Playbook - July 22, 2019

July 22, 2019 • Playbook


The Playbook

Weekly Commentary – July 22, 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 23 Existing Home Sales June 19 5.15 M 5.34 M
July 24 Markit Manufacturing PMI Flash July 19 51.0 50.6
July 25 Durable Goods Orders June 19 2.2% -1.3%
July 26 GDP Growth Rate Q/Q Adv Q2 19 1.7% 3.1%
July 26 Budget Balance April 19 $2.1B -$14.9B

Key Earnings:
July 22: Celanese Corp., Crane Co., Hexcel Corp., Ocean Power Technologies Inc.
July 23: Ability Inc., Biogen Inc., Dolby Laboratories Inc., SEACOR Holdings Inc.
July 24: AT&T Inc., Knowles Corp., Spirit Airlines Inc., Sterling Bancorp.
July 25: Alphabet Inc., Intel Corp., Stryker Corp., Viad Corporation
July 26: AbbVie Inc., Aon PLC, Lear Corp., Weatherford International PLC
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian manufacturing sales reach new high
Fresh data from Statistics Canada showed a 1.6% surge in manufacturing sales during May, more than enough to erase the upwardly revised 0.4% decline reported in April and establish a new all-time high of $58.9 billion. The emergence of an improvement in this sector is a positive sign, as it has continued to struggle in the post-recession period. Manufacturing employment peaked at 2.33 million in September 2002 and continued to decline even well after the 2008/09 financial crisis had ended. By the time it hit its recent bottom in December 2016, only 1.68 million were still employed by manufacturers in Canada, a decline of 28.1%. As a proportion of Canada’s GDP by industry, the sector has declined steadily from 15.8% of total output in September 2000 to 10.4% in the April 2019 data. While there continues to be a secular shift away from manufacturing in the major developed countries, a more gradual structural move would be welcome.

U.S. industrial production slumps again in the second quarter
The latest information from the U.S. Federal Reserve (Fed) revealed no change in industrial production during June. However, on a quarterly basis, output fell 1.2% (annualized) during the second quarter of 2019. This follows the 1.9% drop (on the same basis) recorded during the first quarter. These are the first back-to-back quarterly declines since Q1 and Q2 2016. Total industrial output hit a peak for the current business cycle in December 2018 and has so far been unable to recover. At the same, time the Fed reported that capacity utilization had fallen to 77.9% in June, matching the April reading, which is the lowest since February 2018 (77.8%). Factory output appears to be suffering in the face of trade-related headwinds as import tariffs raise the prices of inputs and heighten uncertainties about the global supply chain. Given the apparent untapped capacity shown in this report, these data should add further support for a July interest rate cut.

Chinese economy slows to near three-decade low
China’s economic growth decelerated to its slowest pace since official records for quarterly growth began in 1992, hampered by trade tensions with the U.S. and a growing movement to push manufacturing supply chains off shore. The National Bureau of Statistics of China reported that the economy expanded 6.2% (Y/Y) in the second quarter of 2019, slowing from 6.4% in the first quarter of 2019. Previously released trade data revealed that exports fell 1.3% (Y/Y) in June, while imports dropped 7.3% after plummeting 8.5% in the previous month. Despite softer growth, however, China’s fiscal stimulus plan, which includes approximately two trillion yuan of tax cuts, appears to have helped support retails sales, industrial output and fixed asset investment growth. Nevertheless, the economic slowdown underscores the case for the People’s Bank of China (PBOC) to reduce reserve-requirement ratios to encourage credit growth. Further, rising pressures will likely force the PBOC to revamp its current two-interest rate system and eventually abandon its one-year benchmark lending rate.

