Playbook– August 5, 2019

August 02, 2019 • Playbook

The Playbook

The Playbook

Weekly Commentary – August 5, 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
August 5 ISM Non-Manufacturing New Orders July 19 55.2 55.8
August 5 Markit Services PMI Final July 19 52.2 51.5
August 6 IBD/TIPP Economic Optimism August 19 54.0 56.6
August 9 Core PPI July 19 0.2% 0.3%
August 9 Participation Rate July 19 65.6% 65.7%
August 9 Building Permits June 19 6.2% -13.0%

Key Earnings:
August 5: Boise Cascade Co., Brookdale Senior Living Inc., Parker Drilling Co.
August 6: Apollo Investment Corp., Century Casinos Inc., Monster Beverage Corp.
August 7: Athersys Inc., Cabot Microelectronics Corp., Fox Corp., Infinera Corp.
August 8: Azul S.A., Cumulus Media Inc., Murphy Oil Corp., Perrigo Company PLC
August 9: Genesee & Wyoming Inc., RMR Group Inc., Tidewater Inc., US Concrete Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy grinds higher
Updated figures from Statistics Canada revealed a 0.2% advance in gross domestic product (GDP) by industry during May, marking a third consecutive gain. A rebound (2.3%) in durables manufacturing led the monthly improvement. However, year-over-year growth slipped to 1.4% from a revised 1.6% pace in April. At the same time, the statistics gathering agency released revised GDP data going back to January 2018. As a result, annualized growth in the April to June 2019 period is now expected to be in the 3.0% range. This would be the strongest quarter of economic growth since the second quarter of 2017. The apparent strength in this report may be enough to allow the Bank of Canada to remain among the few major central banks that are not looking to ease monetary policy. Not surprisingly, in anticipation of a more favourable interest rate differential, traders pushed up the strength of the Canadian dollar in the wake of this report.

Fed cuts rates for the first time since the financial crisis
At the conclusion of its latest policy deliberations, the U.S. Federal Reserve (Fed) cut administered interest rates by 0.25%, reducing the range on federal funds to 2.00% – 2.25%. This was the first rate cut since December 16, 2008, during the height of the financial crisis and is the first rate cut under Fed Chair Jerome Powell. The previous policy move by the Fed was to raise interest rates by the same 0.25% on December 19, 2018. As seen previously, the press release that accompanied this announcement highlighted the continued strength of the U.S. job market. However, this commentary was countered by statements relating to the softening of global economic activity and the persistence of muted domestic inflationary pressures. In addition, the release spoke specifically to quantitative tightening, stating that the “Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.” Analyst speculation on a followup rate cut will begin immediately, with the next meeting scheduled for September 17 and 18.

Australian stocks hit record high
Australian equities rose to record levels on July 30, reclaiming levels that were last seen before the global financial crisis. The S&P/ASX 200 Index closed the session at 6,845.1, breaching its previous record high close of 6,828.7 set on November 1, 2007. Since subsequently bottoming out on March 6, 2009, the index has advanced a cumulative 117.6%. The length of the recovery period can be attributed, in part, to the Reserve Bank of Australia’s (RBA) relatively tight monetary policy. Unlike most other major central banks, the RBA raised rates seven times between October 2009 and November 2010. However, since first cutting rates again in November 2011, the bank has subsequently reduced administered interest rates to levels below those seen during the financial crisis. The benchmark “cash rate” now sits at a record low of 1.0%. The current coalition government’s election win in May also bolstered support for the equity market. Despite easy monetary policy, concerns remain as Australia’s lackluster growth and weak inflation raise questions with respect to the sustainability of these market levels.

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 30
According to the U.S. Bureau of Economic Analysis, personal income increased 0.4% in June and personal consumption expenditures (PCE) rose 0.3%. Based on revised figures, personal income increased 0.4% and PCE increased 0.5% in May. Both income and expenditure figures for June are marginally higher than consensus expectations. Income and spending patterns of consumers are critical factors in the health of the broader economy.

