The Playbook – October 28, 2019

October 28, 2019 • Playbook


The Playbook

Weekly Commentary – October 28, 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
  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
October 29 Pending Home Sales Y/Y Sep 2019 1.2% 2.5%
October 30 Gross Domestic Product (GDP) Q/Q Adv Q3 2019 1.9% 2.0%
October 30 Fed Interest Rate Decision   1.75% 2.0%
October 31 Personal Spending Sep 2019 0.2% 0.1%
November 1 Nonfarm Payrolls Oct 2019 155k 136k
November 1 ISM Manufacturing PMI Oct 2019 47.2 47.8
October 30 Bank of Canada Interest Rate Decision   1.75% 1.75%
October 31 Gross Domestic Product Aug 2019 0.1% 0.0%
*Source: Trading Economics

Key Earnings Calendar**

October 28: Alphabet Inc., AT&T Inc., Baidu Inc., HSBC Holdings PLC, Restaurant Brands International Inc., T-Mobile US Inc.
October 29: Amgen Inc., BP PLC, Chubb Ltd., ConocoPhillips, Mastercard Inc., Merck & Co. Inc., Pfizer Inc., Shopify Inc.
October 30: Apple Inc., CME Group Inc., Facebook Inc., General Electric Co., GlaxoSmithKline PLC, Starbucks Corp.
October 31: Altria Group, American Tower Corp., BCE Inc., Bristol-Myers Squibb Co., Celgene Corp., Royal Dutch Shell PLC
November 1: AbbVie Inc., Berkshire Hathaway Inc., Chevron Corp., Exxon Mobil Corp., Imperial Oil Ltd., TC Energy Corp.
**Source: Seeking Alpha

Market Focus

Canadian retail spending dips lower in August

Despite recent reports that have highlighted the strength of Canada’s labour market, with the unemployment rate hovering near a fifty-year low, Statistics Canada announced a 0.1% decline in retail sales during August. The monthly drop in spending left annual sales growth at 1.1%, well below the pace of both job (2.4%) and wage (4.3%) growth. Sales were down in six of 11 subsectors, representing 51% of total retail sales with food and beverage sales (-0.8%) reporting the largest monthly decline. Sporting goods, hobby, book and music stores (1.1%) recorded the largest gain. Geographically, six of the 10 provinces reported monthly increases, with New Brunswick (3.8%) leading the gainers. Manitoba (-1.6%) posted the largest monthly decline. The overall results suggest that consumer spending will exert a material dampening influence on the broader GDP growth for the third quarter.

U.S. housing activity stalls in September

Updated figures from the U.S. Census Bureau showed that new-home sales fell 0.7% in September. At the same time, the median price of a new home fell below $300,000, dropping by 7.9% on the month, to its lowest level since February 2017. Similarly, the U.S. National Association of Realtors revealed a 2.2% decline in existing home sales during September and a monthly price decline of 2.4%. These reports come on the back of an earlier Census Bureau announcement that showed a 9.4% decline in housing starts and a 2.7% drop in building permits, also during September. While the housing sector remains on firm footing, with higher wages and lower mortgage rates supporting affordability, it appears that momentum may be slowing despite this support.

Draghi passes the baton

At Mario Draghi’s final meeting of his eight-year tenure as President of the European Central Bank (ECB), he surprised no one by keeping the bank’s benchmark overnight rate unchanged at a record low of -0.50%. He hands the reins to the new ECB President, and former chief of the International Monetary Fund, Christine Lagarde on October 31. Not surprisingly, Lagarde recently signalled that she will conduct a review of the bank’s “monetary framework,” similar to the review currently being undertaken at the U.S. Federal Reserve. Even though bank watchers may question whether any other new policy tools will be uncovered, the market anticipates that Lagarde will adopt the same “whatever it takes” attitude, espoused by Draghi in 2012, when she takes the helm.

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

October 21
Japan’s Ministry of Finance announced a trade deficit of ¥123 billion in September, widely shifting away from its ¥124.1 billion surplus in the same month a year earlier. Importantly, exports in September slumped 5.2% (Y/Y), recording their 10th straight contraction. The decline was significantly larger than market forecasts of -4.0%. Total imports declined by a softer 1.5% (on the same basis) in September, the fifth consecutive monthly drop. Imports from the U.S. slid 11.6% on the month, which triggered Japan’s trade surplus with the world’s largest economy to narrow by 3.5% from a year earlier to ¥564.1 billion. The prolonged weakness in Japanese exports, as well as the overall trade data, may highlight the need for the Bank of Japan to ease monetary policy to support an economy caught in the crosshairs of the Sino-U.S. trade war.

