The Playbook – February 3, 2020

February 03, 2020 • Playbook


The Playbook

Weekly Commentary – February 3, 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 3 ISM Manufacturing PMI Jan 2020 49.1 47.2
February 4 Factory Orders Dec 2019 -0.5% -0.7%
February 5 Balance of Trade Dec 2019 -$49.0B -$43.1B
February 6 Nonfarm Productivity Q/Q Prel Q4 2019 1.5% -0.2%
February 6 Initial Jobless Claims Feb 01, 2020 219k 216k
February 7 Nonfarm Payrolls Jan 2020 148k 139k
February 7 Unemployment Rate Jan 2020 3.6% 3.5%
February 5 Balance of Trade Dec 2019 -$1.09B $0.50B
February 7 Unemployment Rate Jan 2020 5.9% 5.6%
*Source: Trading Economics

Key Earnings Calendar**

February 3: Alphabet Inc., BP PLC, Sony Corp., Mitsubishi Electric Corp., Panasonic Corp., Tele2 AB
February 3: Alpha Laval AB, Carlsberg A/S, Chubb Ltd., Fiserv Inc., Gilead Sciences Inc., Walt Disney Co.
February 5: GlaxoSmithKline PLC, Merck & Company Inc., Novo Nordisk A/S, Qualcomm Inc., Suncor Energy Inc.
February 6: Bristol-Myers Squibb Co., L'Oreal Co., Philip Morris International Inc., S&P Global Inc., Toyota Motor Corp.
February 7: AbbVie Inc., CAE Inc., DSV Panalpina A/S, Ricoh Co. Ltd., Toromont Industries Ltd.
**Source: Seeking Alpha

Headline News

The World Health Organization has declared the prevailing coronavirus situation a “Global Emergency.” While the spread of 2019-nCOV is still in its early stages, it is likely to unfold in a manner that is like the spread of SARS in 2002-3. Given global improvements in medical technology, there is likely to be improved assessment and evaluation of the virus. However, with the dramatic increase in international travel and the relatively long incubation period, the migration of the virus will be more difficult to control, as has already been seen. Assessing the longer-term implications, are challenging at this early juncture. The number of cases has eclipsed the SARS virus more quickly, but the mortality rate appears to be considerably lower. From an economic/market perspective, the shut-down of activity in various parts of China will be damaging for their GDP. The secondary effects will be felt by international importers and exporters. Diminished trade and passenger movements will hurt transport industries until this subsides. Usually, the negative implications for economic growth from such an event are brief, and then eventually reversed. The markets will do their best to forecast this – with mixed results.

Market Focus

Canadian economy inches forward

The latest figures from Statistics Canada revealed a modest 0.1% increase in GDP by industry in November. The gain largely offset the 0.1% contraction in October. Due to cold weather in the western provinces, utilities led the 11 gaining sub-sectors with a sharp 2.1% advance in November. Meanwhile, mining, quarrying, and oil and gas extraction (-1.4%) led five declining sub-sectors. Four subsectors reported no monthly change. As well, StatsCan revised its GDP data going back to January 2019 in this release. As a result, year-over-year growth is now pegged at 1.5%. In addition, in the absence of a material improvement in growth in December, fourth quarter output will be well below the annualized 1.3% reported for the third quarter of 2019.

U.S. GDP and interest rates steady in early 2020

The U.S. Bureau of Economic Analysis’ release of the “advance estimate” of gross domestic product (GDP) results for the fourth quarter revealed a 2.1% (annualized) growth rate, matching the third quarter pace. The moderation in the second half of the year left 2019 with overall economic growth of 2.3%. This is well down from the 2.9% figure in 2018 and is now the slowest full-year pace since 2016 (1.6%). Still, strength in the domestic labour market, and the resultant consumer spending, remained the key driver for economic expansion. As a percentage of overall activity, personal consumption stood at 69.8%, matching the record set in the prior quarter. The robust job market was, once again, specifically mentioned in the press release that accompanied the Federal Reserve’s (Fed) latest monetary policy announcement. Interest rates were left unchanged at the first meeting of 2020 and the Fed indicated that rates were consistent with its longer-term objectives. However, the evolving global coronavirus situation has introduced another variable, with economic implications that will take some time to fully evaluate.

