The Playbook – January 27, 2020

January 27, 2020 • Playbook


The Playbook

Weekly Commentary – January 27, 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
January 27 New Home Sales Dec 2019 0.713M 0.719M
January 28 Durable Goods Orders Dec 2019 -0.5% -2.0%
January 29 Wholesale Inventories Adv Dec 2019 -0.2% -0.1%
January 29 Pending Home Sales Y/Y Dec 2019 0.4% 1.2%
January 29 Fed Interest Rate Decision   1.75 1.75%
January 30 GDP Growth Rate Q/Q Adv Q4 2019 2.1% 2.1%
January 30 Initial Jobless Claims Jan 25, 2020 232k 211k
January 31 Personal Income Dec 2019 0.4% 0.5%
January 31 Personal Spending Dec 2019 0.5% 0.4%
January 31 GDP Growth Rate Nov 2019 0.1% -0.1%
*Source: Trading Economics

Key Earnings Calendar**

January 27: 3M Co., AbbVie Inc., Alaska Air Group Inc., Bristol-Myers Squibb Co., Honeywell International Inc.
January 28: Konami Corp., Lockheed Martin Corp., McDonald's Corp., Pfizer Inc., Starbucks Corp., United Technologies Corp.
January 29: AT&T Inc., Automatic Data Processing Inc., General Electric Co., Novartis AG, Qualcomm Inc., Tesla Inc.
January 30: Amgen Inc., Eli Lilly & Co., Facebook Inc., Royal Dutch Shell PLC, Verizon Communications Inc., Visa Inc.
January 31: Alphabet Inc., Inc., Boeing Co., Chevron Corp., Ricoh Co. Ltd., Roche Holding AG
**Source: Seeking Alpha

Market Focus

Bank of Canada sees improving economy in 2021

At the conclusion of its latest monetary policy deliberations, the Bank of Canada left administered interest rates unchanged. The bank rate was held at 2.0% and the deposit rate at 1.5%, where they have been since October 24, 2018. At the same time, the bank released their updated Monetary Policy Report. The new economic forecast points to materially stronger gross domestic product (GDP) growth of 2.0% in 2021. This was raised from a projection of 1.8% in the October 2019 report. Concurrently, changes to growth expectations for both 2020 (to 1.6% from 1.7%) and 2019 (to 1.6% from 1.5%) were virtually offsetting. The new 1.6% forecast for 2019 GDP growth implies an annualized growth rate of no more than 0.6% for the final quarter of last year. Ironically, if the 2.0% growth rate is achieved in 2021, the bank further indicates that this would be “above potential.” The implication is that rate hikes should be anticipated if this above potential growth persists for an extended period.

ECB holds rates steady, kicks off policy review

At its first monetary policy meeting of 2020, the European Central Bank (ECB) left its policy mix unchanged, extending the prolonged period of “easy money” as the export-dependent euro area struggles to accelerate growth. Significantly, however, the press release accompanying the announcement stated that the bank planned to “launch a review” of its monetary policy framework. This would be the first review since 2003 and follows years of extensive quantitative easing and negative interest rates that have largely failed to revive inflation. Harmonized consumer prices in the euro area rose 1.3% in December, well below the bank’s inflation target of “close to, but below, 2%.” ECB President Christine Largarde stated that the reappraisal will include “how we measure, what tools we have and how we communicate.” Further, the policy reassessment could potentially include redefining the bank’s inflation goal, by way of a symmetrical target approach, and altering its current inflation bogey, which significantly underweights housing prices. Ms. Lagarde noted that the conclusions of the strategy review will likely be communicated before the end of 2020.

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 21
Statistics Canada reported that manufacturing sales fell 0.6% in November, the third consecutive monthly decline. Lower sales in the primary metal, chemical and food industries were partly offset by higher sales in the transportation and fabricated metal industries. In line with the string of weaker monthly figures, year-over-year sales are now down 0.1%. This report is weaker than the market consensus. These data are closely watched as manufacturing output has a significant influence on overall GDP growth.

The U.K. Office for National Statistics reported that employment increased by 208,000 to a record high of 32.9 million (seasonally adjusted) in the three months to November, the largest increase since the three months to January 2019. This was driven primarily by an increase in full-time workers (197,000). This pulled down the employment rate 0.2 percentage points to 75.9%. The number of people out of work fell marginally by 7,000 to 1.31 million over the same period. As a result, the unemployment rate held steady at 3.8%, which equals its lowest level since the three months to January 1975. Total earnings (including bonuses) rose by an annual 3.2%. Total earnings (ex-bonuses) slowed to 3.4%, a tick lower than in the previous three months. The overall labour figures matched market consensus.

