Playbook - July 15, 2019

July 15, 2019 • Playbook

 


The Playbook

Weekly Commentary – July 15, 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
U.S.        
July 16 Retail Sales ex Autos June 19 0.2% 0.5%
July 16 Manufacturing Production June 19 0.3% 0.2%
July 16 Capacity Utilization June 19 78.2% 78.1%
July 17 Building Permits June 19 1.251 M 1.294 M
Canada        
July 17 Inflation Rate (Y/Y) June 19 2.2% 2.4%
July 18 Retail Sales ex Autos May 19 1.5% 0.1%

Key Earnings:
July 15: Charles Schwab Corp., Luby's Inc., ShiftPixy Inc., Sify Technologies Ltd.
July 16: CSX Corp., Johnson & Johnson Inc., Kinder Morgan Inc., United Airlines Holdings Inc.
July 17: Crown Holdings Inc., eBay Inc., Limelight Networks Inc., Textron Inc.
July 18: E*TRADE Financial Corp., Intuitive Surgical Inc., PPG Industries Inc., Snap-On Inc.
July 19: Banco Latinoamericano de Comercio Exterior S.A., Gentex Corp., Schlumberger N.V.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada holds steady amid currency concerns
The Bank of Canada surprised no one as they left interest rates unchanged at the end of their latest policy deliberations. The bank’s key overnight rate has now been stable since a 0.25% tightening move was announced on October 24, 2018. However, the Canadian dollar, which closed 2018 at US$0.733, has now traded up to US$0.766 (on July 4) in the wake of a slew of strong economic reports. Adding to the upward pressure on the currency have been the growing expectations that most of the other major central banks have, or will adopt, easier monetary policy that would include rate cuts, a return to significant quantitative easing, or both. Given the volatile political backdrop, the environment for global trade remains highly uncertain and the recent improvements in Canada’s terms of trade can be traced, at least in part, to the currency. A prolonged, secular gain in the value of the Canadian dollar would put this at even greater risk.

U.S. inflation data yields mixed signals
The U.S. Bureau of Labor Statistics announced that the overall consumer price index (CPI) rose a modest 0.1% in June, leaving the annual inflation rate at 1.6%, down from both 1.8% in May and 2.0% in April. However, the so-called core CPI (excludes volatile food and energy components) rose 0.3% during the month. This is now the sharpest gain since January 2018 and follows four consecutive increases of just 0.1%. On a year-over-year basis, this price measure was up 2.1%. The June disparity was largely due to a 2.3% decline in energy prices during the month, which was led by a 3.6% drop in gasoline prices. Despite the shift in core CPI during June, most analysts contend that this provides little reason for the Federal Reserve to alter its current course and futures markets suggest that a rate cut at the two-day July 30 and 31 meeting appears all but assured.

S&P reaches 3,000, Dow hits 27,000
Both the S&P 500 and Dow Jones Industrial Average (DJIA) closed at record highs on July 11, bolstered by two days of dovish testimony from Federal Reserve Chairman Jerome Powell. U.S. investors cheered the notion that the central bank has room to ease monetary policy and appeared willing to bet on a 50-basis point interest rate cut at the end of the month. The S&P 500’s first look at the 3,000 level and the Dow’s initial move to 27,000 extend the market’s bull run to a record-setting 124 months. The DJIA took 540 days to go from 26,000 to 27,000, while the S&P 500 took 1,779 days to go from 2,000 to 3,000. Since bottoming out at the height of the financial crisis on March 9, 2009, the DJIA has accumulated a 314% gain while the S&P 500 has advanced a cumulative 343%. While the market adage that “bull markets don’t die of old age” remains true, concerns over the seemingly endless spate of trade disputes and the looming U.S. debt ceiling may yet raise some red flags.

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

July 8
Destatis, the federal statistics office of Germany, revealed that Germany’s trade surplus widened to €18.7 billion (calendar and seasonally adjusted) in May, up from an unrevised €17.0 billion in April and its second largest surplus this year. The monthly widening in the adjusted surplus reflected a 1.1% increase in exports to €110.3 billion. The positive figure came after an upwardly revised -3.4% decrease in exports in the previous month and €2.6 billion short of March’s record high. Total monthly imports fell 0.5%, following an upwardly revised -0.9% in the previous month. It was the first back-to-back decline in imports since February-March 2018. On an unadjusted basis, the surplus widened to €20.6 billion (Y/Y), or 3.0% in April. It is unlikely that the final total net exports figure will make a significant contribution to real GDP in the current quarter.

