Playbook - September 9, 2019

September 09, 2019 • Playbook

The Playbook

Weekly Commentary – September 9, 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
September 10 NFIB Business Optimism Index August 19 104.0 104.7
September 11 PPI Y/Y August 19 1.9% 1.7%
September 13 Retail Sales August 19 0.4% 0.7%
September 13 Export Prices Y/Y August 19 -1.1% -0.9%
September 13 Import Prices Y/Y August 19 -1.7% -1.8%
September 10 Housing Starts August 19 190 k 222 k
Septmeber 11 Capacity Utilization Q2 19 83.0% 80.9%

Key Earnings:
September 9: Aspen Group Inc., Dynagas LNG Partners LP, Limoneira Co.
September 10: CM Finance Inc., GameStop Corp., HD Supply Holdings Inc.
September 11: General Finance Corp., Progressive Corp., Oxford Industries Inc.
September 12: Broadcom Inc., Kroger Co. Streamline Health Solutions Inc.
September 13: Alliance Media Holdings Inc., Ditech Holding Corp., RAIT Financial Trust
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada leaves rates steady but with a more dovish tone

The Bank of Canada left interest rates unchanged at its latest monetary policy window, bucking the easing trend seen at most of the world’s other major central banks. Nevertheless, the press release that accompanied the announcement revealed a more dovish tone, which suggests that the Bank may cut rates before the end of 2019. Specifically, it stated that the U.S.-China trade conflict “is weighing more heavily on global economic momentum than the Bank had projected.” In addition, domestic activity is clearly a concern despite the 3.7% gross domestic product (GDP) growth figure reported for the second quarter. The releases highlighted that “consumption spending was unexpectedly soft in the quarter” and that “business investment contracted sharply after a strong first quarter.” Given that the Bank expects inflation to decline and “economic activity to slow in the second half of the year,” it appears likely that a rate cut could come either at its next meeting on October 30 or its final meeting of the year on December 4.

North American jobs data show mixed results

On the back of a 25,000 advance in employment of temporary government workers, needed to prepare for the 2020 Census, U.S. non-farm payrolls rose by 130,000 in August. Private employment gained a modest 96,000 and the unemployment rate was unchanged at 3.7%. The overall employment increase proved to be a disappointment, raising concerns that the U.S. labour market’s run of record gains may be at risk. Domestically, Statistics Canada reported an 81,100 surge in employment in August, following two consecutive monthly declines. However, the bulk of the gain (57,200) was also in part-time positions. The unemployment rate was steady at 5.7%, but average hourly earnings fell for the third time in four months. Even though the headline job gain appears encouraging, the balance of the report suggests little that would significantly bolster near-term growth in consumer spending.

Australian economy slows to 10-year low

Australia’s economy grew at its slowest annual pace since the global financial crisis in the second quarter of 2019, as low wage growth and a sharp contraction in housing prices weighed on consumer spending. The Australian Bureau of Statistics revealed that the economy expanded 1.4% (Y/Y, seasonally adjusted) in the three months to June, the weakest annual growth rate since the third quarter of 2009 and well short of Australia’s 2.75% potential level. On a quarterly basis, real GDP advanced 0.5% in the three months to June, unchanged from the revised increase of 0.5% (originally reported as 0.4%) in the first quarter. Despite setting its key cash rate to a record low of 1.0% following back-to-back 25-basis-point cuts this year, the sluggish growth in Australia’s economy may highlight the need for the Reserve Bank of Australia to provide additional stimulus. Futures markets currently suggest that the bank will cut rates by another quarter point at its October 1 meeting.

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

September 3
The Institute for Supply Management reported that its Purchasing Managers’ Index slipped to a 49.1 reading in August. This is a 2.1-point loss from July’s 51.2 figure, falling below the key 50.0 (generally expanding) level for the first time since January 2016. The reading is well below expectations and indicates a contraction in manufacturing activity.

The U.S. Census Bureau announced that construction spending increased 0.1% in July, following an upwardly revised 0.7% decline in June (originally reported as -1.3%). On a year-over-year basis, construction was down 2.7%. The monthly figure is marginally below consensus estimates. This result indicates continued softening in the construction sector.

The IHS Markit Canada Purchasing Managers’ Index slipped to 49.1 in August, following a 50.2 reading in July and sliding below the key 50.0 expansion threshold. This reading was the lowest in three months and pointed to a downturn in overall manufacturing performance in Canada. New orders dropped for the sixth consecutive month, falling at the sharpest pace since December 2015. Lower levels of purchasing activity have been recorded in five of the last six months, and input cost inflation eased to a seven-year low. The reading was well below market forecasts.

■ The Reserve Bank of Australia (RBA) met expectations by holding its key “cash rate” at a record low of 1.0%. This follows cuts of 25 basis points at the RBA’s last two meetings in May and June. The statement accompanying the decision stated that the “outlook for the global economy remains reasonable, although the risks are tilted to the downside,” noting that prolonged uncertainty has been caused by global trade and technology disputes. The RBA also cited that growth in Australia is expected to strengthen “gradually” to be around trend over the next couple of years. Importantly, however, bank officials now state that inflation pressures remain “subdued,” which will likely be the case for a protracted period of time. The bank’s next policy announcement is scheduled for October 1.

The Australian Bureau of Statistics reported that Australia’s current account balance swung to a A$5.9 billion surplus in Q2 2019, following a downwardly revised A$1.1 billion shortfall in Q1 2019. This was the country’s first current account surplus since Q2 1975 (bolstered by an unexpected surge in iron ore prices) and was fuelled by record Chinese steel production, which boosted export receipts to record levels. Additionally, the report stated that “the largest quarterly goods and services surplus on record at A$19.9 billion and a narrowing net income deficit to A$13.9 billion” contributed to the surplus. This result is well above market consensus of a A$1.5 billion surplus.

