Playbook - July 5, 2019

July 05, 2019 • Playbook


The Playbook

Weekly Commentary – July 8, 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 8 Consumer Inflation Expectations June 19 2.40% 2.45%
July 10 Wholesale Inventories May 19 0.4% 0.9%
July 11 Initial Jobless Claims July 19 209 k 221 k
July 12 PPI June 19 0.2% 0.1%
July 9 Housing Starts June 19 230.0 k 202.3 k
July 11 New Housing Price Index May 19 -0.1% 0.0%

Key Earnings:
July 8: AZZ Inc., Century Bancorp Inc., Talos Energy Inc.
July 9: Aspen Group Inc., Levi Strauss & Co., PepsiCo Inc., WD-40 Co.
July 10: AngioDynamics Inc., Bed Bath & Beyond Inc., Yirendai Ltd.
July 11: Delta Air Lines Inc., Fastenal Co., CounterPath Corp.
July 12: Cross Border Resources Inc., Ditech Holding Corp., Green Planet Group Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

U.S. / Canada job markets show strength
The U.S. Bureau of Labor reported that non-farm payrolls jumped 224,000 in June, helping to erase concerns that May’s revised 72,000 advance had signaled a move to sharply weaker employment growth. Either way, June’s gain was a record 105th consecutive monthly increase. Meanwhile, the nominal uptick in the unemployment rate to 3.7% from May’s 50-year low (3.6%) reflected a 335,000 gain in the labour force rather than the modest increase in the number of unemployed workers (87,000). At the same time, Statistics Canada announced a 2,200 decline in jobs during June. Still, given the strength seen in prior reports, job growth in the second quarter (132,000) was the strongest seen since Q4 2017 (138,900) and the third best quarter since the financial crisis ended in 2009. The marginal increase in the unemployment rate to 5.5% from May’s 43-year low (5.4%) was also due almost entirely to a 30,500 increase in the labour force. Domestic wage growth improved to 3.8% on a year-over-year basis, the strongest advance since May 2018. Despite the apparent softening of global economic growth, North American job markets appear resilient at this juncture.

North American trade results shift
Fresh data from Statistics Canada showed that merchandise exports had jumped 4.6% to a record $53.1 billion in May. At the same time, a more modest 1.0% gain in imports allowed Canada’s trade balance to shift from a $1.1 billion deficit in April to a $762 million surplus in May. This is now just the second surplus ($9 million in July 2018) recorded since December 2016. Despite considerable uncertainty and continued political wrangling, the surplus with the U.S. rose to $5.9 billion, the largest since October 2008 ($6.2 billion). In the U.S., the international trade deficit rose to its highest level of 2019, widening to $55.5 billion in May from $51.2 billion in April. Exports rose 2.0% but imports outpaced them, climbing 3.3% during the month. Analysts suggested that much of the import gain could be traced to stockpiling ahead of the latest round of tariffs to be levied on goods from China. Imports of Chinese goods surged 12.8% during May, producing a deficit of $30.2 billion.

Australia sees new records
Updated figures from the Australian Bureau of Statistics revealed that the nation’s trade surplus had broken to a new record high of $5.75 billion in May. The advance extends dramatic gains seen in the trade figures since the beginning of 2019. Over the first five months of this year, the monthly trade surplus has averaged $5.14 billion, well ahead of both the 2018 average of $1.93 billion and the 2017 average of $818 million. The extended gains here will likely be reflected in stronger quarterly GDP data, despite concerns over domestic consumption. To address those concerns, the Reserve Bank of Australia (RBA) lowered its key “cash rate” by 0.25% for a second time in 2019 at its latest policy meeting. The move set the benchmark rate at 1.00%, a new record low. The press release that accompanied the announcement stated that the move would “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.”

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 2
The RBA announced that it had reduced its key “cash rate” by 25 basis points (a basis point is 1/100th of one percent) to a new record low of 1.00%, in line with market consensus. This follows a 25-basis-point rate cut revealed at the RBA’s June 4 meeting and marks the first back-to-back cut since 2012. The press release that accompanied the statement cited that the “persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks.” Importantly, however, the RBA also noted that the cut should help make further inroads into spare capacity and assist with lowering the unemployment rate, which has stood at 5.2% (seasonally adjusted) since April. Moreover, the central bank indicated that housing prices in Sydney and Melbourne are now beginning to stabilize after months of deterioration and weakness. The RBA suggested that the central scenario for the economy remains “reasonable” as the sub-trend growth rate stood at 1.8% (Y/Y), after noting in June its growth expectation of around 2.75% in 2019 and 2020. The bank’s next policy announcement is scheduled for August 9.