Germany’s ZEW Indicator of Economic Sentiment climbed 16.0 points to 26.7 in January, the highest mark since July 2015 and following a reading of 10.7 in December. Over the same period, a separate gauge measuring investors’ assessment of the economy’s current conditions jumped 10.4 points to -9.5, the highest mark since July 2019. The overall results are significantly above market expectations. The ZEW Indicator of Economic Sentiment is a leading indicator for the German economy similar to the ifo Index.

January 22
Statistics Canada reported that wholesale sales dropped 1.2% in November, matching the upwardly revised 1.2% October decline. At the same time, inventories increased 0.4% in November after three consecutive monthly declines. Despite the increase in November, inventories were down 1.8% from their highest level in July. The monthly sales decline is larger than expected. Activity at the wholesale level can be an indicator of future consumer trends.

The U.K. Confederation of British Industry (CBI) revealed in its Industrial Trends Orders survey that its monthly order book balance gained 6.0 percentage points to -22.0% in January. At the same time, business optimism increased to 23% in the three months to January, after a -44% reading in October which was its fastest pace of improvement since April 2014. The CBI reported that this was the “largest swing” in sentiment (67.0 percentage points) in a single quarter since records began in 1958. Meanwhile, export sentiment (-8% from -44%) continued to fall but was noticeably less gloomy compared to the previous quarter. The results are slightly stronger than market consensus. The CBI Industrial Trends Orders measures the economic expectations of the manufacturing executives in the U.K. and is a leading indicator of business conditions.

At its first monetary policy window of 2020, the Bank of Canada announced that it was, once again, holding the target for its key overnight interest rate steady at 1.75%, keeping rates unchanged for a tenth straight meeting. The bank rate was left unchanged at 2.00% and the deposit rate remains at 1.50%. The bank last changed borrowing costs by raising rates 0.25% on October 24, 2018. The press release that accompanied the announcement appeared less dovish, pointing to a stabilizing global economy and noting that some “recent trade developments have been positive.” The press release also states that the bank “now estimates growth of 0.3% in Q4 2019 and 1.3% in Q1 2020,” as both exports and business investment weakened in the latter months of last year. The decision to leave interest rates unchanged was in line with market expectations. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

According to the U.S. National Association of Realtors, existing-home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units in December from the 5.35 million-unit pace in November. Sales are now 10.8% above the 5.0 million-unit pace in December 2018. These results are significantly stronger than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that consumer prices jumped 0.4% (seasonally adjusted, monthly basis) in December, after rising 0.1% in November. This is the largest monthly increase since July. However, on a year-over-year basis, the consumer price index (CPI) was up 2.2%, matching the November pace. Transportation recorded the largest monthly gain (0.5%) of the eight main sub-indexes. All three of the Bank of Canada’s core inflation measures showed underlying inflation near their 2.0% target, ranging from 2.0% to 2.2%. CPI common, which the central bank says is most closely correlated with the output gap, was marginally higher at 2.0%. The overall figures are broadly in line with market expectations.

Statistics Canada also announced that its New Housing Price Index rose 0.2% in December, matching the September advance as the largest monthly gain in two years. On a year-over-year basis, the index is now up 0.1%. These results are stronger than consensus expectations but suggest only modest improvements in net worth for homeowners.

January 23
The U.S. Department of Labor announced that initial jobless claims totalled 211,000 (seasonally adjusted) in the week ending January 18, an increase of 6,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 205,000. The four-week moving average was 213,250, a decrease of 3,250 from the previous week's revised average. The previous week's average was revised up by 250 to 216,500. These results are in line with consensus estimates.

The ECB announced that it was holding the interest rate on its key deposit facility steady at a record low of -0.50%. The interest rates on its main refinancing rate and marginal lending facility were also left unchanged at 0.00% and 0.25%, respectively. Additionally, the bank confirmed that it will continue its net bond purchases at a monthly pace of €20 billion under its asset purchase program, which former ECB President Mario Draghi had resumed on November 1, 2019. The statement accompanying the announcement indicates that the central bank is 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%.” The bank’s next policy meeting is scheduled for March 3.

The Australian Bureau of Statistics revealed that the number of employed persons increased 28,900 (seasonally adjusted) to 4,146,900 in December, while unemployment fell by 12,900 to 693,100. As a result, Australia’s unemployment rate ticked down to 5.1% in December, from 5.2% in November. This is the lowest jobless rate since March 2019. At the same time, both the underemployment rate and participation rate were unchanged on the month at 8.3% and 66.0%, respectively. The overall labour force data are stronger than market consensus.

January 24
Statistics Canada reported that retail sales climbed 0.9% in November, partially offsetting the 1.1% decline in October. Sales were up in six of 11 subsectors, representing 70% of total retail sales with motor vehicles and parts sales reporting the largest monthly gain (3.0%). Clothing stores recorded the largest decline (-1.7%). Overall, year-over-year sales growth stood at 1.9% in November. These results are above consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.


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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