Destatis also reported that monthly output in the manufacturing sector increased by a provisional 0.3% (price, calendar and seasonally adjusted) in May, following a downwardly revised -2.0% slump in April and marginally below market consensus. The monthly gain was attributable to the production of capital goods (2.0%) and consumer goods (1.1%). In contrast, both production in energy (-2.2%) and construction (-2.4%) were the primary detractors of output. Annual growth in industrial production declined -3.7% in May, after a downwardly revised -2.3% in the previous month and above market consensus. Despite the monthly increase, it is likely that the sector will detract from real GDP growth by the end of the quarter.

July 9
The Canada Mortgage and Housing Corporation announced that housing starts totalled 245,657 units (seasonally adjusted annual rate) in June. This is up from the 196,809-unit level in May (originally reported as 202,337) and is now the strongest level seen since November 2017. The gain in housing starts was largely due to a 31% surge in multiple urban starts. These results are well above market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities fell 13.0% to $8.2 billion in May, following a record high of $9.5 billion in April. Increases in six provinces and all three territories were not enough to offset a 49.8% decrease in British Columbia as levels there reversed from the extreme seen in April. On a year-over-year basis, permits are now down 1.9%. These results are weaker than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The Italian National Institute of Statistics (Istat) reported that retail sales in Italy dropped 0.7% in value terms (monthly basis, seasonally adjusted) in May, following an unrevised flat growth in April. This marks the fourth consecutive month of no growth and was significantly below market consensus. Unadjusted annual growth plummeted 1.8% (Y/Y), after posting a strong 4.2% increase in the previous month. Volume sales posted a 0.8% decline in May (on the same basis), their third decline in the last four months. Non-food sales fell 0.6% in May, their third straight period of decline, while food sales slumped 1.1% over the same period. The level of total nominal sales in May equalled its lowest point since December 2016. May’s sales data suggest that the retail sector will likely have a negative contribution to second quarter real GDP growth.

July 10
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 raised borrowing costs by 0.25% on October 24, 2018. The press release that accompanied the announcement noted that inflation data are in line with the bank’s 2.0% target. However, in its updated Monetary Policy Report, the bank made slight adjustments to its GDP projections for 2019 (1.3% from 1.2%) and 2020 (1.9% from 2.1%). Importantly, however, the bank stated that “Canada’s economy is returning to growth around potential” and also noted that exports rebounded in the second quarter and are likely to “grow modestly as foreign demand continues to expand.” The bank’s next policy meeting is September 4. 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.K. Office for National Statistics revealed that the economy expanded 0.3% (M/M, seasonally adjusted) in May, following an unrevised 0.4% contraction in April. The advance was in line with market expectations and marks the economy’s strongest monthly performance in 2019. However, the previously anticipated March 29 Brexit deadline continues to distort the data. Rolling three-month GDP advanced 0.3% (Q/Q) in the three months to May, marking the second consecutive slowing of growth since the end of Q1 2019. These results were above market expectations.

July 11
The U.S. Department of Labor announced that initial jobless claims totalled 209,000 (seasonally adjusted) in the week ending July 6, a decrease of 13,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 222,000. The four-week moving average was 219,250, a decrease of 3,250 from the previous week's revised average. The previous week's average was revised up by 250 to 222,500. These results are somewhat stronger than consensus estimates.

The U.S. Bureau of Labor Statistics reported that the CPI rose 0.1% (seasonally adjusted basis) in June. Over the last 12 months, the index increased 1.6%. These figures are consistent with market expectations of easing inflationary pressures.

Statistics Canada announced that its New Housing Price Index fell 0.1% in in May, after remaining unchanged for three consecutive months. On a year-over-year basis, the index is unchanged. These results are weaker than consensus expectations and suggest no real improvement in net worth for homeowners.

Insee, the national statistics office of France, revealed in its final report that consumer prices increased 0.2% (M/M) in June, following a 0.1% rise in May and in line with market consensus of 0.2%. The annual CPI growth rate was up 1.2% (final reading) in June, matching its provisional estimate and up 0.3 percentage points from a near two-year low in May. As a result, annual core inflation, which excludes public sector prices and the most volatile consumer product prices, and adjusts for tax measures, spiked 0.4 percentage points to stand at 0.9% in June. Although the final inflation data look more positive this month, France’s annual CPI growth still stands well below the European Central Bank’s 2.0% target.

July 12
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.1% (seasonally adjusted) in June. The index increased 1.7% for the 12 months ended June 2019, the smallest year-over-year advance since an identical 1.7% rise in January 2017. These figures match consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

 

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