The Playbook - May 27, 2019

May 27, 2019 • Playbook


The Playbook

Weekly Commentary – May 27, 2019

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
CI Multi-Asset Management
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy
Assante Wealth Management

Please click here to listen to Richard Wylie's audio version.

A PDF version of The Playbook is also available for download.

Economic Calendar

Date Release Period Consensus Previous
May 28 CB Consumer Confidence May 19 130.0 129.2
May 30 GDP Growth Rate 2nd Est Q/Q  Q1 19 3.2% 2.2%
May 30 Wholesale Inventories Adv  April 19 0.3% -0.1%
May 31 Personal Spending April 19 -0.3% 0.9%
May 31 GDP Growth Rate Q/Q Q1 19 0.5% 0.1%
May 31 Budget Balance March 19 -$5.0B $4.3B

Key Earnings:
May 27: Nordic American Offshore Ltd.
May 28: Eco-Stim Energy Solutions Inc., Euroseas Ltd., LAIX Inc., Natuzzi S.p.A.
May 29: Abercrombie & Fitch Co., Amerco Inc., Future Fintech Group Inc., PVH Corp.
May 30: Costco Wholesale Corp., Environmental Tectonics Corp., Nutanix Inc.
May 31: Alliance Media Holdings Inc., Genesco Inc., Thermon Group Holdings Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian consumers bounce back
Updated figures from Statistics Canada revealed a March surge (+1.1% seasonally adjusted) in retail sales, which comes on the heels of an upwardly revised +1.0% advance in February. The March gain is the largest since May 2018 and suggests that the apparent strength in the labour market is fueling a recovery in consumer spending. However, even this solid two-month stretch barely manages to push the quarterly figures into positive territory. Retail sales rose +0.4% (quarter-over-quarter, annualized) in the first quarter of 2019. This does represent an improvement from the -1.9% decline (on the same basis) in the final quarter of 2018 but cannot be expected to translate into a significant bump in overall GDP growth. Once again, these data reflect an improvement in the economy but likely fall short of altering the expected “no change” monetary policy announcement from the Bank of Canada at their next window on May 29.

Higher U.S. housing prices appear to be dampening sales
The latest data from the U.S. Census Bureau showed that new home sales tumbled -6.9% to an annualized 673,000-unit pace in April from an eleven and a half year high in March. The report also indicated that the median sales price for a new home had surged +11.9% during the month to $342,200, the highest level since December 2017. Existing home sales appear to have experienced similar pressures. The National Association of Realtors announced that existing home sales slipped -0.4% in April. The move down came against a +2.9% monthly increase in the median sales price for an existing home. At this juncture, availability appears to be less of a problem as there is a 5.9 month’s supply of new homes and a 4.2 month’s supply of existing homes on the market. Still, more supply can be anticipated as both housing starts and building permits rose in April.

“Risk-off” trading returns
throughout the current, extended, bull market in equities, there have been several episodes where investors have chosen to take risk off the table and sharply reduce their stock holdings, preferring instead to put their cash into bonds. This pattern of trading has recently re-emerged. Word that British Prime Minister Theresa May would resign on June 7 was just one of the catalysts as the intensifying U.S.-China trade spat continued to threaten and expectations of easier monetary policy spread through many regions. The flight to bonds pushed prices sharply higher and yields commensurately lower. Yields on sovereign debt in Spain, Portugal and Australia all fell to record lows in the 10-year term. Meanwhile, the yield on the U.K. 10-year Gilt hit its lowest point since 2017, as did the yield on the 30-year U.S. Treasury bond. Even though the U.K. yield curve has not yet “inverted,” as it did during the financial crisis, the two to 10-year spread is now the smallest since then. It remains to be seen if the central banks will fulfil the expectations of easier monetary policy.

Longer View

It will likely take some time for central banks to normalize interest rates and unwind the quantitative easing that has added trillions of dollars to central banks’ balance sheets. Growth rates for loans will slow significantly because of the unwind likely causing economies to grow at below-average rates. Valuations for stocks are fair and expected returns are positive although overall markets are unlikely to deliver double-digit returns over the next decade. Companies that have solid balance sheets will likely outperform. Recent volatility and general noise in the market can represent a material distraction and may discourage investors. Working with a financial advisor will ensure your portfolio is optimized and continues to meet your needs.

Weekly Summary

May 21
According to the U.S. National Association of Realtors, existing-home sales slipped 0.4% lower to a seasonally adjusted annual rate of 5.19 million units in April from a 5.21 million level in March. Sales are now 4.4% below the 5.43 million-unit pace in April 2018. With the market looking for an increase, these results are weaker than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.K. Confederation of British Industry (CBI), a research and lobby organization, revealed in its Industrial Trends Survey that its monthly order book balance fell 5.0 points to -10.0 in May, following a -5.0 reading in April. The gauge fell to its weakest measure since October 2016 (-6.0). According to the CBI, U.K. factories are now burdened with the greatest stocks of finished goods (+25.0) since May 2009, following the recent increase ahead of the original Brexit deadline. Domestic outlook eased to -1.0, and export orders fell at the fastest rate since July 2016 (-16.0). These results were significantly weaker than market consensus.

