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The Playbook – January 20, 2020

January 20, 2020 • Playbook

The Playbook


The Playbook

Weekly Commentary – January 20, 2020

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
  Toshi K. Okada, B.MOS
Analyst, 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
U.S.        
January 22 Existing Home Sales Dec 2019 5.42M 5.35M
January 23 Initial Jobless Claims Jan 18, 2020 227k 204k
Canada        
January 21 Manufacturing Sales Nov 2019 0.6% -0.7%
January 22 Inflation Rate Y/Y Dec 2019 2.0% 2.2%
January 22 Wholesale Sales Dec 2019 -0.6% -1.1%
January 22 Band of Canada Interest Rate Decision   1.75% 1.75%
January 24 Retail Sales Nov 2019 -0.1% -1.2%
*Source: Trading Economics

Key Earnings Calendar**

January 20: American Express Co., Atlassian Corp. PLC, Canadian Pacific Railway Ltd., PPG Industries Inc.
January 21: The Charles Schwab Corp., International Business Machines Corp., Morgan Stanley, Netflix Inc., Sandvik AB
January 22: Crown Castle International Corp., General Dynamics Corp., Johnson & Johnson, United Technologies Corp.
January 23: Comcast Corp., Intel Corp., Union Pacific Corp., Lockheed Martin Corp., Starbucks Inc., Texas Instruments Inc.
January 24: Abbott Laboratories, Air Products and Chemicals Co., eBay Inc., Raytheon Co., Waters Corp.
**Source: Seeking Alpha

Market Focus

U.S. consumers close 2019 on a positive note

The December report from the U.S. Census Bureau revealed a third consecutive 0.3% monthly increase in retail and food services sales. This was enough to push annual sales growth to 5.8%, its strongest pace since August 2018 (6.1%). However, for the fourth quarter, annualized growth in sales came in below both Q2 (7.7%) and Q3 (5.7%) at a still-healthy 2.2%. For calendar 2019, sales grew 3.6%, a tenth consecutive year of gains. Again, while this is a solid pace of expansion, it is below the figures recorded in both 2017 (4.2%) and 2018 (4.9%). Even though continued strength in the U.S. job markets will, undoubtedly, support ongoing expansion of consumer spending, growth in spending is expected to moderate to a pace resembling a “sustainable” level. The appearance of less rapid spending growth can be expected to influence both the fourth quarter and annual gross domestic product (GDP) results for 2019.

Investor optimism lifts stocks on U.S.-China trade deal

While long anticipated, the U.S.-China trade deal signed on January 15, boosts China’s commitment to buy American goods and services by $200 billion by 2021. In addition, China agreed to ‘crack down’ on business practices that the Trump administration has criticized. The actual results of the agreement remain to be seen, as both sides may have different interpretations as to how the deal will work in practice. Still, investors embraced the accord which, on the same day, pushed the Dow Jones Industrial Average (DJIA) to its first-ever close above the psychological 29,000 mark. At the end of trading, the DJIA stood with a cumulative 343.4% gain from the low posted during the financial crisis. Similarly, the broader S&P 500 also set a record high close of 3,289.3 on January 15, representing a 386.2% gain over that same period.

Weak economy weighs on Bank of England

Mounting evidence from soft U.K. economic data is applying pressure on the Bank of England (BoE). Recent figures from the Office for National Statistics (ONS) revealed that consumer prices rose 1.3% in December, slowing from the 1.5% pace of the previous two months and establishing the lowest year-over-year inflation rate since November 2016. The figures show that U.K. inflation has been consistently below the BoE’s target rate of 2% since August 2019. ONS data also show that the economy unexpectedly shrank 0.3% in November. This is its fifth monthly economic contraction since February 2018. Amid growing concerns that Britain’s slowing inflation and sluggish economy will lead to a prolonged period of subdued growth, traders are now pricing in a more than 60% chance of an interest rate cut at the central bank’s monetary policy meeting. This meeting will take place on January 30, just one day ahead of the anticipated Brexit date.

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

January 13
The U.K. ONS reported that provisional monthly GDP contracted -0.3% in November, down from an upwardly revised 0.1% growth rate recorded in October (originally reported as 0.0%). Rolling three-month growth was 0.1% in November, after advancing by an upwardly revised 0.2% in the three months to October (originally reported as 0.0%). On a year-over-year-basis, GDP rose just 0.6% in November, marking its weakest expansion since June 2012. These results are weaker than market consensus.

