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The Playbook - March 25, 2019

March 25, 2019 • Playbook


The Playbook

Weekly Commentary – March 25, 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

Richard Wylie’s podcast will return the week of April 8, 2019.

A PDF version of The Playbook is also available for download.

Economic Calendar

Date Release Period Consensus Previous
March 26 Building Permits February 19 -1.2% 1.4%
March 26 Housing Starts February 19 1.15 M 1.23 M
March 28 GDP Growth Rate Q/Q Final Q4 19 2.7% 3.4%
March 29 Personal Spending January 19 0.4% -0.5%
March 27 Balance of Trade January 19 -$3.90B -$4.59B

Key Earnings:
March 25: EDAP TMS S.A., Leatt Corp., Southcross Energy Partners LP, WageWorks Inc.
March 26: IHS Markit Ltd., Neogen Corp., Pacific Coast Oil Trust, Polar Power Inc.
March 27: Citizens Inc., Movado Group Inc., Ocean Bio-Chem Inc., Titan Machinery Inc.
March 28: China Automotive Systems Inc., Eastside Distilling Inc., Rosehill Resources Inc.
March 29: Carmax Inc., Natuzzi S.p.A., Tsakos Energy Navigation Ltd., Voxeljet AG
Source: Trading Economics, Yahoo Finance

Market Focus

Weak inflation remains in Canada
The latest data from Statistics Canada revealed a 1.5% (year-over-year) increase in the consumer price index (CPI) in February. This is the second consecutive month that consumer prices fell below the central bank’s 2.0% inflation target. In January, the pace of growth was even lower, recording a level of 1.4% (on the same basis). Amongst the Bank of Canada’s core inflation measures, CPI common edged a tick lower to 1.8%, while both the CPI trim (1.9%) and CPI median (1.8%) were unchanged. Regardless of the overall CPI measure, core inflation remained relatively steady and the Bank of Canada, which raised rates a total of five times in 2017 and 2018, is expected to tread cautiously in terms of changes to monetary policy. The inflation data suggest that the bank should stay on the sidelines until the economy shows signs of recovery, particularly caused by low oil prices and a weaker than expected housing market.

U.S. Federal Reserve turns surprisingly dovish
The U.S. Federal Reserve met market expectations by holding interest rates steady at its second policy meeting of 2019. However, changes to the press release that accompanied the announcement suggest that the tightening schedule will be left on pause for the remainder of this year as a result of slowing economic growth. Importantly, text that explicitly stated “household spending has continued to grow strongly” was dropped. The release now states that “recent indicators point to slower growth of household spending and business fixed investment in the first quarter.” In the press conference following the announcement, Federal Reserve Chairman Jerome Powell specifically stated that the Fed will be undertaking a “wait-and-see approach” to adjust to changes in the economy. Most importantly, however, the projections report indicated that 11 of the 17 Fed officials did not think the bank would need to raise rates this year, up from two officials in December. The Fed’s shift has come as inflation fell shy of officials’ estimates last year that it would rise above their 2.0% target.

Bank of England holds interest rates due to softened outlook
The Bank of England’s (BoE) Monetary Policy Committee (MPC) left its key bank rate unchanged at 0.75% following its latest meeting, setting its target inflation to 2.0%. This comes after CPI inflation edged up to 1.9% in February and a Brexit-induced slump in business investment. In the meeting’s minutes, the MPC indicated that the economic outlook would continue to depend “significantly on the nature and timing of EU withdrawal” and the monetary policy in response to Brexit “will not be automatic and could be in either direction.” Despite the tight labour market and a higher than expected employment rate, the report also cited that in response to weakness in productivity growth levels, the “near-term outlook was expected to lead to a small margin of slack opening up this year.” On March 22, U.K. Prime Minister Theresa May was granted an extension for a Brexit delay on the conditions that Britain will have until May 22 to withdraw from the EU should the House of Commons pass the deal, or until April 12 should the deal not pass. Moreover, as Brexit is currently more unclear than ever, MPC officials are now predicting that rates will more likely go down than up.

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

March 18
According to preliminary estimates, the European Union’s statistical agency, Eurostat, reported that the trade surplus in the euro area narrowed to €1.5 billion in January, following a revised €3.1 billion in the same month last year. January exports stood at €183.4 billion, a 2.5% increase from January 2018. Imports stood at €181.8 billion, a rise of 3.4% compared to January 2018. On a monthly basis, the trade balance increased to a €17.0 billion surplus (seasonally adjusted), up from €16.0 billion in December 2018. This was the highest level since April 2018. Exports increased 0.8%, the first gain since October 2018, offsetting the 0.3% increase in imports. The trade surplus was considerably larger than expected. The improved net trade results should boost real GDP growth in the current quarter.

