The Playbook – December 9, 2019

December 09, 2019 • Playbook


The Playbook

Weekly Commentary – December 9, 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
  Toshi K. Okada, B.MOS
Analyst, 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
December 10 Nonfarm Productivity Q/Q Q3 2019 -0.3% 2.5%
December 11 Inflation Rate Nov 2019 0.1% 0.4%
December 11 Inflation Rate Y/Y Nov 2019 1.9% 1.8%
December 11 Core Inflation Rate Nov 2019 0.2% 0.2%
December 11 Core Inflation Rate Y/Y Nov 2019 2.3% 2.3%
December 12 Initial Jobless Claims Dec 7, 2019 211k 203k
December 13 Retail Sales Nov 2019 0.3% 0.3%
December 9 Housing Starts Nov 2019 219k 202k
December 9 Building Permits Oct 2019 4.0% -6.5%
*Source: Trading Economics

Key Earnings Calendar**

December 9: Casey's General Stores Inc., Chewy Inc., Thor Industries Inc., Toll Brothers Inc., Vail Resorts Inc.
December 10: Ashtead Group PLC, AutoZone Inc., Cantel Medical Corp., HD Supply Holdings Inc.
December 11: Inditex SA, Lululemon Athletica Inc., Nordson Inc., North West Company Inc., Pivotal Software Inc.
December 12: Adobe Systems Inc., Broadcom Inc., Ciena Corp., Costco Wholesale Corp., Empire Company Inc.
December 13: Hudson's Bay Company., INTL FCStone Inc., Urstadt Biddle Properties Inc.
**Source: Seeking Alpha

Market Focus

Bank of Canada closes 2019 without a move

During much of the past 12 months, market expectations for Canadian monetary policy have been scattered. A Federal Reserve (Fed) rate hike on December 19, 2018 was the ninth of the tightening cycle that looked likely to be extend into the new year. The Bank of Canada appeared to be on the same page with five hikes of its own, the last occurring on October 24, 2018. However, the S&P 500 nearly stepped into bear market territory with a 19.8% index loss at the end of 2018. Similarly, the S&P/TSX had given up 16.8% by Christmas eve. Underlying economic growth also provided a shifting backdrop with U.S. gross domestic product (GDP) accelerating to 3.1% in first quarter of 2019 and then cooling to 2.0% in the second. Domestically, GDP swung from 0.8% in the first quarter to 3.5% in the second. Throw in the still on-going trade wars and three Fed interest rate cuts during 2019 and the Bank of Canada had clearly been dealt a confusing hand. Still, once the dust had settled after their final policy meeting of 2019, administered interest rates were unchanged from the October 24, 2018 level.

North American trade deficits narrow - slightly

Updated figures from Statistics Canada revealed a modest narrowing of the merchandise trade deficit from $1.2 billion in September to $1.1 billion in October. On a positive note, the narrowing came on the back of monthly gains in both exports (0.8%) and imports (0.5%). Still, despite the continued weakness in the Canadian dollar, ongoing trade issues left total exports down 5.2% from the high recorded in May of 2019. Running counter, the U.S. trade deficit narrowed as a result of declines in both exports (0.2%) and imports (1.7%). The overall deficit in October stood at US$47.2 billion, down from US$51.1 billion in September. This was the first time in sixteen months that the deficit was below the US$50.0 billion mark and was the lowest since May 2018. In this release, the politically sensitive trade deficit with China was reported to have decreased to US$77.3 billion for the third quarter. Exports edged marginally higher while imports declined by US$2.6 billion. These results may fuel addition rhetoric from the White House in its position on the U.S.-China trade spat.

U.S. and Canadian job markets diverge again in November

The U.S. Bureau of Labor statistics surprised the market by announcing a 266,000 gain in non-farm payrolls during November, the strongest advance since January and a record 110th consecutive monthly gain. The gain was sufficient to drive the unemployment rate back to the 3.5% cyclical low recorded in September, the lowest since December 1969. Wage growth remained firm standing at 3.1% when compared to November 2018. Statistics Canada’s surprise was far less encouraging as 71,200 jobs were lost in November, and the unemployment rate rose by 0.4 percentage points to 5.9%. This was the largest single-month job loss since January 2009 (124,800), during the height of the last recession. Job losses were evenly split as full-time jobs fell by 38,400, while part-time employment dropped by 32,800. In line with the back-to-back declines in employment, the annual pace of job growth slipped to 1.6% (292,900) from 2.5% just three months earlier. The weakness in the Canadian job market will raise questions regarding the strength of the underlying economy in the fourth quarter of 2019.

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

December 2
The IHS Markit/BME Germany Manufacturing Purchasing Managers’ Index (PMI) edged higher to 44.1 (seasonally adjusted) in November, following a flash estimate of 43.8 and compared to October’s final reading of 42.1. The latest reading is the highest since June but marks the index’s 11th straight print below the 50.0 expansion threshold. The survey revealed that manufacturing output fell for the 10th consecutive month in November, which “marked the longest sequence of decline since 2008-09.” However, the data showed a further recovery of manufacturers’ output expectations from a “series record-low in August” and that sentiment was in positive territory for the first time since June. Despite overall weakness in the sector, the survey’s results are marginally stronger than market consensus.