The ONS also reported that the U.K. posted a trade surplus of £4.03 billion (seasonally adjusted) in November, following a revised £1.34 billion deficit in October (originally reported as a £5.12 billion deficit). It is the largest surplus posted since monthly records began in 1998. The surplus reflected a 1.1% rise in exports to an all-time high of £59.84 billion. Meanwhile, total imports plunged 7.8% to a near two-year low of £55.8 billion. The trade figures are significantly stronger than market consensus.

Destatis, the federal statistical office of Germany, reported that wholesale prices in Germany decreased 1.3% (Y/Y) in December, following a 2.5% drop in November. This was the sixth straight month of declines in wholesale prices, amid declines in the cost of petroleum products and waste and residual materials. On a monthly basis, wholesale prices were flat, after a 0.1% decline in November. These results are well below market consensus.

January 14
The U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) increased 0.2% (seasonally adjusted basis) in December. Over the last 12 months, the index increased 2.3%. These results were marginally lower than expectations. These figures are consistent with the U.S. Federal Reserve's expectations of neutral inflationary pressures.

The General Administration of Customs of China reported that the nation’s trade surplus narrowed to US$46.8 billion in December from US$57.1 billion in the same month a year earlier. Total exports jumped 7.6% (Y/Y) to US$237.7 billion in December, marking the first increase in exports in five months and the steepest growth since March. Meanwhile, total imports unexpectedly surged 16.3% (on the same basis) in on the month to US$190.9 billion. The total trade balance figures fell short of market consensus.

January 15
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) edged up 0.1% (seasonally adjusted) in December. The index increased 1.3% in 2019, after a 2.6-percent advance in 2018. This is now the smallest annual growth figure since a 1.1% decline was recorded in 2015. These results are marginally lower than consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.K. ONS revealed that consumer prices were flat (M/M) in December, after a 0.2% advance in November. On a year-over-year basis, the CPI slowed to 1.3% in December, following a 1.5% increase in November. This is the lowest year-over-year reading since November 2016. Further, the core CPI, which excludes the volatile prices of energy, food and tobacco, was also flat on the month, after rising 0.2% in October. This pulled down the underlying annual rate to 1.4% from 1.7%, its sixteenth straight sub-2.0% outturn. The data show that annual inflation is downward trending and will likely remain below the Bank of England’s 2.0% medium-term target should there be no changes to monetary policy. The bank’s next policy meeting is scheduled for January 30.

January 16
The U.S. Department of Labor announced that initial jobless claims totalled 204,000 (seasonally adjusted) in the week ending January 11, a decrease of 10,000 from the previous week's unrevised level of 214,000. The four-week moving average was 216,250, a decrease of 7,750 from the previous week's unrevised average of 224,000. These results are somewhat stronger than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in January and at a far more robust pace. The Philly Fed general business conditions index jumped to 17.0 from an upwardly revised 2.4 reading in December. These results are well above market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The U.S. Census Bureau announced that retail and food services sales were up 0.3% (seasonally adjusted) for the month of December and were 5.8% above December 2018 levels. Excluding autos, sales were up 0.7% during the month and up 6.3% on a year-over-year basis. With the revisions, these figures are in line with market expectations. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

January 17
The U.S. Census Bureau announced that housing starts in December were at a seasonally adjusted annual rate of 1,608,000. This is 16.9% above the upwardly revised November estimate of 1,375,000 and is 40.8% above the December 2018 rate of 1,142,000. At the same time, the number of building permits issued in December was at a seasonally adjusted annual rate of 1,416,000. This is 3.9% below the downwardly revised November rate of 1,474,000 but is 5.8% above the December 2018 figure of 1,339,000. These figures are generally stronger than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada announced that foreign investors sold off $1.8 billion of Canadian securities in November, the first reduction in four months. At the same time, Canadian investors' holdings of foreign securities rose $5.5 billion, predominantly in equities. The foreign acquisition of Canadian securities was well below expectations. Foreign investment flows can significantly influence the relative strength of the Canadian dollar.

The U.S. Federal Reserve announced that industrial production declined 0.3% in December after rising 0.8% in November. On a year-over-year basis, industrial production was reported to have dropped 1.0%. Total output for the quarter declined at an annualized 0.5% pace, well down from the 1.2% gain recorded in the third quarter. Capacity utilization for total industry fell to 77.0% in December from 77.4% in November and 79.5% a year earlier. These results are in line with market expectations. The softening in production should be reflected in softer quarterly GDP figures.

 

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.

 

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