The Playbook – February 10, 2020

February 10, 2020 • Playbook


The Playbook

Weekly Commentary – February 10, 2020

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
February 13 Inflation Rate Y/Y Jan 2020 2.4% 2.3%
February 13 Core Inflation Rate Y/Y Jan 2020 2.3% 2.3%
February 13 Initial Jobless Claims Feb 08, 2020 229k 202k
February 14 Retail Sales Jan 2020 0.4% 0.3%
February 14 Industrial Production Jan 2020 0.2% 0.3%
February 10 Housing Starts Jan 2020 189.0k 197.3k
February 10 Building Permits Dec 2019 5.0% -2.4%
*Source: Trading Economics

Key Earnings Calendar**

February 10: Allergan PLC, Brookfield Infrastructure Partners LP, Gedeon Richter PLC, Restaurant Brands International Inc.
February 11: Daimler AG NA O.N., Dominion Energy Inc., Exelon Corp., Hilton Worldwide Holdings Inc., LYFT Inc., Vale SA
February 12: Cisco Systems Inc., CME Group Inc., CVS Health Corp., Global Payments Inc., NVIDIA Corp., Shopify Inc.
February 13: Airbus Group SE, Alibaba Group Holdings Ltd., Nestle SA, PepsiCo Inc., TC Energy Corp.
February 14: AstraZeneca PLC, Canopy Growth Corp., Enbridge Inc., Eni S.p.A, IGM Financial Inc., Wabco Holdings Inc.
**Source: Seeking Alpha

Market Focus

Canadian and U.S. job markets open 2020 with a bang

Both the U.S. Bureau of Labor Statistics and Statistics Canada reported significant job gains in January. However, both also made material benchmark revisions to prior data. Domestically, the changes went back to January 2017, and in the U.S., the revisions go all the way back to 1994. Regardless of the historic changes, job growth in Canada totalled 34,500 in January, which pushed the total level of employment to a new record high. Additionally, a 35,700 advance in full-time positions was accompanied by a commensurate 1,200 decline in part-time rolls and a 4.2% (Y/Y) gain in average hourly earnings. In the U.S., non-farm payrolls rose by 225,000 which is now a 112th consecutive month of gains. Another advance in the labour force pushed the participation rate to 63.4%, the highest since January 2013. Even though it will take analysts some time to fully digest the historic revisions, the labour markets have started 2020 on the right note on both sides of the border.

North American trade rises to close 2019

The final figures from 2019 show that Canada’s merchandise exports (1.9%) and imports (0.2%) both rose in December. Accordingly, Statistics Canada reported that the deficit narrowed to $369 million for the month, the smallest since an outright surplus ($228 million) was recorded in May 2019. For the year, the deficit totalled $18.3 billion. Similarly, this is also the lowest annual deficit reading since a surplus ($4.7 billion) was posted in 2014. Despite serious international headwinds, Canada’s two-way trade flows rose 0.5% in 2019. In the U.S., the Census Bureau also announced that both imports and exports rose during the final month of the year, leaving the deficit at US$48.9 billion. Nevertheless, despite considerable rhetoric and disruption of international trade, the U.S. trade deficit averaged US$51.4 billion over 2019, only marginally lower than the US$52.3 billion figure recorded in 2018. In either case, these figures are both considerably larger than the US$44.1 billion average monthly deficit seen in the ten-year period following the financial crisis (2010 – 2019).

RBA holds steady but maintains dovish posture

The Reserve Bank of Australia (RBA) held its key cash rate unchanged at a record low 0.75% at its first policy meeting of 2020. The decision follows three 0.25% cuts in 2019, as the bank continues to deal with inflation (1.8% Y/Y) stuck below its 2-3% target range. However, recent developments have added material uncertainty to near-term forecasts. The serious headwinds of the ongoing bushfires and drought have now been further complicated by the spread of the 2019-nCOV coronavirus. RBA Governor Philip Lowe stated that the virus “is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be.” Australia’s attempts to limit the virus’ spread could also dampen tourism and trade, with China as the recipient of nearly a third of Australian exports. Not surprisingly, the RBA noted that it “remains prepared to ease monetary policy further if needed.” The bank’s next monetary policy meeting is scheduled for March 3.

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

February 3
Final figures show that the IHS Markit/BME Germany Manufacturing Purchasing Managers’ Index (PMI) was revised slightly higher to 45.3 (seasonally adjusted) in January (officially reported as 45.2), following a 43.7 reading in December. The latest reading pointed to a thirteenth straight month of contraction in the manufacturing sector; however, the index has now risen in three of the past four months. Order book volumes declined by the least in 15 months, while export sales neared stabilization. In contrast, employment continued to fall sharply at the beginning of 2020. The IHS Markit PMI indexes provide a snapshot of the performance of the manufacturing economy derived from indicators for new orders, output, employment, suppliers’ delivery times and stocks of purchases.

Final figures show that the IHS Markit/CIPS U.K. Manufacturing PMI was revised higher to 50.0 (seasonally adjusted) in January (officially reported as 49.8), following a reading of 47.5 in December and touched the key 50.0 (generally expanding) level for the first time since March 2019. The data show that new orders rebounded slightly despite a continued decline in exports, while employment remained generally unchanged. However, January saw inventories of purchases decline at the fastest pace since May 2013 and, according to the report, “companies linked this to a combination of reducing Brexit safety stocks, efforts to improve cash flow, inventory depletion strategies.”

