Playbook - July 29, 2019

July 29, 2019 • Playbook


The Playbook

Weekly Commentary – July 29, 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
July 30 Personal Income June 19 0.3% 0.5%
July 31 ADP Employment Change July 19 135 k 102 k
August 1 ISM Manufacturing PMI July 19 51.1 51.7
August 2 Balance of Trade June 19 -$49.0B -$55.5B
July 31 PPI June 19 0.9% 0.1%
August 1 Markit Manufacturing PMI July 19 49.5 49.2

Key Earnings:
July 29: Baidu Inc., Mercury General Corp., ONE Gas Inc., Trinity Biotech PLC
July 30: Ares Capital Corp., Apple Inc., Procter & Gamble Co., Sprint Corp.
July 31: ACCO Brands Corp., General Electric Co., Molson Coors Brewing Co.
August 1: Gulfport Energy Corp., Hamilton Beach Brands Holding Co., Kellogg Co.
August 2: PNM Resources Inc., Sealed Air Corp., Vistra Energy Corp., WP Carey Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

U.S. shows resilience in the second quarter
The first look at second quarter gross domestic product (GDP) data from the U.S. Bureau of Economic Analysis revealed a 2.1% annualized gain on the heels of the first quarter’s 3.1% growth pace. Even though this is the “advance” reading and will likely be revised, the underlying figures revealed surprising strength even though the economy was buffeted by trade headwinds, a slowdown in global activity and a partial unwinding of inventory accumulation. Once again, it was the American consumer to the rescue as strong labour markets allowed personal consumption expenditure to post a solid 4.3% annualized advance, the strongest showing since the final quarter of 2017. While there is no doubt that the data reveal a moderation in overall activity, fears that that the U.S. economy was perilously close to a recession appear unfounded. The strength of this report will renew analyst speculation on the size of the rate cut that many are assuming will be delivered by the Federal Reserve at its July 30 to 31 meeting.

Boris Johnson replaces May as PM, but Brexit uncertainties remain
On July 23, Boris Johnson was announced as the winner of the Conservative party’s leadership race, making him the U.K.’s incumbent Prime Minister. Occasionally a controversial figure, Johnson has been critical of U.S. President Donald Trump in the past. However, their relationship has improved to the point where President Trump tweeted “Congratulations to Boris Johnson on becoming the new Prime Minister of the United Kingdom. He will be great!” Still, any political honeymoon will be short lived as the nation’s focus will return squarely to Brexit. Previously a vocal supporter of Brexit, Johnson has recently fanned the flames of uncertainty by stating that the U.K. must leave the European Union (EU) by the October 31 deadline “do or die, come what may.” Most analysts view a “no-deal” Brexit as being the worst-case scenario, allowing for no transition period for businesses with operations deeply integrated within the trading bloc.

ECB signals rate cut, quantitative easing
The European Central Bank (ECB) signalled on July 25 that it was prepared to increase monetary support for the euro area with potentially lower interest rates and “new net asset purchases.” At its latest policy window, the ECB met expectations by leaving its benchmark refinancing rate unchanged at 0.00%. The deposit rate was held at -0.40% and the rate on the marginal lending facility remained at 0.25%. ECB President Mario Draghi and the Governing Council noted that, borrowing costs were expected to remain at their current or “lower levels at least through the first half of 2020.” This in turn may allow the deposit rate to be reduced below its record low of -0.40%. In addition, the announcement sent a strong signal that a renewed asset purchase program will commence, reaffirming its “commitment to symmetry” with the inflation target. The bank noted that it “stands ready to adjust” its instruments to ensure the convergence of inflation to its target “below, but close to, 2% over the medium term” and will likely open its tool kit should adverse economic data warrant. Economists suggest that a 10-basis point cut in the deposit rate should be anticipated in September 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

July 22
Statistics Canada reported that wholesale sales fell 1.8% in May, following five consecutive monthly increases. At the same time, inventories rose 1.1% during the month, a ninth consecutive advance. On a year-over-year basis, overall wholesale sales are now up 1.2% while inventories are up 9.1%. These results are weaker than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

July 23
The U.K. Confederation of British Industry Business Optimism Index plunged 19 points to -32 in the quarter to July 2019. The survey showed that optimism fell at the fastest pace since the three months to July 2016. According to the survey, only 10% of firms stated they were more optimistic about the general business situation than three months ago, while 42% of businesses claimed they were less optimistic. The press release also stated that “investment spending plans weakened again” and both new domestic and export orders fell at their fastest respective paces since the global financial crisis. The overall results were significantly below market consensus.