The Bank of Japan (BOJ) met expectations by leaving its key short-term policy rate for excess reserves unchanged at -0.1% and the target for 10-year Japanese government bonds (JGBs) at around 0.0%. The BOJ also slightly updated its economic forecasts from its previous projections in April. Real GDP is now forecast to grow by 0.7% (vs. 0.8%) in 2019, 0.9% (unchanged) in 2020 and 1.1% (down from 1.2%) in 2021. Meantime, core inflation forecasts have been revised down to 0.8% (vs. 0.9%) in 2019 and 1.2% (vs. 1.3%) in 2020. The bank restated that it will continue to purchase JGBs at an annual rate of ¥80 trillion. Importantly, however, the press release that accompanied the statement noted that the BOJ intends to keep policy rates at “extremely low” levels, at least until early 2020, to achieve its inflation target of 2.0%. The next policy meeting is scheduled for October 31.

The Statistics Bureau of Japan reported that the unemployment rate fell to a four-month low of 2.3% (seasonally adjusted) in June, down from 2.4% in May and below the consensus forecast of 2.4%. The unemployment rate has been at or below 2.5% since the beginning of fiscal 2018. Moreover, the number of employed persons increased by 600,000 (0.9% Y/Y) to 67.47 million in June, while the number of unemployed persons dropped by 60,000 (-3.6% Y/Y) to 1.62 million. Accordingly, Japan’s participation rate increased to 62.3% in June, up from 61.7% in the same month a year earlier.

The European Commission’s Business Climate Indicator (BCI) for the euro area declined by 0.29 points to -0.12 in July. It was the weakest reading since September 2013 and well below market expectations. The report indicated that managers’ views on past production, production expectation, as well as their assessments on overall and export order books, have all deteriorated. Meanwhile, managers’ assessments of the level of stocks improved. The BCI measures the current situation of businesses in the euro area and their prospects.

The U.S. Conference Board announced that its Consumer Confidence Index rose sharply in July from June's upwardly revised level. The index now stands at 135.7, up from 124.3 in June (previously reported as 121.5). The Present Situation Index increased to 170.9 from 164.3. The Expectations Index rose to 112.2 from 97.6. With the upward revisions, these results are considerably stronger than expectations. Consumer confidence is an indicator of spending patterns.

July 31
Statistics Canada announced that, on a monthly basis, real GDP by industry grew 0.2% in May, a third consecutive increase. The May advance was led by a rebound in manufacturing with 13 out of 20 industrial sectors expanding. On a year-over-year basis, GDP growth stands at 1.4%. These results are somewhat stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that its Industrial Product Price Index (IPPI) fell 1.4% in June while its Raw Materials Price Index (RMPI) dropped 5.9%. On a year-over-year basis, the indexes are down 1.7% and 9.2%, respectively. Lower prices for energy products were seen during the month. These figures are considerably weaker than consensus expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

In a preliminary flash estimate, Eurostat, the statistical office of the European Union, reported that the euro area economy expanded 0.2% (Q/Q, seasonally adjusted) in Q2 2019, slowing from 0.4% in Q1 2019. This was in line with market expectations and equalled the weakest performance since the first quarter of 2013. Accordingly, annual GDP growth slowed to 1.1% in Q1 2019, down from 1.2% in the previous quarter and slightly beating market expectations. Moreover, last week’s downbeat Purchasing Managers’ Index (PMI) data for the euro area also show that business activity has been sluggish to start the quarter.

A flash estimate from Eurostat also revealed that annual inflation in the euro area decelerated to 1.1% (Y/Y) in July, down from 1.3% in June. This was in line with market expectations and registered its lowest print since February 2018. Importantly, core inflation, which excludes volatile prices of energy, food and tobacco, slowed by a sharper 0.2 percentage points to 0.9% in July. After last week’s decision by the European Central Bank to hold interest rates steady, the subdued inflation data offer further support for the central bank to provide stimulus or begin easing in September.