Japan’s Ministry of Finance announced that the country’s international trade surplus in goods and services stood at 339 billion yen in February, following a revised 1,416 billion-yen deficit in the previous month. On a year-over-year basis, exports decreased 1.2% in February for a third consecutive period, following a revised 8.4% decline in January. Imports fell 6.7% in February, following a revised 0.8% decrease in the previous month. Despite the impact of lunar new year holidays, this is a sign that the trade-reliant economy is undergoing pressure from concerns of a slowing global economy and trade uncertainties. These results were weaker than market expectations.

March 19
The U.S. Census Bureau announced that durable goods orders increased 0.3% in January, following a downwardly revised 1.3% increase in December (originally reported as 1.2%). Excluding transportation, new orders decreased 0.2% in January. Excluding defence, new orders increased 0.2%. With the market looking for a reversal, these figures are relatively stronger than expected. Orders for durable goods indicate how busy manufacturers will be in the months to come as they work to fill those orders.

The U.K. Office for National Statistics reported that the number of unemployed workers fell by 35,000 to 1.3 million in the three months to January. The unemployment rate edged down 0.1 percentage points to 3.9% over the same period, the lowest rate since November 1974 to January 1975. However, the unemployment rate reached a record 3.8% in November alone, somewhat below market expectations of 4.0%. Meanwhile, the report showed a 222,000 gain in employment to a record high of 32.7 million in Q4 2018, the greatest jump since Q3 2015. As a result, the employment rate reached a record high of 76.1%. Average weekly earnings, both excluding and including bonuses increased by an annual 3.4% in nominal terms. The report’s data show a blended portrait of the U.K. labour market and that there is not enough strength to provoke a Bank of England (BoE) tightening schedule.

Germany’s ZEW Indicator of Economic Sentiment increased by 9.8 points from February to a -3.6 reading in March. It was the highest reading since March 2018 and well above market expectations of -11.0. The current conditions index declined 3.9 points to 11.1, following a 15.0 reading in the previous month. This was its sixth consecutive fall and weakest outcome since December 2014. Despite the many inevitable delays, optimism related to a smooth Brexit and renewed hopes for a finalized U.S.-China trade deal seem to have boosted economic confidence.

March 20
The U.K. Office for National Statistics announced that consumer prices increased 0.5% (seasonally adjusted, monthly basis) in February. This is up from the 0.8% decrease in January and the sharpest drop since January 2016. On a monthly basis, consumer price index (CPI) growth edged up 0.1 percentage points to 1.9% in February. This is the second time since January 2017 that inflation has registered levels below its 2.0% medium-term target and its first increase recorded since August 2018. Both monthly and annual results were marginally above market expectations. The February inflation data will likely bear little weight with respect to the BoE’s policy decisions.

Destatis, Germany’s statistics gathering agency, reported that producer prices decreased 0.1% in February (monthly basis), following a 0.4% increase in January. On a year-over-year basis, the producer price index (PPI) stood at 2.6% in February, unchanged from the previous month and the lowest PPI inflation since May 2018. The monthly and annual figures were below market expectations.

The U.S. Federal Reserve left interest rates unchanged following its latest two-day policy meeting. The target range for the federal funds rate was left at 2.25% to 2.50%. The Fed last raised interest rates by 0.25% on December 19. The press release that accompanied the announcement highlighted the continued strength of the labour market and household spending. The Fed signalled that it will keep interest rate hikes on hold for the remainder of the year, reflecting concerns of slowing economic growth and muted inflation pressures, largely as a result of lower energy prices. The announcement of unchanged interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policymakers in other countries.

March 21
The U.S. Department of Labor announced that initial jobless claims totalled 221,000 (seasonally adjusted) in the week ending March 16, a decrease of 9,000 from the previous week's revised level. The four-week moving average was 225,000, an increase of 1,000 from the previous week's unrevised average. These results are in line with consensus estimates.