The IHS Markit/CIPS U.K. Construction Purchasing Managers Index registered a seasonally adjusted 45.0 reading in August, down slightly from 45.3 in July. IHS Markit noted that the headline index remained below the 50.0 expansion threshold for the fourth consecutive month as business optimism slipped to the lowest level since the financial crisis in 2008. Further, lower volumes of construction output contributed to worsening order books and a “lack of new projects to replace completed contracts.” Meanwhile, input cost inflation slowed to its slowest level since March 2016. The latest decline was led by the sharpest reduction in new work since 2009, as fears are heightening with Prime Minister Boris Johnson suggesting that he is committed to leaving the European Union on October 31, with or without a deal. The results are weaker than market consensus.

Eurostat, the European Union’s statistical office, reported that producer prices (ex-construction) in the euro area rose 0.2% (M/M) in July, recovering from an unrevised 0.6% decline in June. This reduced annual producer price index inflation from 0.7% to 0.2%, its lowest mark since November 2016. The results are in line with market expectations.

September 4
The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to US$54.0 billion in July from an upwardly revised US$55.5 billion in June. July exports were US$207.4 billion, US$1.2 billion more than June exports. July imports were US$261.4 billion, US$0.4 billion less than June imports. Despite the improvement, the trade deficit was larger than expected. The improved trade results will support overall GDP growth.

Statistics Canada announced that Canada's merchandise imports rose 1.2% in July, while exports fell 0.9%. As a result, Canada's trade deficit with the world widened from $55 million in June to $1.1 billion in July. Since the market was looking for a narrowing of the deficit in July, these results are considerably weaker than expected. They are a negative sign for overall GDP growth.

Statistics Canada also reported that Canadian business labour productivity edged up 0.2% in the second quarter of 2019, after increasing 0.4% in the first quarter. The productivity increase in the second quarter was mainly attributable to goods-producing businesses, which increased 0.6%. Productivity in services declined 0.2%. Overall productivity was somewhat weaker than expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

The Australian Bureau of Statistics reported that the economy expanded 0.5% (Q/Q, seasonally adjusted) in Q2 2019, unchanged from an upwardly revised 0.5% advance (originally reported as 0.4%) in Q1 2019 and matching market consensus. On a year-over-year basis, GDP growth decelerated from a downwardly revised 1.7% (originally reported as 1.8%) in Q1 to a ten-year low of 1.4% in Q2, also in line with market consensus. The data comes after the RBA held its key cash rate steady at 1.0% at its September 3 monetary policy meeting, noting that economic growth in the first half of the year has been weaker than expected with falling housing prices and low-income growth weighing on consumer spending.

Eurostat, the European Union’s statistical office, reported that retail sales in the euro area dropped 0.6% (M/M, seasonally adjusted) in July, following an upwardly revised 1.2% pickup (originally reported as 1.1%) in June and matching market consensus. Regionally, Germany (-2.2%) and Croatia (-3.3%) reported the most wounding figures. On an annual basis, calendar-adjusted retail sales decelerated from a revised 2.8% (originally reported as 2.6%) to 2.2% in July, above market consensus and the second best reading since February. The sales data show that next quarter’s GDP growth in the euro area will likely be weaker than expected.

■ 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 international trade issues continue to undermine both global and domestic economic growth. In addition, it stated that inflation had recently been stronger than expected, but that this was likely to be a temporary phenomenon. The bank’s next policy meeting is on October 30. 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.

September 5
The U.S. Department of Labor announced that initial jobless claims totalled 217,000 (seasonally adjusted) in the week ending August 31, an increase of 1,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 215,000 to 216,000. The four-week moving average was 216,250, an increase of 1,500 from the previous week's revised average. The previous week's average was revised up by 250 from 214,500 to 214,750. These results are in line with consensus estimates.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 2.3% (annualized) rate during the second quarter of 2019, while unit labour costs rose 2.6% 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.

The Australian Bureau of Statistics reported that the nation’s trade surplus narrowed to A$7.27 billion (M/M, seasonally adjusted) in July, following a downwardly revised A$7.98 billion deficit (originally reported as A$8.04) in June. Monthly exports increased a mere 0.6% on the month, while imports rose 2.9%. However, on a year-over-year basis, exports are still up a sizeable 16.6%, while imports stand at 3.0%. The overall trade balance was relatively weaker than market forecasts.

September 6
Eurostat, the European Union’s statistical office, confirmed that GDP in the euro area grew 0.2% (Q/Q, seasonally adjusted) in Q2 2019, slowing from 0.4% in Q1 2019. This matched market consensus and was the weakest performance since the first quarter of 2013. Accordingly, annual GDP growth slowed to 1.2% in Q2 2019, following an upwardly revised 1.3% expansion in the previous period, and two percentage points above its 1.1% flash estimate. The annual results were above market consensus.

Statistics Canada announced that 81,100 jobs were created in August. At the same time, the unemployment rate remained stable at 5.7% as the labour force grew by 91,300. In line with the strong monthly advance, employment was up 2.5% (+471,300) from 12 months earlier. These results are stronger than market consensus. The employment data reflects the strength of the broader economy and individual sectors. It is also indicative of consumer spending trends.

■ The U.S. Bureau of Labor Statistics reported that the unemployment rate remained unchanged at 3.7% in August and non-farm payroll employment rose by 130,000. Employment in federal government rose, largely reflecting the hiring of temporary workers for the 2020 Census. Notable job gains also occurred in health care and financial activities, while mining lost jobs. The employment figure is below consensus forecasts, while the unchanged unemployment rate was anticipated. This is the most closely followed set of U.S. statistics as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.


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