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 15
The National Bureau of Statistics of China reported that the economy expanded 6.2% (Y/Y, preliminary estimate) in the three months to June 2019, decelerating from 6.4% in the three months to March 2019. It was the slowest growth rate since at least 1992, when official records for quarterly growth began, and was just below market consensus of 6.3%. In contrast, GDP grew 1.6% (Q/Q) in the three months to June, accelerating from a 1.4% advance in the three months to March. It was the fastest pace of growth since Q3 2018 and was marginally above market consensus. Although year-over-year economic growth slowed in China, monthly data show that annual growth advanced in June for fixed asset investment (5.8%), retail sales (9.8%) and industrial production (6.3%).

July 16
The U.S. Census Bureau announced that retail and food services sales were up 0.4% (seasonally adjusted) for the month of June and were 3.4% above June 2018 levels. Excluding autos, sales were up the same 0.4% during the month and up 3.3% on a year-over-year basis. These figures are stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

The U.K. Office for National Statistics reported that employment increased by 28,000 (seasonally adjusted) in the three months to May 2019, raising total employment to a record high of 32.75 million. At the same time, the number of unemployed decreased by 51,000 on the quarter to 1.29 million. Accordingly, the unemployment rate remained steady at 3.8%, its lowest since October-December 1974. Interestingly, the unemployment rate for women decreased 0.2 percentage points an all-time low of 3.6%. Total earnings, including bonuses, rose by an annual 3.4%, accelerating from an upwardly revised 3.2% in the previous period. The overall report is in line with market expectations.

The ZEW Indicator of Economic Sentiment for Germany dropped 3.4 points to -24.5 in July, down from its -21.1 level in June. This marked its lowest reading since October 2018 and was slightly worse than market consensus. Over the same period, the assessment of the economic situation in Germany slightly plunged by 8.9 points and stood at a final reading of -1.1. The drop in the indicator comes after the continued negative trend in new orders in Germany industry, which has likely intensified financial markets’ pessimism around future growth. The ZEW Indicator is a leading indicator that measures the level of optimism that financial analysts and institutional investors have about the expected economic developments in Germany over the next six months.

The U.S. Federal Reserve announced that industrial production was flat in June. However, for the second quarter, output declined at an annualized rate of 1.2%, its second consecutive quarterly decrease. On a year-over-year basis, industrial production was reported to have gained 1.3%. Capacity utilization for total industry fell to 77.9% from 78.1% in May and from an identical 78.1% a year earlier. These results are weaker than expected. The softening in production should be reflected as a drag on real economic output in the quarterly GDP figures.

July 17
Statistics Canada reported that consumer prices fell 0.1% (seasonally adjusted, monthly basis) in June, after rising 0.3% in May. On a year-over-year basis the consumer price index (CPI) was up 2.0%, down from the 2.4% annual pace in May. The three measures of core inflation, established by the Bank of Canada in 2016, were relatively stable near their 2.0% target, ranging from 1.8% to 2.2%. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.8%. The dip in CPI during June was in line with consensus expectations.

Statistics Canada reported that manufacturing sales rose 1.6% to $58.9 billion in May, following a 0.4% decline in April. Sales were up in 12 of 21 industries, representing 66.2% of total Canadian manufacturing. Petroleum and coal products (+19.8%) led the gainers while wood products (-19.2%) recorded the largest decline. On a year-over-year basis, manufacturing sales rose 3.0%. These results are somewhat weaker than market consensus. This result is closely watched it they can create high-value employment and remains one of the slowest to recover from the 2008-09 recession.

The U.S. Census Bureau announced that housing starts in June were at a seasonally adjusted annual rate of 1,253,000. This is 0.9% below the revised May estimate of 1,265,000 but is 6.2% above the June 2018 rate of 1,180,000. At the same time, the number of building permits issued in June was at a seasonally adjusted annual rate of 1,220,000. This is 6.1% below the revised May rate of 1,299,000 and is 6.6% below the June 2018 figure of 1,306,000. These figures are weaker than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.K. Office for National Statistics reported that consumer prices were flat in June (M/M), following a 0.3% gain in May. The unchanged price levels in the month left the annual CPI rate at 2.0%, matching its May reading and holding the annual rate within 0.2 percentage points of the Bank of England’s 2.0% medium-term inflation target through 2019. The core inflation rate, which excludes the price of energy, food, alcohol and tobacco, advanced to 1.8% from a 28-month low of 1.7% in May.