The Australian Bureau of Statistics reported that the number of unemployed workers decreased by 11,700 to 664,300 in February. Employment rose a modest 4,600 to 12.76 million in February compared to a 38,300 rise in January, missing market expectations of a 14,000 gain. As a result, the unemployment rate inched lower for a third consecutive month to 4.9% (seasonally adjusted), its lowest jobless rate since June 2011 and below expectations of 5.0%. Today’s labour report data suggest a strong labour market and it is likely the Reserve Bank of Australia (RBA) will leave its key “cash rate” at 1.5%. However, the severe downturn in Australia’s housing market could serve as a potentially greater threat to the economy and may force the RBA to deliberate about future rate cuts.

The BoE’s Monetary Policy Committee (MPC) left its key bank rate unchanged at 0.75% following its latest meeting. The text accompanying the release stated that since the MPC’s previous meeting, the “MPC’s February Inflation Report projections appear to be on track” as CPI inflation rose modestly to 1.9% in February and is expected to remain close to its annual inflation target of 2.0%. The report also noted that given weakness in productivity growth levels, a weaker “near-term outlook was expected to lead to a small margin of slack opening up this year.” This is despite the tight labour market and a higher than expected employment rate. With Britain just days away from its March 29 scheduled departure from the European Union, the BoE had remained consistent in its statement that ongoing monetary policy tightening over the forecasted period will be appropriate to meet its 2.0% inflation target. The unanimous decision to hold the benchmark rate steady was in line with market expectations.

The U.K. Office for National Statistics reported that retail sales increased 0.4% (monthly basis, seasonally adjusted) in February, following a downwardly revised 0.9% advance in January. It was the third increase in the last four months. These results were significantly above market expectations. Growth was recorded in all the main sectors, with the exception of food stores, which registered its steepest decrease since December 2016. On a year-over-year basis, sales eased to 4.0% in February, following a downwardly revised 4.1% in January and beating market estimates of 3.3%. These figures followed strong data released in this week’s labour market report, and retail sales figures depict that an improving trend in real wages is the dominant force on household spending.

March 22
Statistics Canada reported that consumer prices rose 0.3% (seasonally adjusted, monthly basis) in February, following a 0.1% decline in January. On a year-over-year basis, the consumer price index (CPI) edged up to 1.5%, remaining below the Bank of Canada’s 2.0% target for the second consecutive month. The transportation index (+0.9%) and the clothing and footwear index (+0.5%) reported the largest increases, while the household operations, furnishings and equipment index (-0.3%) declined the most during the month. All three measures of core inflation established by the Bank of Canada showed that underlying inflation remained stable and was below their 2.0% target, ranging from 1.8% to 1.9%. CPI common, which the central bank says is most closely correlated with the output gap, slipped to 1.8% from 1.9% in January. The overall figures were marginally stronger than market expectations.

Statistics Japan announced that, on a year-over-year basis, consumer prices increased 0.2% in February, unchanged from January’s 15-month low and below market expectations of 0.3%. The annual figure was significantly below the Bank of Japan’s “price stability target” of 2.0%. On a month-over-month basis, the consumer price index (CPI) stood at 0.0% (seasonally adjusted), following a 0.3% advance in the previous month. The fall in January’s headline inflation largely reflects the drop in food prices (-1.4%) and transportation costs (-0.6%), each of which fell for a third consecutive month. Annual core CPI, which excludes fresh food prices, inched lower by 0.1 percentage points to 0.7%. The CPI results were marginally below the market expectations.

The IHS Markit Eurozone Manufacturing PMI fell further by 1.7 points to 47.6 (seasonally adjusted) in March, after a 49.3 reading in February. The latest reading pointed to the steepest contraction in the manufacturing sector, slipping below the key 50.0 expansion threshold for the second consecutive month since June 2013. Manufacturing output was undermined by the sharpest decline in new work received in six years and export orders (including intra-euro area trade) fell for a sixth consecutive month, its greatest degree for over six years. By country, Germany, the largest economy of the 19-nation euro area, posted the weakest Manufacturing PMI figure (44.7) in 69 months. This is well below the 50.0 expansion figure and points to prolonged periods of contraction in the sector. These results were significantly below market expectations.

According to the U.S. National Association of Realtors, existing-home sales surged 11.8% to a seasonally adjusted annual rate of 5.51 million units in February from a downwardly-revised 4.93 million in January (originally a 4.94 million-unit pace). Sales are now 1.8% below the 5.61 million-unit pace in February 2018. It was the highest reading in 11 months and the biggest monthly rise since December 2015. These results are significantly stronger than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.


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 is 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.


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