July 24
The IHS Markit Flash Germany Manufacturing PMI fell 1.9 points to 43.1 in July, down from 45.0 in June. The data suggest that German manufacturers recorded their worst monthly performance since July 2012 as output registered its steepest decline since March and suffered one of the most significant contractions since 2009. Meanwhile, new orders fell at the fastest rate since April amid continued weakness in the automotive sector and lower levels of export sales. The index remained below the 50.0 expansion threshold for the seventh consecutive month. The overall reading was below market consensus.

The IHS Markit Flash Eurozone Manufacturing PMI dropped 1.2 points to 46.4 in July, following a 48.5 reading in June. The latest reading was below the 50.0 expansion threshold and pointed to the steepest contraction in manufacturing since December 2012, marking a 79-month low. The press release indicates that new business slowed to the lowest level in five months as manufacturers reported the second-largest drop in new orders since 2012 and goods exports fell at the sharpest rate since November 2011. The overall reading was below market consensus.

The U.S. Census Bureau announced that new home sales totalled 646,000 units (seasonally adjusted annual rate) in June 2019. This is 7.0% above the downwardly revised May rate of 604,000 units and 4.5% above the June 2018 level of 618,000 units. With the revisions, these results are weaker than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

July 25
The U.S. Department of Labor announced that initial jobless claims totalled 206,000 (seasonally adjusted) in the week ending July 20, a decrease of 10,000 from the previous week's unrevised level of 216,000. The four-week moving average was 213,000, a decrease of 5,750 from the previous week's unrevised average of 218,750. These results are somewhat stronger than consensus estimates.

The U.S. Census Bureau announced that durable goods orders rose 2.0% in June, following a downwardly revised 2.3% decline in May (originally reported as down 1.3%). Excluding transportation, new orders increased 1.2% in June. Excluding defence, new orders rose 3.1%. Even with the downward revisions to the previous data, these figures 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 ECB announced on July 25 that it will hold its main refinancing rate unchanged at 0.0%. The interest rates on the marginal lending facility and the deposit facility will also remain unchanged at 0.25% and -0.40%, respectively. The ECB last lowered borrowing costs on March 16, 2016. The press release that accompanied the announcement indicated that the bank is prepared to cut short-term rates and potentially resume its asset purchase program. Importantly, the bank stated that it expects rates to remain at “their present or lower levels at least through the first half of 2020” to sustain the convergence of inflation to its 2.0% target over the medium term. Meanwhile, the bank’s previous policy announcement stated that rates will “remain unchanged” at least through the first half of 2020. The ECB’s next policy announcement is scheduled for September 12. The decision was in line with market expectations.

The ifo Business Climate Index for Germany dropped 1.8 points to 95.7 in July, following an upwardly revised 97.5 reading in June. The climate indicator fell to its lowest level since May 2010, falling for a fourth consecutive month, and was well beneath the market consensus. The fall in the headline indicator was attributable to a downgrade in both the business expectations and current conditions sub-indexes. Current conditions fell 1.7 points to 99.4, marking its fourth straight monthly decline and the first reading below 100.0 since May 2016. Moreover, business conditions slid 1.8 points to 92.2, its weakest print since June 2016. At the sector level, sentiment worsened across the board as manufacturing, construction, trade and services diminished. The overall results echoed a similar representation of this week’s IHS Markit Flash Germany PMI, as weakness in manufacturing is expected to last. The ifo Business Climate Index is a closely watched data point of leading indicators in German economic activity.

July 26
The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 2.1% in the second quarter of 2019. This is the “advance estimate” prepared with preliminary data and is often subject to substantial revision. In the first quarter, real GDP increased 3.1% on the same basis. These results are stronger than expected as the market was looking for a more substantial weakening from first-quarter strength. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.


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