The Institute for Supply Management reported that its Chicago Purchasing Managers’ Index slipped to a 44.4 reading in July. This is a significant drop from June's 49.7 reading and moves the index further below the key 50.0 (generally expanding) level. This is the second sub-50 reading in 30 months. With the market looking for a gain, this reading is well below consensus expectations and indicates a deceleration in manufacturing activity within the region.

The Fed cut interest rates following its latest two-day policy meeting. This is the first rate cut since December 16, 2008 and the first rate cut under current Federal Reserve Chair Jerome Powell. The target range for the federal funds is now set at 2.00% to 2.25%, a decrease of 0.25%. The previous policy move was to raise interest rates (also by 0.25%) on December 19, 2018. The press release that accompanied the announcement highlighted the continued strength of the U.S. job market. However, this commentary was countered by statements related to the softening of global economic activity and the persistence of muted domestic inflationary pressures. The announcement of a 0.25% interest rate cut 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.

August 1
The U.S. Department of Labor announced that initial jobless claims totalled 215,000 (seasonally adjusted) in the week ending July 27, an increase of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 207,000. The four-week moving average was 211,500, a decrease of 1,750 from the previous week's revised average. The previous week's average was revised up by 250 to 213,250. These results are in line with consensus estimates.

The Bank of England’s (BOE) monetary policy committee met expectations by leaving its key bank rate unchanged at 0.75% and its quantitative easing ceiling at £435 billion gilts, setting its policy to meet its 2.0% inflation target. Importantly, the BOE elected to retain a tightening bias on the assumption of a smooth departure from the EU despite growing perceptions of a likely no-deal Brexit. The press release accompanying the statement indicated that “… increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainability to the 2.0% target.” This comes on the back of the bank’s updated forecast which predicts that Consumer Price Index inflation will increase to 2.4% by the end of its three-year projection period. The announcement is the first from the bank since Boris Johnson became prime minister with a calling to withdrawal from the EU on October 31. The bank’s next policy meeting is scheduled for September 19.

The Institute for Supply Management reported that its Purchasing Managers’ Index edged lower to a 51.2 reading in July. This is a 0.5-point loss from June’s 51.7 figure but remains above the key 50.0 (generally expanding) level for a 35th consecutive month. The reading is below expectations and indicates a slight deceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending fell 1.3% in June, following an upwardly revised 0.5% decline in May (originally reported as -0.8%). On a year-over-year basis, construction was down 2.1%. The monthly figure is well below consensus estimates. This result indicates continued softening in the construction sector.

August 2
Eurostat announced that retail volumes rose 1.1% (seasonally adjusted) in June in the euro area and were 2.6% above June 2018 levels. Gains were led by gasoline, food, drinks and tobacco products. These figures are stronger than expected and are a positive indicator for overall GDP growth.

The U.S. Bureau of Labor Statistics reported that the unemployment rate remained steady at 3.7% in July, as it was in June, near May’s 3.6% figure, which was a 50-year low. At the same time, non-farm payroll employment rose by 164,000. The May advance was revised downward to 193,000 (originally reported as 224,000). Employment continued to trend up in professional and technical services, health care, social assistance, and financial activities. With the revisions, the employment figures are 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.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed slightly to $55.2 billion in June from a revised $55.3 billion in May. June exports were $206.3 billion, $4.4 billion less than May exports. June imports were $261.5 billion, $4.6 billion less than May imports. The trade deficit was marginally larger than expected. The trade deficit will continue to restrain overall GDP growth.

Statistics Canada announced that Canada's merchandise imports tumbled 4.3% in June, while exports fell 5.1%. As a result, Canada's trade surplus with the world narrowed from a downwardly revised $556 million in May (originally reported as $762 million) to a surplus of $136 million in this report. Since the market was looking for a return to a deficit position in June, these results are somewhat stronger than expected. They are a positive sign for overall GDP growth.


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