Final figures show that the IHS Markit Eurozone Manufacturing PMI was revised 0.1 points higher to 47.9 in January. The index has now recorded below the 50.0 (generally expanding) level for 12 straight months, signaling further contraction in factory activity. However, the latest reading was the highest since April 2019. Euro area manufacturing production and new order levels both continued to decline at the start of 2020, although in each case at weaker rates than at the end of 2019. Job losses were also registered for the ninth consecutive month. However, the report stated that “looking ahead to the next 12 months, confidence about the future jumped … to its highest level since August 2018.”

The Institute for Supply Management reported that its PMI climbed higher to a 50.9 reading in January. This is a 3.1-point advance from December’s 47.8 figure and is enough to drive the index back above the key 50.0 (generally expanding) level, after five consecutive months below this benchmark. The reading is above expectations and indicates an acceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending fell 0.2% in December, following an upwardly revised 0.7% gain in November (originally reported as 0.6%). On a year-over-year basis, construction was up 5.0%. The monthly growth figure is below consensus estimates. This result indicates continued mixed results for the construction sector.

February 4
At its first meeting of 2020, the RBA left its key cash rate unchanged at a record low of 0.75%. The policy statement was little changed, reiterating that the outlook for the global economy remains “reasonable.” Moreover, policy-makers made a slight adjustment to their statement, noting that, there have been “signs that the slowdown in global growth … is coming to an end.” The decision comes on the heels of a falling unemployment rate and rising inflation in the final two months of 2019, despite looming threats from ongoing wildfires and a slowdown in China’s economy, Australia’s largest trading partner. RBA Governor Phillip Lowe announced in a statement that the central bank “remains prepared to ease monetary policy further if needed” should any signs of weakness begin to emerge in Australia’s economy.

February 5
Eurostat, the statistical office of the European Union, reported that retail sales in the euro area dropped 1.6% (M/M, seasonally adjusted) in December, following a downwardly revised 0.8% increase in November (originally reported as 1.0%). This was the largest monthly fall in retail trade since March 2008. On a year-over-year basis, retail sales advanced 1.3% in December, slowing from an upwardly revised 2.3% gain in the previous month (originally reported as 2.2%). These results are significantly weaker than market consensus.

Statistics Canada announced that Canada's merchandise imports edged up 0.2% in December, while exports jumped 1.1%. As a result, Canada's merchandise trade deficit with the world narrowed to $370 million in December from $1.2 billion in November. Since the market was looking for a more modest narrowing, these results are stronger than expected. They are a positive sign for overall gross domestic product (GDP) growth.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to US$48.9 billion in December from a revised US$43.7 billion in November. December exports were US$209.6 billion, US$1.6 billion more than November exports. December imports were US$258.5 billion, US$6.8 billion more than November imports. The trade deficit was larger than expected. The weaker trade results will dampen overall GDP growth.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 55.5 reading in January. It was up 0.6 points from the revised 54.90 level registered in December and remained above the key 50.0 (generally expanding) level for a 120th consecutive month. This figure is in line with consensus expectations. This result indicates continued growth, but at a slightly faster rate in the non-manufacturing sector.

February 6
The Australian Bureau of Statistics announced that the country’s exports rose 1.0% in December while imports climbed 2.0%. As a result, Australia’s trade surplus with the world shrank to A$5.22 billion from A$5.51 billion in November. Since the market was looking for a larger surplus in December, these results are weaker than expected. Nevertheless, the surplus will continue to bolster GDP growth.

The U.S. Department of Labor announced that initial jobless claims totalled 202,000 (seasonally adjusted) in the week ending February 1, a decrease of 15,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 217,000. The four-week moving average was 211,750, a decrease of 3,000 from the previous week's revised average. The previous week's average was revised up by 250 to 214,750. These results are stronger than consensus estimates.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 1.4% (annualized) rate during the fourth quarter of 2019 while unit labour costs rose an identical 1.4% on the same basis. These figures are in line with market expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

Destatis, the federal statistical office of Germany, reported that factory orders dropped 2.1% (M/M, price, calendar and seasonally adjusted) in December, following a downwardly revised 0.8% decline in November (originally reported as -1.3%). This was the steepest monthly decline since February 2019. On a year-over-year basis, factory orders plummeted 8.7% (price and calendar adjusted) in December, down from a 6.0% decrease in the previous month. These results are significantly below market consensus.

February 7
Statistics Canada announced that 34,500 jobs were added in January, and the unemployment rate dipped lower by 0.1 percentage points to 5.5%. Despite the recent gains, employment was up just 1.4% (267,700) from 12 months earlier. These results are stronger than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, they are indicative of consumer spending trends.

The U.S. Bureau of Labor Statistics reported that the unemployment rate edged higher by 0.1 percentage points to 3.6% in January, and non-farm payroll employment rose by 225,000. Employment continued to trend up in construction, in health care, and in transportation and warehousing. The employment figures are considerably stronger than expectations while the modest rise in the unemployment rate was generally in line with consensus estimates. This is the most closely followed set of U.S. statistics as they indicate the relative health of the various sectors of the economy and are suggestive of consumer spending.


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