The IHS Markit Eurozone Manufacturing PMI was revised higher to 46.9 (seasonally adjusted) in November, following a flash estimate of 46.6 and compared to October’s reading of 45.9. The latest reading pointed to the 10th consecutive print below the 50.0 expansion threshold, albeit at the slowest rate in three months. Of the eight countries covered by the survey, only Greece and France posted manufacturing expansion on a month-over-month basis in November. Meanwhile, Germany remained at the bottom of the group, despite posting its best PMI reading since June. Importantly, however, the report stated that “spare capacity remained prevalent in the manufacturing economy during November, as signalled by a 15th successive monthly reduction in work outstanding.” The overall euro area PMI results are slightly above market consensus.

The U.S.-based Institute for Supply Management announced that its Manufacturing PMI recorded a 48.1 reading in November. It was down 0.2 points from the 48.3 level registered in October and remained below the key 50.0 (generally expanding) level for a fourth consecutive month, amid a steeper decline in new orders and employment. This figure is weaker than market consensus expectations.

December 4
The Australian Bureau of Statistics announced that, real GDP expended by 0.4% (Q/Q) in the third quarter, after an upwardly revised 0.6% in the second quarter (originally reported as 0.5%). Year-over-year growth was reported at 1.7%, remaining below trend but revealing improvement on the previous quarter's 10-year low (1.6% revised higher from 1.4%). Consumer demand remained subdued with material concerns for the household sector limiting spending gains. These results are weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada announced that labour productivity of Canadian businesses grew 0.2% in the third quarter of 2019, after edging 0.1% higher in the previous quarter. Labour costs per unit of output in Canadian businesses rose 1.0% in the third quarter, after increasing 0.6% in the second quarter. These figures are considerably weaker than expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

The Bank of Canada announced that it was, once again, holding the target for its key overnight interest rate steady at 1.75%. The bank rate was left unchanged at 2.00% and the deposit rate remains at 1.50%. The bank last changed borrowing costs by raising rates 0.25% on October 24, 2018. The press release that accompanied the announcement appeared less dovish, pointing to a stabilizing global economy and both strong wages and increased investment spending domestically. With the U.S. Federal Reserve widely expected to hold interest rates steady at their December 10 to 11 meeting, the current divergence in Canadian-U.S. rates is expected to remain intact. The Bank of Canada’s first policy meeting of 2020 is scheduled January 22. The decision to leave interest rates unchanged was in line with market expectations. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

The U.S. Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 53.9 reading in November. It was down 0.8 points from the 54.7 level registered in October but remained above the key 50.0 (generally expanding) level for a 118th consecutive month. This figure is below consensus expectations. This result indicates continued growth, but at a slightly slower rate in the non-manufacturing sector.

December 5
Destatis, Germany’s federal statistical office, reported that the country’s manufacturing orders declined 0.4% in October. This followed an upwardly revised 1.5% increase in September (originally reported as 1.3%). On a year-over-year basis, orders are now up 5.5% compared to October 2018. With the market looking for another monthly gain, these results are weaker than expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

The U.S. Department of Labor announced that initial jobless claims totalled 203,000 (seasonally adjusted) in the week ending November 30, a decrease of 10,000 from the previous week's unrevised level of 213,000. The four-week moving average was 217,750, a decrease of 2,000 from the previous week's unrevised average of 219,750. These results are stronger than consensus estimates.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to US$47.2 billion in October from a downwardly revised $51.1 billion in September. October exports were $207.1 billion, $0.4 billion less than September exports. October imports were $254.3 billion, $4.3 billion less than September imports. The trade deficit was smaller than expected. The narrower trade deficit will help raise overall GDP growth.

Statistics Canada announced that Canada's merchandise imports rose 0.5% in October, while exports rose 0.8%. As a result, Canada's merchandise trade deficit with the world narrowed from $1.2 billion in September to $1.1 billion in October. Since the market was looking for a widening of the deficit in October, these results are stronger than expected. They are a positive sign for overall GDP growth.

The U.S. Census Bureau reported that factory orders increased 0.3% in October. This followed a downwardly revised 0.8% decline in September (originally reported as -0.6%). Excluding transportation, new orders rose 0.2% in October. These results matched consensus expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

December 6
Statistics Canada announced that 71,200 jobs were lost in November, and the unemployment rate rose by 0.4 percentage points to 5.9%. This was the largest single-month job loss since January 2009, during the height of the last recession. In line with the back-to-back declines in employment, annual job growth slipped to 1.6% (292,900) from 2.5% just three months earlier. These results are well below market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

The U.S. Bureau of Labor Statistics reported that the unemployment rate edged down by 0.1 percentage points to 3.5% in November, its lowest level since December 1969. At the same, time non-farm payroll employment rose by 266,000. Notable job gains occurred in health care and in professional and technical services. This report is considerably 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.


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