The Playbook – September 30, 2019

September 30, 2019 • Playbook

The Playbook

Weekly Commentary – September 30, 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 1 ISM Manufacturing PMI Sep 2019 49.4 49.1
October 3 Initial Jobless Claims Sep 2019 202 k 202 k
October 3 ISM Non-Manufacturing PMI Sep 2019 56.0 56.4
October 4 Balance of Trade Aug 2019 -$54.3B -$54.0B
October 1 Gross Domestic Product Jul 2019 0.2% 0.2%
October 4 Balance of Trade Aug 2019 -$0.4B -$1.1B
October 4 Ivey PMI Sep 2019 58.0 60.6
United Kingdom        
September 30 Gross Domestic Product Q/Q Q2 2019 0.5% -0.2%
*Source: Trading Economics

Key Earnings Calendar**

September 30: Cal-Maine Foods Inc., Thor Instustries Inc., QIAGEN N.V.
October 1: Landec Corp., NovaGold Resources Inc., Stitch Fix Inc., Thor Industries Inc., United Natural Foods Inc.
October 2: Acuity Brands Inc., Lamb Weston Holdings Inc., Lennar Corp., Paychex Inc., RPM International Inc., Ford Motor Co., Bed Bath & Beyond Inc.
October 3: AngioDynamics Inc., Constellation Brands Inc., Costco Wholesale Corp., Kura Sushi, PepsiCo Inc.
October 4: International Speedwat Corp.
**Source: Seeking Alpha

Market Focus

Canadian Budget Deficit Widens

An update from Canada’s federal Department of Finance showed a monthly budget deficit of $1.5 billion for July 2019. This compares to a small surplus of $0.1 billion recorded in July of 2018. The “Fiscal Monitor” report indicated that despite an overall revenue increase of $1.0 billion, due to higher tax income, expenditures rose by a far greater $2.6 billion. The bulk of this was program spending; however, debt servicing was $363 million above the level we saw a year ago. The report also included an update to the official forecast for fiscal 2019-2020. Based on the actual April to July figures, the deficit is now expected to hit $20 billion for the year. This would be the largest deficit since the end of the financial crisis but would not include any fiscal changes made by the incoming government following the October 21 federal election.

U.S. Consumer Spending Slows

The latest data from the U.S. Bureau of Economic Analysis revealed a 0.4% gain in personal income in August, which was accompanied by a more modest 0.1% increase in personal consumption expenditures (PCE). In addition, downward revisions to PCE were seen for the prior three months. Annual growth in consumer spending now stands at 3.7%, a healthy pace but the lowest since February and below the pace of income growth (4.6%). It appears at this juncture, that U.S. consumers are increasing their savings and lowering their debt levels. This report also included the core PCE deflator, the Federal Reserve’s (Fed) key inflation benchmark, which rose 0.1% during August to stand with a 1.8% advance on a year-over-year basis. This is the fastest since January, but it remains below the Fed’s 2.0% target. Concerns over slowing consumer spending and weakening business investment were clearly laid out in the press release that accompanied the Fed’s rate cut on September 18. It appears that the data will continue to show the same pattern at the next monetary policy meeting on October 29 and 30.

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

September 23
The IHS Markit Flash Germany Manufacturing PMI plunged a further 2.1 points to 41.4 in September, following a downwardly revised 43.5 (originally 43.6) reading in August. The latest reading is the ninth consecutive print below the 50.0 expansion threshold and points to the steepest contraction in factory activity since the financial crisis in mid-2009. The data show sustained weakening in demand, with total inflows of new business falling for the third consecutive month and at the fastest pace in seven years. Additionally, manufacturing orders recorded the steepest drop in over a decade and, notably, there was also a drop in service sector new business for the first time since December 2014. Both manufacturers and service providers reported decreases in new export orders during the month. The overall results are well below consensus expectations.