Eurostat, the statistical office of the European Union, reported that the final annual inflation rate in the euro area rose to 1.3% in June. It was 0.1 percentage points above both its provisional estimates and the final print in May. This was the second-lowest reading in 2019 and marginally above market expectations. In relation to May, inflation in services jumped 0.6 percentage points to 1.6%, while the cost of energy eased 2.1 percentage points to 1.7%. Despite the uptick in inflation, the European Central Bank is still likely to cut rates as early as September and relaunch its quantitative easing program

July 18
The U.S. Department of Labor announced that initial jobless claims totalled 216,000 (seasonally adjusted) in the week ending July 13, an increase of 8,000 from the previous week's revised level. The previous week's level was revised down by 1,000 to 208,000. The four-week moving average was 218,750, a decrease of 250 from the previous week's revised average. The previous week's average was revised down by 250 to 219,000. These results are in line with consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in July and at a far more robust pace. The Philly Fed general business conditions index jumped to 21.8 from 0.3 in June. These results are far above market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The U.K. Office for National Statistics reported that retail sales volumes increased 1.0% in June, following a downwardly revised -0.6% (M/M, seasonally adjusted) decline in May. On a year-over-year basis, sales growth surged from a downwardly revised 2.2% in May, a 13-month low, to 3.8% in June. All four main sectors contributed positively to sales growth. The monthly rise was primarily attributable to non-food stores (+1.7%), marking their first rise in three months. Although sales were up on the month, quarterly retail sales advanced by only 0.7% in the three months to June and, consequently, will make a much smaller contribution to GDP than they did in the previous quarter. The overall results were significantly above market expectations.

The U.S. Conference Board announced that its Leading Economic Index (LEI) declined 0.3% in June, following no change in May. This is the first decline since December 2018 and the move was largely due to weaker new orders for manufacturing, housing permits and unemployment insurance claims. With the market looking for a gain in this indicator, these results are weaker than anticipated. The report suggests that the moderation in the U.S economy will likely continue over the mid-term.

July 19
Statistics Canada reported that retail sales cooled in May, dropping 0.1% (seasonally adjusted) following April’s 0.2% advance. However, excluding sales at motor vehicle and parts dealers and gasoline stations, retail sales decreased 1.0%. Overall, year-over-year sales growth slowed to 1.0% from 3.8%. These results are below consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

Destatis, the Federal Statistical Office of Germany, reported that producer prices eased 0.4% in June (M/M), following a 0.1% decline in May. It was the steepest monthly decline since December 2018 and prices have now fallen in four of the last five periods. Annual producer price index (PPI) inflation slowed to 1.2% (Y/Y), after a 1.9% in the previous month. It was the slowest rate of inflation since December 2016. The overall report was weaker than market consensus.


Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Although the above information has been compiled from sources believed to be reliable, as at the date indicated, we cannot guarantee its accuracy or completeness. The information is provided solely for informational and educational purposes and is not to be construed as advice in respect of securities or as to the investing in or buying or selling of securities, whether express or implied. All data provided are subject to change without notice. The authors of this publication are employed by CI Investments Inc. or its affiliates. CI Multi-Asset Management is a division of CI Investments Inc. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc. Assante Wealth Management and/or Assante Wealth Management and design are trademarks of CI Investments Inc. Neither CI Investments Inc. nor any of its affiliates or their respective officers, directors, employees or advisors is responsible in any way for damages or losses of any kind whatsoever in respect of the use of this information. © 2019 CI Investments Inc.


Privacy Policy | Legal

© 2019 CI Investments Inc.

« back to Newsletter page