BoE holds steady, U.K. Brexits

Mark Carney’s final policy meeting as Governor of the Bank of England (BoE), on the very eve of Brexit, resulted in a 7-2 vote to leave its official bank rate steady at 0.75%. This was the thirteenth straight meeting with no change to interest rates. Concurrently, the bank released its updated Monetary Policy Report and the new GDP forecast anticipates the slowest pace of economic growth since the global financial crisis. Growth projections were revised downward for 2020 (to 0.75% from 1.25%), 2021 (1.50% from 1.75%) and 2022 (1.75% from 2.00%). The report also forecasts that inflation will not reach the BoE’s 2.00% target until Q1 2021. Importantly, it emphasized that the updated forecast assumes “an immediate but orderly move … to a deep free trade agreement” with the European trade bloc. Further, the bank’s decision comes after a slew of weak underlying economic data that may be offset by a post-Brexit bounce. However, should the economy weaken further, or if trade talks with the EU falter, the decision to utilize the bank’s monetary policy toolkit will fall on Carney’s successor, Andrew Bailey.

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

January 27
Germany’s ifo Business Climate Index fell to 95.9 (seasonally adjusted) in January, down from 96.3 in December. At the same time, the ifo current conditions gauge edged up 0.3 points to 99.1 in December, registering its highest reading since July 2019. The ifo business expectations gauge dropped 1.0 points to 92.9, after posting three consecutive months of gains. The overall ifo survey figures are weaker than market consensus expectations. The headline ifo Business Climate Index is used as a forward-looking indicator of morale in German industry.

The U.S. Census Bureau announced that new-home sales totalled 694,000 units (seasonally adjusted annual rate) in December 2019. This is 0.4% below the downwardly revised November rate of 697,000 units but is 23.0% above the December 2018 level of 564,000 units. These results are weaker than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

January 28
The U.S. Census Bureau announced that durable goods orders jumped 2.4% in December, partially erasing a downwardly revised 3.1% decline in November (originally reported as -2.0%). Excluding transportation, new orders decreased 0.1% in December. Excluding defence, new orders decreased 2.5%. Even with the downward revisions to the previous data, the headline results are stronger than 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 National Australia Bank (NAB) reported that its business confidence survey fell 2.0 points to -2.0 in December, following a 0.0 reading in November and registering its lowest mark since July 2013. The results are still well below its long-run average of 6.0%. Meantime, the report indicated that business conditions edged lower by 1.0 points to 3.0 on the month, amid a slowdown in sales and lower profitability levels. The overall survey’s results are weaker than market consensus forecasts. The survey measures the expectations of business conditions for the following month.

The U.K. Confederation of British Industry’s (CBI) distributive trades survey revealed that monthly retail sales volumes and orders were flat for the third consecutive month in January. The CBI stated that sales are “expected to remain below seasonal norms in the year to February.” The survey underscored growing stockpiles in relation to sales, which rose above the long-run average, and that orders placed with suppliers continued to fall at an accelerating pace. The overall survey’s results are significantly below market consensus.

January 29
Germany’s Gfk Consumer Climate Index edged up 0.2 points to 9.9 heading into February, following an upwardly revised 9.7 level in January (originally reported as 9.6). This was the highest reading since June 2019 and shows improvement in German consumer sentiment. The survey’s sub-index measuring economic expectations gained 0.7 points to -3.7, below its long-term average of 0.0. Additionally, the sub-index measuring personal income expectations rose 9.6 points to 44.6. The survey’s overall results are much stronger than market consensus forecasts. Gfk SE (Growth from Knowledge) is Germany’s largest market research institute, and its consumer climate survey measures German consumers’ assessments of current economic conditions.

The U.S. Federal Reserve (Fed) held interest rates steady following its latest two-day monetary policy meeting, the first meeting of 2020. The Fed cut interest rates by 0.25% three times in 2019 (July 31, September 18, and October 30), but held steady in December. The target range for the federal funds remains at 1.50% to 1.75%, the lowest since June 12, 2018. The press release that accompanied the announcement continued to underscore the strength of both the U.S. job market and the broader economy. At the same time, the release continued to highlight relatively soft inflationary pressures. The announcement of no changes to interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economies. Its lead is often followed by policymakers in other countries.

January 30
The U.S. Department of Labor announced that initial jobless claims totalled 216,000 (seasonally adjusted) in the week ending January 25, a decrease of 7,000 from the previous week's revised level. The previous week's level was revised up by 12,000 to 223,000. The four-week moving average was 214,500, a decrease of 1,750 from the previous week's revised average. The previous week's average was revised up by 3,000 to 216,250. These results are in line with consensus estimates.

