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The Playbook - March 18, 2019

March 18, 2019 • Playbook

 


The Playbook

Weekly Commentary – March 18, 2019

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy

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
U.S.        
March 19 Factory Orders January 19 0.3% 0.1%
March 21 Initial Jobless Claims March 19 243 k 229 k
March 22 Markit Services PMI Flash March 19 53.1 56.0
March 22 Existing Home Sales February 19 5.00 M 4.94 M
Canada        
March 21 ADP Employment Change February 19 25.0 k 35.4 k
March 22 Retail Sales Y/Y January 19 1.3% 1.7%

Key Earnings:
March 18: CorMedix Inc., Manhattan Bridge Capital Inc., Nevada Gold & Casinos Inc.
March 19: FedEx Corp., Pacific Coast Oil Trust, Tencent Music Entertainment Group
March 20: Cintas Corp., Guess? Inc., General Mills Inc., Herman Miller Inc.
March 21: Canadian Solar Inc., Conagra Brands Inc., Nike Inc., Spirit MTA REIT
March 22: Abtech Holdings Inc., Alliance Media Holdings Inc., Carnival Corp., Tiffany & Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canada’s housing market softens further
Updated figures from Statistics Canada revealed a -0.1% decline in its New Housing Price Index (NHPI) during January. This was the first outright decline in a year and drove the annual growth rate (also -0.1%) into negative territory for the first time since December 2009. Not surprisingly, Canada’s largest housing markets mirrored the national results. The annual decline in new home prices in Toronto/Oshawa stood at -1.5%, a dramatic drop from the +9.9% growth pace seen as recently as April 2017. New home prices in Vancouver are now down -0.3% on a year-over-year basis, down from the +9.1% pace of February 2018. Similarly, the Canada Mortgage and Housing Corporation (CMHC) announced that housing starts in February had fallen for a third consecutive month to stand at their lowest level (173,153 units) since December 2015. Starts fell in both Ontario (-21.8%) and British Columbia (-8.6%) during the month. Given the recent softening of the Bank of Canada’s commentary, most analysts now look for no change in interest rates again at the next policy window on April 24.

U.S. retail spending edges higher to start 2019
The U.S. Census Bureau reported that retail and food services sales rose 0.2% in January. While this was a positive development, it comes on the heels of two straight monthly declines and substantial downward revisions (from -1.2% to -1.6%) to December’s already weak results. The scale of the downward revisions took the dollar level of sales in December to its lowest point since April of 2018. The changes also lowered quarterly sales growth to just 1.0% (annualized) from 1.6%, during the fourth quarter of 2018. Still, there was a bright spot in the report. The so-called “core” retail sales (excludes automobiles, gasoline, building materials and food services) recorded a much stronger rebound (+1.1%) in January after a downwardly revised 2.3% plunge in December. This subset of retail sales closely corresponds with the consumer spending component of GDP and the improvement in January may provide some momentum for the balance of the first quarter.

Chinese economic slowdown broadens
China’s National Bureau of Statistics reported that the country’s retail sales rose a combined 8.2% (year-over-year) during January and February. This was the same pace as December. However, this appeared to be the lone bright spot amid an otherwise less optimistic mix of economic reports. Industrial production rose 5.3% (on the same basis) over the same period, but this is now the slowest pace since February 2002. The moderation in business activities also seems to have taken a toll on the job market as February’s unemployment rate rose to 5.3%, the highest rate since February 2017. Further, the worsening jobless rate will likely exacerbate the current slowdown in land and property sales. In addition to the domestic economic issues, ongoing uncertainty over developments in international trade will also continue to weigh on policymakers. Analysts suggest that, going forward, a more accommodative stance on monetary policy is likely.

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

March 11
The U.S. Census Bureau announced that retail and food services sales were up 0.2% (seasonally adjusted) for the month of January and were 2.3% above January 2018 levels. The December decline was revised downward from -1.2% to -1.6%. Excluding autos, sales in January were up 0.9% during the month and up 2.8% on a year-over-year basis. Given the scale of the revisions, these figures are generally in line with consensus expectations. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

Destatis, the Federal Statistical Office of Germany, reported that the country’s trade surplus decreased to €14.5 billion (unadjusted) in January compared to the revised €17.2 billion in January 2018. On a year-over-year basis, exports grew 1.7% while imports grew by a much stronger 5.0% in January. The slowdown in world business and the impact of trade tensions have seen the trade surplus shrink by almost a fifth from the highs recorded in 2017.

Destatis also reported that Germany’s industrial production unexpectedly fell 0.8% (month-over-month) in January, following an upwardly revised 0.8% increase in November 2018. On a year-over-year basis, it declined by 3.3% in January, following a downwardly revised 2.7% fall in the previous month. Despite a solid 3.6% rise for energy output and a 0.2% increase in construction, these gains failed to offset a 9.2% slump in the automobile industry. Industrial production has fallen in six of the last eight months. This report was significantly weaker than the market expectations.

March 12
The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.2% (seasonally adjusted basis) in February after being unchanged in January. Over the last 12 months, the index increased 1.5%. These results matched consensus expectations. These figures are consistent with the U.S. Federal Reserve's expectations of only moderate inflationary pressures.