Destatis, the federal statistics office of Germany, reported that producer prices unexpectedly edged up 0.1% in September (M/M), only their second increase since April, following a 0.5% decline in August. Moreover, this reduced annual Producer Price Index (PPI) inflation was down from 0.3% to -0.1% (Y/Y) in September, stronger than market consensus forecasts, but the first sub-zero reading since October 2016. This PPI update leaves unchanged the soft outline of core pipeline inflation pressure in German manufacturing.

October 22
Statistics Canada reported that retail sales cooled in August, dropping 0.1% (seasonally adjusted) following July’s upwardly revised 0.6% monthly increase. Sales were down in six of 11 subsectors, representing 51% of total retail sales with food and beverage sales (-0.8%) reporting the largest monthly decline. Sporting goods, hobby, book and music stores (1.1%) recorded the largest gain. Year-over-year sales growth slowed to 1.1% from a revised 1.4% in July. Even with the upward revisions to the prior data, these results are below consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

October 23
Statistics Canada reported that wholesale sales tumbled 1.2% in August, virtually eliminating the 1.4% advance seen in July. At the same time, inventories fell 0.3% during the month, the first decline following 11 consecutive increases. On a year-over-year basis, overall wholesale sales are now up 2.0% while inventories are up 8.7%. The monthly sales report was considerably weaker than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

October 24
The IHS Markit Flash Germany Manufacturing PMI edged up 0.2 points to a revised 41.9 (seasonally adjusted) reading in October, recording a tenth straight month below the 50.0 expansion threshold and slightly above September’s 10-year low reading of 41.7. The report showed that employment in Germany’s private sector fell for the first time in six years, pointing to a third-quarter slowdown that could stretch into the closing months of the year. IHS Markit also indicated that job creation in the services sector dropped to its lowest level in over three years. The results are weaker than market consensus forecasts.

The U.S. Department of Labor announced that initial jobless claims totalled 204,000 (seasonally adjusted) in the week ending October 19, a decrease of 6,000 from the previous week's revised level. The previous week's level was revised up by 4,000 to 218,000. The four-week moving average was 215,000, a decrease of 750 from the previous week's revised average. The previous week's average was revised up by 1,000 to 215,750. These results are in line with consensus estimates.

The U.S. Census Bureau announced that durable goods orders decreased by 1.1% in September, following an upwardly revised 0.3% increase in August (originally reported as 0.2%). Excluding transportation, new orders decreased 0.3% in September. Excluding defence, new orders decreased 1.2%. Even with the revisions to the previous data, these figures are weaker than market expectations. Orders for durable goods indicate how busy manufacturers will be in the months to come, as they work to fill those orders.

The European Central Bank (ECB) announced that the interest rate on the deposit facility will remain unchanged at a record low of -0.50%. The interest rates on the main refinancing rate and the marginal lending facility will also remain unchanged at 0.00% and 0.25%, respectively. The statement accompanying the announcement indicates that the central bank is still open to more stimulus, stating that interest rates will “remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%.” As decided at its September meeting, net purchases will restart under the ECB’s asset purchase program at a monthly pace of €20 billion as of November 1. The bank’s next policy meeting is scheduled for December 12.

The U.S. Census Bureau announced that new-home sales totalled 701,000 units (seasonally adjusted annual rate) in September. This is 0.7% below the revised August rate of 706,000 units but is 15.5% above the September 2018 level of 608,000 units. With the market anticipating a larger monthly decline, these results are stronger than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

October 25
Germany’s ifo Business Climate Index remained steady at 94.6 (seasonally adjusted) in October. Meanwhile, the current conditions gauge dropped 0.8 points to 97.8, following an upwardly revised reading of 98.6 in September. By contrast, the business expectations gauge jumped 0.6 points to 91.5, posting its first increase since March. The overall ifo survey figures are marginally stronger than market consensus expectations. The headline ifo Business Climate Index is used as a forward-looking indicator of morale in German industry.

Germany’s GfK Consumer Climate Index fell to 9.6 heading into November, 0.2 points below its downwardly revised reading of 9.8 in October and missing market consensus of 9.8. GfK SE (Growth from Knowledge) is Germany’s largest market research institute, and its Consumer Climate Survey measures German consumers’ assessments of current economic conditions.


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