|Weekly Commentary – April 3, 2017
Please click here to listen to Richard Wylie’s audio version.
Canadian growth accelerates
U.S. consumer exuberance appears to be cooling
U.K. economy remains robust amid Brexit activity
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.
▲ The U.S. Bureau of Economic Analysis announced that real gross domestic product grew at an annual rate of 2.1% in the fourth quarter of 2016. The previous growth estimate was 1.9%. In the third quarter, real GDP increased 3.5% on the same basis. The upward revision was attributed to personal consumption expenditures (PCE), which increased more than previously estimated. These results are stronger than expected as the market was looking for a more modest upward revision. 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) increased 0.1% while its Raw Materials Price Index (RMPI) rose 1.2% in February. On a year-over-year basis, the indexes were up 3.5% and 23.7%, respectively. Similar drivers were seen in each index. Higher prices for meat, fish and dairy products were largely responsible for the IPPI increase. Animals and animal products drove the RMPI higher. 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.
▼ According to Brazil’s government statistics agency, retail sales volumes excluding cars and building materials declined 0.7% month-over-month in January 2017, following a downwardly revised 1.9% drop in December. Declines were widespread across subsectors with sales weakening in the office, computing and communication equipment and supplies subsector (-4.8%), and the fuels and lubricants subsector (-4.4%). On a year-on-year basis, retail sales tumbled 7.0% after a 4.9% drop in the previous month. Both monthly and yearly figures are weaker than expected.
▲ According to Germany’s federal statistics office, consumer prices rose by 1.6% in the year to March 2017 after reaching a four-and-a-half year high of 2.2% in February. It was the lowest inflation rate in four months and the first slowdown in annual inflation in nearly a year. Rising energy prices and higher food costs were the main drivers behind the overall increase, however, they both rose at a much slower pace than in February (5.1% compared to 7.2% and 2.3% compared to 4.4%, respectively). The results missed market expectation, taking some pressure off the European Central Bank to wind up its monetary stimulus program.
▲ Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.6% in January, after rising 0.3% in December. Goods-producing industries grew for the seventh time in eight months, increasing by 1.1% in January. Service-producing industries rose 0.4%, their highest monthly growth rate since June 2015. On a year-over-year basis, overall GDP growth stands at 2.3%. These results are significantly stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.
▲ According to the U.K. Office for National Statistics, the economy advanced 0.7% (Q/Q) in the final quarter of 2016, following a downwardly revised 0.5% expansion in the previous period. The improvement was mainly driven by continued strong consumer spending and exports. Household spending jumped by £2 billion during the final three months of 2016. Meanwhile, business investment contracted for the fourth consecutive time. The quarter-on-quarter figures are in line with expectation. However, on a year-on-year basis, GDP for the last quarter advanced 1.9% following a 2.0% expansion in the previous period. Looking at 2016 as a whole, GDP growth slowed to 1.8% from 2.2% a year earlier. The year-on-year figure is marginally weaker that consensus estimates.
▲ The Institute of Supply Management reported that its Chicago Purchasing Managers Index rose to a 57.7 reading in March. This is above February’s 57.4 mark and well above the key 50.0 (generally expanding) level. With the market looking for the index to move lower, the reading is well above consensus expectations and indicates another acceleration in manufacturing activity within the region.
▼ The Thomson Reuters/University of Michigan index of consumer sentiment slipped to 96.9 in the month-end figure for March. This is weaker than the 97.6 level recorded mid-month but ahead of the 96.3 reading for February. The index has been above the 90.0 level since mid-November, but the current reading is weaker than market expectations. This is another indicator of the likely pattern of consumer spending.
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