Playbook - August 26, 2019

August 26, 2019 • Playbook


The Playbook

Weekly Commentary – August 26, 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
August 26 Durable Goods Orders July 19 0.5% 2.0%
August 29 Corporate Profits Prel (Q/Q) Q2 19 2.9% -3.1%
August 30 Chicago PMI August 19 49.0 44.4
August 30 Michigan Consumer Expectatiosn Final August 19 82.3 90.5
August 29 Current Account Q2 19 -$18.00B -$17.35B
August 30 GDP Growth Rate (Q/Q) Q2 19 0.4% 0.1%

Key Earnings:
August 26: Akoustis Technologies Inc., Altaba Inc., Caleres Inc., Futu Holdings Ltd.
August 27: Barnes & Noble Education Inc., Dycom Industries Inc., J M Smucker Co.,
August 28: Box Inc., Global Cord Blood Corp., Greif Inc., Tiffany & Co.
August 29: Best Buy Co Inc., Dell Technologies Inc., Golar LNG Ltd., Titan Machinery Inc.
August 30: Campbell Soup Co., Hycroft Mining Corp., Williams-Sonoma Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian consumers pause in June
Fresh data from Statistics Canada revealed a nominal (less than 0.1%) decline in retail sales during June. Despite the minor reversal, the annual pace of sales growth rose from 0.7% to 1.0%. In addition, for the second quarter of 2019, annualized growth in sales came in at a surprisingly strong 4.7%. This is the best quarterly result since the second quarter of 2018 (5.3%). Despite the recent mixed employment results, the broader labour market has seen surprisingly strong growth in wages (4.5% year-over-year in July). This suggests that consumer spending is likely to remain stable and overall gross domestic product (GDP) growth for the second quarter may be stronger than the 2.3% forecast that the Bank of Canada provided in its July Monetary Policy Report.

Mexico’s Economy Stalls in Second Quarter
Latin America’s second-largest economy stalled in the second quarter of 2019, just narrowly dodging a technical recession. The National Institute of Statistics and Geography, an agency of the Mexican government, revealed that Mexico’s GDP was flat in the three months to June, revised slightly down from its preliminary estimate of 0.1%. This follows a downwardly revised 0.3% contraction (initially reported as 0.2%) in the previous three-month period. Services increased 0.2% in the second quarter, offsetting a 0.2% decline in industrial production, while agricultural production dropped 3.4%. The second quarter results pulled the annual GDP growth rate down to -0.8%, Mexico’s first yearly economic contraction since the final quarter of 2009. Ceasing the privatization of the energy sector, coupled with prolonged weakness in investment and industrial output, has harmed consumer confidence and will likely prompt the Banco de México to cut interest rates. The bank’s next monetary policy meeting is scheduled for September 26.

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

August 20
Statistics Canada reported that manufacturing sales fell 1.2% in June, largely reversing the 1.6% advance reported in May. Sales were down in 16 of 21 industries, representing 68.0% of total manufacturing sales. In line with the decline, sales on a year-over-year basis are now up only 0.1%. With the market braced for a sharp reversal, this report is in line with consensus expectations. These data are closely watched as manufacturing can create high-value employment and this sector continues to struggle.

Destatis, Germany’s federal statistical office, reported that producer prices edged up 0.1% in July (M/M), following a 0.4% decline in June. This pulled annual producer price index (PPI) inflation down from 1.2% in June to 1.1% (Y/Y) in July, a tick above market consensus. It was the slowest rate of inflation since December 2016. They key driver behind the monthly gain was a 0.7% rise in energy prices, which in turn was lifted by a 2.2% advance in electricity prices. The overall report was marginally stronger than market consensus.

August 21
Statistics Canada reported that consumer prices jumped 0.4% (seasonally adjusted, monthly basis) in July, after slipping 0.1% lower in June. On a year-over-year basis the Consumer Price Index (CPI) was up 2.0%, matching the June result. Not surprisingly, higher gasoline prices pushed the transportation sub-index up 0.6% during the month. The three measures of core inflation, established by the Bank of Canada, showed continued stability with underlying inflation near their 2.0% target, ranging from 1.9% to 2.1%. CPI common, which the central bank says is most closely correlated with the output gap, rose from 1.8% to 1.9%. The overall figures are largely in line with market expectations.

According to the U.S. National Association of Realtors, existing-home sales increased 2.5% to a seasonally adjusted annual rate of 5.42 million units in July from a downwardly revised 5.29 million in June (originally a 5.27 million-unit pace). Sales are now 0.6% above the 5.39 million-unit pace in July 2018. These results are stronger than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

August 22
The IHS Markit Flash Germany Manufacturing PMI ticked up a trivial 0.4 points to 43.6 in August, following a seven-year low of 43.2 in July and below the key 50.0 expansion threshold for the eighth straight month. The data show that aggregate new orders fell for the third time in four months, with manufacturers’ order books declining at the fastest pace since April 2013. New work at service providers advanced modestly, albeit at the weakest rate in seven months. Backlogs of work across Germany’s private sector declined for the tenth consecutive month and at the sharpest rate since 2012, signalling a decline in outstanding business. The overall reading was marginally above market consensus.

The IHS Markit Flash Eurozone Manufacturing PMI gained 0.6 points to 47.0 in August, after a 46.5 reading in July. The latest reading was below the 50.0 expansion threshold and pointed to the slightly slower contraction in manufacturing. Despite an advance in services activity, the manufacturing PMI data point to weak GDP growth in the euro area in Q3 2019. The overall reading was marginally above market consensus.

The U.K. Confederation of British Industry’s (CBI) distributive trades survey revealed that monthly retail sales volumes and orders plunged 33 points from a month earlier to -49 in August, the sharpest decline since December 2008 and the second weakest since official records began in 1983. The survey underscored further deteriorating conditions, with investment intentions for next year staying negative for the sixth straight quarter. Orders fell at their fastest rate in over a decade and surveyed retailers expect the sharpest drop in business conditions since February 2009. The results were significantly weaker than market expectations.

The U.S. Department of Labor announced that initial jobless claims totalled 209,000 (seasonally adjusted) in the week ending August 17, a decrease of 12,000 from the previous week's revised level. The previous week's level was revised up by 1,000 221,000. The four-week moving average was 214,500, an increase of 500 from the previous week's revised average. The previous week's average was revised up by 250 to 214,000. These results are stronger than consensus estimates.

Statistics Canada reported that wholesale sales climbed 0.6% in June, partly offsetting the 1.9% decline in May. At the same time, inventories rose a more substantial 1.5%, the tenth consecutive advance. On a year-over-year basis, overall wholesale sales are now up 2.3% while inventories are up 9.4%. The monthly sales advance was somewhat stronger than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

August 23
Statistics Canada reported that retail sales fell less than 0.1% (seasonally adjusted) in June following May’s 0.2% decline. Sales were down in four of 11 subsectors, representing 48% of total retail trade. Stronger sales across most subsectors were offset by lower sales at motor vehicle and parts dealers and gasoline stations. Year-over-year sales growth accelerated modestly to 1.0% from 0.7%. These results are in line with consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

The U.S. Census Bureau announced that new-home sales totalled 635,000 units (seasonally adjusted annual rate) in July. This is 12.8% below the upwardly revised June rate of 728,000 units but is 4.3% above the July 2018 level of 609,000 units. Given the revisions to the prior data, these results are broadly in line with consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.


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