May 22
Statistics Canada reported that retail sales jumped in March, rising +1.1% (seasonally adjusted) following February’s upwardly revised +1.0% gain (previously reported as +0.8%). Sales were higher in seven of 11 subsectors, representing 39% of retail trade with gasoline sales (+6.0%) reporting the largest monthly advance. Motor vehicle and parts dealers (-0.7%) recorded the largest decline. Year-over-year sales overall growth stood at +2.6%. These results are above consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

The U.K. Office for National Statistics reported a smaller-than-expected 0.6% advance in its consumer price index (CPI) in April. This was 4.0 percentage points above the 0.2% gain registered in March and pushed the annual growth in CPI to 2.1%, its first reading above the Bank of England’s (BoE) 2.0% medium-term target in 2019. Particularly, the pickup in monthly inflation was driven by the lifting of the government cap on default energy tariffs, i.e., the Office of Gas and Electricity Markets’ (Ofgem) six-month energy price cap, which bolstered the price of electricity (+10.9%) and gas (+9.3%). The year-over-year increase was driven by surging prices in housing and services (+1.4%) and transportation (+2.3%). However, core inflation remained at 1.8% which gives the BoE breathing space to keep rates on hold amid the continuing Brexit impasse.

May 23
The U.S. Department of Labor announced that initial jobless claims totalled 211,000 (seasonally adjusted) in the week ending May 18, a decrease of 1,000 from the previous week's unrevised level of 212,000. The four-week moving average was 220,250, a decrease of 4,750 from the previous week's unrevised average of 225,000. These results are in line with consensus estimates.

Statistics Canada reported that wholesale sales climbed 1.4% in March, a fourth consecutive increase. At the same time, inventories rose 0.4%, a seventh consecutive advance. On a year-over-year basis, overall wholesale sales are now up 2.8% while inventories are up 9.9%. The monthly sales advance was stronger than expected. Activity at the wholesale level can be an indicator of future consumer trends.

Munich’s ifo Institute reported that the ifo Business Climate Index for Germany dropped 1.3 points to 97.9 in May, following a 99.2 reading in April. This was its lowest level since November 2014 and well below market consensus. The gauge of current conditions sank to 100.6 from 103.4, while the business expectations sub-index was unchanged at 95.3. These results signalled that the German economy will likely continue to lack momentum. The ifo Business Climate Index is a closely watched data point of leading indicators in German economic activity.

According to a flash estimate, the IHS Markit Germany Manufacturing PMI ticked down to 44.3 in May, following a 44.4 measure in April. The latest reading came in well below the 50.0 expansion threshold. The data pointed to a fifth month of contraction in the manufacturing sector as new orders fell sharply due to lower demand across the car industry and the effects of customer destocking. Additionally, the data show a third straight monthly decrease in employment in the manufacturing sector as the rate of job losses accelerated to the quickest pace since June 2016. The results were below market consensus while the flash estimate was the second weakest reading in nearly seven years.

Destatis, Germany’s Federal Statistical Office, revealed that the economy advanced 0.4% (Q/Q, seasonally adjusted) in Q1 2019, unrevised from the preliminary flash estimate and after stagnant growth in Q4 2019. The boost in economic growth was mainly supported by consumer spending, which rose the most in nearly eight years. However, the underlying trend of the economy remains weak, and the downturn in manufacturing may deepen as the U.S. delayed imposing tariffs earlier this month by only 180 days on auto imports from the European Union. These final GDP results were in line with market expectations.

May 24
The U.S. Census Bureau announced that durable goods orders fell -2.1% in April, following a downwardly revised +1.7% increase in May (originally reported as +2.7%). Excluding transportation, new orders were flat in April. Excluding defence, new orders decreased -2.5%. Even with the downward revisions to the previous data, these figures are broadly in line with market expectations. Orders for durable goods indicate how busy manufacturers will be in the months to come, as they work to fill those orders.

The U.K. Office for National Statistics reported that retail sales were flat in April, following an upwardly revised 1.2% (seasonally adjusted) advance in March which was comfortably above market consensus. On an annual basis, sales growth slowed sharply to 5.2% from the 6.7% posted in the previous month. Although decelerating, this was still the second-fastest annual growth rate since November 2016 and well above market consensus. Record employment and rising real incomes helped to fortify consumer spending in the wake of the U.K.’s departure from the EU. However, it is unlikely that this data will be given much weight at the BoE’s next monetary policy meeting on June 20.


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