The U.K. Office for National Statistics reported that, the economy bounced back in January with a 0.5% (month-over-month) gain in GDP, following a 0.4% decline in December. This was the biggest single-month increase since December 2016 and came amid a rebound in services, production, manufacturing and construction. On a year-over-year basis, GDP growth stood at 1.4%, up from 1.0% in December. Even though these results are stronger than expected, Bank of England projections suggest that even if the U.K. pulls off a last-minute deal to smooth the Brexit, Britain’s economy looks set for its weakest annual growth pace in 10 years.

The U.K. Office for National Statistics also announced that the country’s international trade deficit in goods and services widened to £3.8 billion (seasonally adjusted, monthly basis) in January, following an upwardly revised £3.5 billion in the previous month. Exports rose 2.3% (month-over-month) to a record high of £54.7 billion and imports jumped 2.8%, also setting an all-time high of £58.5 billion in January. The trade deficit was considerably larger than market expectations.

March 13
The U.S. Census Bureau announced that durable goods orders increased 0.4% in January, following a downwardly revised 1.3% increase in December (originally reported as 1.2%). Excluding transportation, new orders decreased 0.1% in January. Excluding defence, new orders increased 0.7%. With the market looking for a reversal, these figures are considerably stronger than expected. Orders for durable goods indicate how busy manufacturers will be in the months to come, as they work to fill those orders.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) edged up 0.1% (seasonally adjusted) in February. The index increased 1.9% for the 12 months ended February 2019, the smallest year-over-year advance since June 2017. These figures are marginally lower than consensus estimates. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Eurostat, the statistical office of the European Union, reported that industrial production in the euro area expanded 1.4% (seasonally adjusted) in January, following a 0.9% decline in the previous month. The annual growth rate which stood at -4.2% in December was reported as -1.1% in January. The rebound was led by energy (+2.4%), non-durable consumer goods (+2.0%) and consumer durables (+1.1%). Despite these stronger-than-expected results, eurozone industrial production has still fallen in five of the last eight months.

The Research and Statistics Department of the Bank of Japan announced that its PPI increased by 0.8% (annual basis) in February, climbing from a 0.6% increase in the previous month. On a month-over-month basis, producer prices rose 0.2%, after falling 0.6% in January. The uptick was mainly driven by prices for petroleum and coal products (-2.1%). This report was in line with the consensus forecast.

March 14
The U.S. Department of Labor announced that initial jobless claims totalled 229,000 (seasonally adjusted) in the week ending March 9, an increase of 6,000 from the previous week's unrevised level of 223,000. The four-week moving average was 223,750, a decrease of 2,500 from the previous week's unrevised average of 226,250. These results are in line with consensus estimates.

Statistics Canada announced that its NHPI fell 0.1% in January, following five consecutive months of unchanged prices. Mortgage rate increases in 2018, along with tighter mortgage regulations, likely contributed to the flatness observed across Canada. On a year-over-year basis, the index is now in negative territory, down -0.1%. This is the first annual decline since the financial crisis in December 2009. These results are weaker than consensus expectations and suggest an erosion of net worth for homeowners.

China’s National Bureau of Statistics reported that, on a year-over-year basis, Chinese industrial production rose 5.3% in January and February, combined, down from the 5.7% reading in December. On a month-over-month basis, industrial production grew 0.43% in February after increasing 0.49% in the previous month. The overall weakening was mainly driven by softness in the mining sector as growth in the first two months slipped to a mere 0.3% from 3.6%. Utilities also contributed to the softer performance, slowing to 6.8% from 9.6%. This report was weaker than expected and showed the slowest pace for China’s industrial production in 17 years.

March 15
Statistics Canada reported that manufacturing sales rose 1.0% in December, the first monthly gain since September. In line with the monthly advance, sales on a year-over-year basis are now up 4.4%. This report is much stronger than the market consensus. These data are closely watched as manufacturing can create high-value employment and it has been one of the slowest sectors to recover from the 2008-2009 recession.

Eurostat, the statistical office of the European Union, reported that consumer prices in the euro area advanced 0.3% in February (monthly basis), following a -0.1% decrease in January. On a year-over-year basis, the consumer price index (CPI) was up 1.0 percentage points to 1.5% in February, unchanged from the preliminary estimate. This was the first increase in the annual rate in fourth months and equated to its second weakest yield since April 2018. Both the monthly and annual figures were in line with market expectations. The broader annual underlying harmonized index of consumer prices (HICP) (ex-energy, food, alcohol and tobacco) decreased 1.0 percentage points to 1.0% and has continued to remain stable around this level. Despite the European Central Bank’s (ECB) latest monetary statement, it is unclear whether the new policies would be sufficient to push prices higher at a sustainable rate.

At its latest policy window, the Bank of Japan kept its key short-term interest rate at -0.1% in February, unchanged from the policy setting in the previous month. It was the same level since early 2016 and in line with market expectations. The bank also kept its target for the 10-year Japanese government bond yield at around 0.0%. It maintained its headline assessment for Japan’s economy as “expanding moderately,” although exports and industrial production have been affected by the slowdown in overseas economies.

The U.S. Federal Reserve announced that industrial production edged up 0.1% in February after declining 0.4% in January. On a year-over-year basis, industrial production was reported to have gained 3.5%. Capacity utilization for total industry dipped lower to 78.2% from 78.3% in January but was up from 77.2% a year earlier. These results are weaker than expected. The nominal improvement in production is unlikely to be reflected as a material gain in real economic output in the quarterly GDP figures.

 

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