The Playbook - July 1 2019

June 28, 2019 • Playbook

The Playbook

The Playbook

Weekly Commentary – July 1, 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 1 ISM Manufacturing Prices June 19 53.0 53.2
July 3 ADP Employment Change June 19 190 k 27 k
July 5 Balance of Trade May 19 -$52.5B -$50.8B
July 5 Nonfarm Payrolls Private June 19 178 k 90 k
July 2 RBC Manufacturing PMI June 19 49.5 49.1
July 5 Employment Change June 19 43 k  27.7 k

Key Earnings:
July 1: Aethlon Medical Inc., Singing Machine Company Inc.
July 2: Acuity Brands Inc., Greenbrier Companies Inc., Immune Pharmaceuticals Inc.
July 3: International Speedway Corp.
July 4: No earnings to be released
July 5: AEHR Test Systems, Alliance Media Holdings Inc., Griffin Industrial Realty Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian growth appears to stabilize
Updated figures from Statistics Canada showed that gross domestic product (GDP) by industry gained 0.3% in April. The advance came on the heels of a 0.5% improvement in March. The statistics-gathering agency also revised data going back to January 2018 and to a large extent, lowered their previous output estimates. As a result, year-over-year growth now stands at 1.5%. Nevertheless, the back-to-back gains in March and April are now the best two-month stretch for the Canadian economy since April and May of 2017. They further suggest, that after an extended period of decidedly mixed results, the Canadian economy is now on firmer footing. Preliminary data suggest that May and June will also yield positive overall results. Even very modest growth during the two-month period will pave the way for a 2.0% annualized growth rate for the quarter. Even though this would be above The Bank of Canada’s latest projections, it is far from a pace of growth that would warrant concerns of an overheating economy.

U.S. consumer spending continues to rise as inflation remains stable
The U.S. Bureau of Economic Analysis reported that personal consumption expenditure (PCE) climbed 0.4% in May to stand with an annual gain of 4.2%, almost identical to the annual advance in personal income (4.1%). At the same time, the Federal Reserve’s (Fed) key inflation measure (the core PCE deflator) rose a more modest 0.2% during the month and only 1.6% on a year-over-year basis. In fact, annual growth in the deflator has not been above the Fed’s 2.0% target since March 2012, ranging between 1.2% and 2.0% over that 86-month period. Given the absence of a material pickup in inflationary pressures and the continued political rhetoric, it appears likely that the Fed will soon move to cut interest rates. For analysts, the only remaining question appears to be whether the cut will be by 25 basis points or 50 basis points at their next policy meeting, scheduled for July 30-31.

German inflation raises possibility of ECB easing move
The latest data from Destatis, Germany’s federal statistical office, revealed that the country’s consumer prices were stronger than expected in June. Provisional estimates showed that consumer price index (CPI) growth stood at 0.3% (month-over-month) in June, lifting the annual inflation rate by 0.2 percentage points to 1.6%. In contrast, however, the provisional reading of Germany’s harmonized index of consumer prices (HICP), which is calculated to make prices comparable with inflation data from other European Union countries, rose by 1.3% (year-over-year), unchanged from the previous month and noticeably weaker than the annual CPI growth figure. It has not been lower since February 2018 (1.2%) and remains well below the European Central Bank’s (ECB) inflation target for the 19-nation euro area of 2.0%. Importantly, the central bank recently expressed increased dovish sentiment as ECB President Mario Draghi signalled last week that it may be necessary to add stimulus “in the absence of improvement” in the economic outlook. Consequently, the persisting soft levels of German inflation may further reinforce the ECB’s desire to ease monetary policy as early as their next meeting on July 25.

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

June 24
The ifo Business Climate Index for Germany dropped 0.5 points to 97.4 in June, following an unrevised 97.9 reading in May. It was the index’s lowest level registered since November 2014 and marginally below market consensus. The fall in the headline index was attributable to a downgrade in the business expectations sub-index which decreased 1.0 points to 94.2, its second worst print since November 2012. By contrast, the current conditions sub-index surprisingly edged up 0.1 points to 100.8. At the sector level, sentiment deteriorated in manufacturing (1.5 after 3.9 in May), construction (22.9 after 24.3) and services (20.0 after 21.0). However, trade confidence among wholesalers increased to a three-month high (7.9 after 5.4). These results echoed a similar representation of last week’s 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.