The U.S. Bureau of Economic Analysis announced that real gross domestic product grew at an annual rate of 2.1% in the fourth quarter of 2019. This is the “advance estimate” prepared with preliminary data and is often subject to substantial revision. In the third quarter, real GDP increased an identical 2.1% on the same basis. These results matched consensus expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that average weekly earnings declined 0.3% to $1,041.79 in November, partly offsetting a 0.5% increase in October. On a year-over-year basis, average weekly earnings rose 3.1%, down from 3.6% in the previous month. Given the drop in employment previously reported for November, these results are in line with expectations. As this indicator measures growth in income, it can reveal trends in consumer spending.

The Bank of England (BoE) held its key bank rate steady at 0.75% following its latest monetary policy meeting, the first window of 2020 and Mark Carney’s last as the central bank’s governor. The official bank rate has remained at this level since the BoE last raised rates by 0.25% in August 2018. The Monetary Policy Committee’s (MPC) final vote to leave rates unchanged stood at 7-2, with policymakers taking a wait-and-see approach as the U.K. prepares to depart from the European Union. The two dissenting members called for a 0.25% rate cut, marking the third straight month that these MPC officials have voted to lower rates. The press release accompanying the announcement continued to underscore weak economic growth in 2019, with output “expected to be flat” in Q4 2019. At the same time, the release continued to highlight weak inflationary pressures and a deceleration in wage growth. The bank’s next policy meeting is scheduled for March 26.

Destatis, the federal statistics office of Germany, revealed in a preliminary estimate that consumer prices decelerated 0.6% (M/M) in January, following a 0.5% advance in December. This is the third time that monthly consumer price index (CPI) growth slowed since August. On a year-over-year basis, CPI inflation rose 1.7% (Y/Y) in January, up from 1.5% in the previous month and marking the highest annual rate of inflation since July. The overall figures are above market consensus, but inflationary pressures continue to remain subdued.

Destatis also reported that the number of people out of work unexpectedly fell by 2,000 to 2.28 million in January, after an 8,000 rise in December and holding the unemployment rate steady at a near-record low at 5.0%. These results are stronger than market consensus and prove Germany’s overall labour has remained robust. The employment data reflect the strength of the broader economy and individual sectors.

Eurostat, the statistical office of the European Union, revealed that the unemployment rate in the euro area edged lower by 0.1 percentage points to 7.4% (M/M, seasonally adjusted) in December, stronger than market consensus and below the 7.5% level recorded in November. This is the lowest unemployment rate registered in the euro area since March 2008. Additionally, the unemployment rate in the European Union (EU28) also fell by 0.1 percentage points to 6.2% (on the same basis) in December, the lowest level registered in the EU28 since monthly records began in January 2000. Interestingly however, the labour market seems to be performing relatively well in the face of the euro area’s sluggish economic growth.

The European Commission (EC) reported that its Business Climate Indicator (BCI) for the euro area ticked up 0.09 points to -0.23 (seasonally adjusted) in December, following a revised reading of -0.32 in December (officially reported as -0.25) and slightly missing market consensus forecasts. At the same time, the EC’s Economic Sentiment Indicator (ESI) jumped 1.5 points to 102.8 (on the same basis) on the month, its highest level since August and beating market consensus forecasts.

January 31
Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.1% in November, essentially reversing the 0.1% decline reported for October. With this data release, StatsCan revised GDP figures going back to January 2019. Goods output and services output recorded identical 0.1% gains during the month. With the revisions, GDP growth stands at 1.5% on a year-over-year basis. With the market looking for flat results, the headline figure is marginally stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada also reported that its Industrial Product Price Index (IPPI) rose 0.1% and its Raw Materials Price Index (RMPI) rose 2.8% in December. On a year-over-year basis, the indexes are up 0.3% and 7.9%, respectively. Higher prices for metals drove the IPPI higher while energy products exerted the greatest influence on the RMPI during the month. These figures are higher than expected. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.2% in December. Personal consumption expenditures (PCE) increased 0.3%. Based on revised figures, both personal income and PCE increased 0.4% in November. While income figures for December were below expectations, spending results were in line with consensus estimates. Income and spending patterns of consumers are critical factors in the health of the broader economy.


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