The IHS Markit/CIPS U.K. Construction Purchasing Managers Index (PMI) plunged 5.5 points to 43.1 in June, following a 48.6 reading in May. The latest reading pointed to the sharpest contraction in the U.K.’s construction sector since April 2009 and registered a level significantly below its 50.0 expansion threshold in four of the last five months. All three broad categories of activity recorded a decline in output in June. Home building reported its largest fall in three years, which may highlight weaker demand and concerns about the outlook towards residential home sales. Commercial work and civil engineering activity also declined at their sharpest rates since late 2009. These results were well below market expectations.

July 3
Statistics Canada announced that Canada's merchandise imports rose 1.0% in May, while exports climbed 4.6%. As a result, Canada's trade balance with the world went from a deficit of $1.1 billion in April (originally reported as $966 million) to a surplus of $762 million in May, only the second surplus since December 2016. Since the market was looking for another deficit in May, these results are considerably stronger than expected. They are a positive sign for overall GDP growth.

The U.S. Department of Labor announced that initial jobless claims totalled 221,000 (seasonally adjusted) in the week ending June 29, a decrease of 8,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 229,000. The four-week moving average was 222,250, an increase of 500 from the previous week's revised average. The previous week's average was revised up by 500 to 221,750. These results are in line with consensus estimates.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to $55.5 billion in May from a revised $51.2 billion in April (previously reported as $50.8 billion). May exports were $210.6 billion, $4.2 billion more than April exports. May imports were $266.2 billion, $8.5 billion more than April imports. The trade deficit was larger than expected. The weaker trade results will hamper overall GDP growth.

The Australian Bureau of Statistics reported that the nation’s trade surplus hit an all-time high in May as it surged to $5.75 billion (seasonally adjusted) during the month. Exports jumped 3.6% from April levels while exports recorded a more modest 1.5% gain. These results are considerably stronger than expected. These figures should supportive GDP growth.

The U.S. Census Bureau reported that factory orders decreased 0.7% in May. This followed a downwardly revised 1.2% decline in April (originally reported as -0.8%). Excluding transportation, new orders rose 0.1% in May. These results are weaker than market expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 55.1 reading in June. It was down 1.8 points from the 56.9 level registered in May but remained above the key 50.0 (generally expanding) level for a 113th consecutive month. This figure is marginally below consensus expectations. This result indicates continued growth, but at a slightly slower rate in the non-manufacturing sector.

July 4
Eurostat, the statistical office of the European Union, reported that retail sales in the euro area fell 0.3% (monthly basis, seasonally adjusted) in May, following an upwardly revised 0.1 decline (originally reported as -0.4) in April. This was the first back-to-back decrease in sales volumes since December 2017-January 2018 and fell well below market expectations. On an annual basis, calendar-adjusted retail sales slowed to 1.3% in May, the lowest growth rate in five months, following an upwardly revised advance of 1.8% (originally reported as 1.5%) in April. The sales data show that household spending has slowed and will make a much smaller contribution to euro area GDP growth last quarter relative to the beginning of the year.

July 5
Statistics Canada announced that 2,200 jobs were lost in June, and the unemployment rate rose by 0.1 percentage points to 5.5% as the labour force gained 30,500 positions. Despite the nominal decline, overall employment was up 2.3% (421,100) from 12 months earlier. These results are somewhat weaker than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

The U.S. Bureau of Labor Statistics reported that the unemployment rate edged higher by 0.1 percentage points to 3.7% in June from May’s record low, but non-farm payroll employment rose by 224,000. Employment continued to trend up in professional and business services, in health care, and in transportation and warehousing. The employment figures are above consensus expectations while the unemployment rate was broadly in line with expectations. 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.

Destatis, the federal statistical office of Germany, reported that new orders in manufacturing tumbled 2.2% (monthly basis, price, seasonally and calendar adjusted) in May, reversing an upwardly revised 0.4% rise (provisionally 0.3%) in April and significantly below market consensus. Meanwhile, annual growth plummeted 8.6% (price and calendar adjusted), following an upwardly revised 4.9% decline (provisionally -5.0%) in the previous month. It was the worst outturn in nearly a decade and significantly below market consensus. On a positive note, domestic orders saw a 0.7% monthly increase, the first since December 2018. However, the headline decline was credited in full to a 4.3% drop in foreign orders in May, including a 1.7% decline in orders from the euro area. The May report leaves average total orders 1.6% below the mean level in Q1 2019.


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