June 25
Statistics Canada reported that wholesale sales surged 1.7% to $65.3 billion in April, the fifth consecutive monthly increase. Higher sales were recorded in five of seven subsectors accounting for 86% of total wholesale sales. The auto subsector was the leading contributor to April's gains, followed by the machinery, equipment and supplies subsector. At the same time, inventories rose a more modest 0.4% during the month. On a year-over-year basis, overall wholesale sales are now up 4.8% while inventories are up 10.4%. The monthly sales advance was considerably stronger than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

The U.K. Confederation of British Industry’s (CBI) distributive trades survey revealed that June retail sales volumes fell at their fastest pace since March 2009, the midst of the global financial crisis. As a result, the survey’s final weighted balance declined 15.0 percentage points to -42.0% (M/M) in June, after recording a -27.0% balance in May. The survey indicated that some 16.0% of retailers stated that sales volumes were up in June from a year ago, while 58.0% indicated they declined. These results were significantly below market expectations, as well as the CBI’s forecast made last month. The Confederation’s forecast for July stands at -11.0%. The CBI distributive trades survey is an indicator of short-term trends in the U.K. retail and wholesale distribution sector.

Insee, the national statistics office of France, reported that its business climate indicator declined 2.0 points to 102.0 in June, following an unrevised 104.0 May reading. This was the indicator’s lowest outturn since June 2016 and relatively below market expectations. Personal production expectations slid 4.0 points to -12.0 and, in turn, export order books slumped -8.0 points to -17.0, their weakest level since October 2014. Insee’s business climate indicator is a measure of sentiment reflecting the current and expected business conditions in France.

The U.S. Census Bureau announced that new home sales totalled 626,000 units (seasonally adjusted annual rate) in May. This is 7.8% below the revised April rate of 679,000 units (originally reported as 673,000) and 3.7% below the May 2018 level of 650,000 units. These results are significantly weaker than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

June 27
The U.S. Department of Labor announced that initial jobless claims totalled 227,000 (seasonally adjusted) in the week ending June 22, an increase of 10,000 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 221,250, an increase of 2,250 from the previous week's revised average. The previous week's average was revised up by 250 to 219,000. These results are somewhat weaker than consensus estimates.

The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 3.1% in the first quarter of 2019. This figure is the “third estimate” and matches the previous figure. In the fourth quarter of 2018, real GDP increased 2.2% on the same basis. These results matched expectations as the market was looking for no change to the earlier report. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that average weekly earnings climbed 0.7% to $1,023 in April. On a year-over-year basis, average weekly earnings rose 2.9%, the largest increase since August 2018. These results are considerably stronger than expectations. As this indicator measures growth in income, it can reveal trends in consumer spending.

The European Commission reported that the euro area economic sentiment indicator (ESI) fell 1.9 points to 103.3 (M/M) reading in June, after an upwardly revised 105.2 (originally reported as 105.1) in May. The drop made for the gauge’s weakest print since August 2016. The deterioration in euro area economic sentiment was driven primarily by declining confidence in industry (-2.7) and services (-1.1). In terms of industry, managers revealed to have more pessimistic views on production expectations, the current level of overall orders books and the stocks of finished products. This reading was below market expectations.

Destatis, the federal statistics office of Germany, revealed in a provisional estimate that consumer prices increased 0.3% (M/M) in June, following a 0.2% rise in May, beating market expectations of 0.1%. On a year-over-year basis, the annual consumer price index (CPI) was up 1.6% (final reading) in June. This was the second strongest reading in 2019 and above market consensus. However, the gain in June inflation reversed only a share of the decline in the previous month and the annual rate remains unchanged from its December 2018 level.

June 28
According to the U.S. Bureau of Economic Analysis, personal income increased US$88.6 billion, or 0.5% in May. PCE increased $59.7 billion, or 0.4%. Both the PCE price index and the core PCE price index (the Federal Reserve’s key inflation measure) increased 0.2% during the month. While income figures for May were above consensus, spending results were in line with expectations. The price deflators were also in line with market consensus. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.3% in April, after rising 0.5% in March. The growth in March and April followed decidedly mixed results over the preceding six months. The 20 industrial sectors were nearly evenly split between gains and losses. On a year-over-year basis, GDP growth stands at 1.5%. These results are stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that its Industrial Product Price Index (IPPI) rose 0.1% in May while its Raw Materials Price Index (RMPI) fell 2.3%. On a year-over-year basis, the indexes are up 0.6% and down 2.8%, respectively. Higher prices for energy products were seen at the industry level despite a material decline at the raw material level during the month. These figures are generally in line with expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

The U.K. Office for National Statistics revealed that real GDP expanded by an unrevised 0.5% (seasonally adjusted, quarterly basis) in Q1 2019, up from 0.2% in Q4 2018. Services output increased by a revised 0.4% in the first quarter, while construction output was revised upward 1.4%. Production was also a positive contributor as manufacturing output grew by 1.9% in the quarter, the most in nearly 20 years, as U.K. companies looked to fill orders ahead of the original March 29 deadline to leave the European Union. Data show a large increase of £6.6 billion in stockpiling by U.K. companies in the first quarter in response to a no-deal Brexit. The U.K.’s trade deficit widened to £21.58 billion (3.7% of nominal GDP), the widest quarterly deficit on record. This report may be of little significance to the Bank of England, as it recently cut growth estimates from 0.2% to 0.0% in the second quarter of 2019. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.


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