment increased in professional and business services and in mining, while retail trade lost jobs. The results are mixed relative to expectations. The improvement in the unemployment rate was greater than anticipated while the gain in non-farm payrolls is below consensus estimates. 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.
▼ The Office for National Statistics published the U.K. industrial production data, showing the overall industrial activity deteriorated further by 0.7% month-over-month in February 2017, after a downwardly revised 0.3% drop in January. It is the second consecutive month that the industrial production has fallen. Output declined across all categories, although the sharpest declines were seen in pharmaceuticals (-4.4%) and electricity and gas (-3.4%). Manufacturing production slipped 0.1% month-on-month, missing expectations of a 0.3% increase. On the year, industrial output slowed down to 2.8% from an upwardly revised 3.3% a year earlier. Both monthly and yearly results are weaker than expected, suggesting that the U.K. economy has lost a little momentum in Q1.
▲ According to Germany’s federal statistics office, the nation registered a 19.9 billion euro trade surplus in February 2017, compared to an upwardly revised 14.9 billion euro surplus in January. Exports climbed 0.8% month-on-month in February while imports slid for the first time in five months by 1.6%. On a year-on-year basis, exports soared 3.1% to 102.3 billion euros while imports went up 3.7% to 82.4 billion euros. The results are in line with market expectations. In addition, according to the official data, Germany’s industrial production increased 2.2% month-on-month while market expected a 0.1% fall. It is the second consecutive month of growth. The figures proved that February was another solid month for German industry performance.
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