The IHS Markit Flash Eurozone Manufacturing PMI dropped 0.6 points to 45.6 in September, following a 47.0 reading in August. The latest reading is the seventh straight print below the 50.0 expansion threshold and pointed to the sharpest contraction in the euro area’s manufacturing sector since October 2012. Employment growth increased at its slowest pace since January 2015, with the rate of job creation easing for a third consecutive month. Manufacturing output fell for an eighth straight month, while factory orders fell at the sharpest pace since July 2012, led by a steep decline in export sales. Demand for goods and services fell for the first time since January, declining at the fastest rate since June 2013. The overall results are well below consensus expectations.

September 24
Germany’s ifo Business Climate Index edged up 0.3 points to 94.6 (seasonally adjusted) in September. It was the third lowest reading since November 2012 and the second lowest in 2019. The index has dropped 9.0 points from a 103.6 reading in the same month a year earlier. The modest headline gain was attributable to a recovery in the services sector (16.6 after 13.0) and construction sector (22.2 after 21.5). However, the manufacturing sector (-6.4 after -6.0) and trade sector (-3.7 after -2.4) continued in a downward trend. Business conditions ticked up to 98.5 from 97.4 in August, while business expectations slipped from 91.3 to 90.8 over the same period. Despite the minor improvement in the index, the weathered results support the implications of Germany’s PMI survey released on September 23. The results are slightly above market consensus.

The U.K. Confederation of British Industry, a research and lobby organization, revealed in its Industrial Trends Survey that its monthly order book balance dropped 15 percentage points to -28.0% in September. This is near July’s nine-year low and well short of its long-run average of -13.0% It is the gauge’s second weakest measure since October 2016 (-6.0%). Exports (-32% after -15%) fell even further. Meanwhile, the output expectations forecast for the next three months (-19% after -2%) plunged to its lowest mark since April 2009. However, expected selling prices (12% after -2%) were up sharply, as were business inventories (28% after 14%). Growing uncertainties surrounding a no-deal Brexit play a key role in the worsened headline figure. The results were significantly below market consensus. ced that industrial production expanded 0.6% in August after declining 0.1% in July. On a year-over-year basis, industrial production was reported to have gained 0.4%. Capacity utilization for total industry rose to 77.9% from 77.5% in July but was down from 79.3% a year earlier. These results are stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

September 26
Germany’s Gfk Consumer Climate Index ticked up by a surprising 0.2 percentage points to 9.9 heading into October, after a confirmed 9.7 reading on its climate indicator in September. This is the first increase since February and its highest level registered since June, as the propensity to buy (2.5 points) has “stood firm,” and even increasing in August. However, income expectations declined by a marginal amount following the recovery in the previous month. The economic expectation indicator fell 8.3 points to -12.0 in August, the lowest value in since January 2013 (reported as -12.5). The figure is now 30.0 points lower compared to the same period last year. The headline results were slightly above market consensus.

The U.S. Department of Labor announced that initial jobless claims totalled 213,000 (seasonally adjusted) in the week ending September 21, an increase of 3,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 210,000. The four-week moving average was 212,000, a decrease of 750 from the previous week's revised average. The previous week's average was revised up by 500 to 212,750. These results are in line with consensus estimates.

The U.S. Bureau of Economic Analysis announced that real gross domestic product grew at an annual rate of 2.0% in the second quarter of 2019. This is the “third estimate.” In the first quarter, real gross domestic product (GDP) increased 3.1% on the same basis. These results match expectations as the market was looking for no change to the prior estimate. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that average weekly earnings rose 0.5% to $1,026.96 in July. On a year-over-year basis, average weekly earnings rose 2.7%, up from 2.1% in June. These results are in line with expectations. As this indicator measures growth in income, it can reveal trends in consumer spending.

September 27
According to the U.S. Bureau of Economic Analysis, personal income increased 0.4% in August. PCE increased 0.1%. Based on revised figures, personal income increased 0.1% and PCE increased 0.5% in July. While income figures for August met market expectations, spending results were weaker. Income and spending patterns of consumers are critical factors in the health of the broader economy.

The U.S. Census Bureau announced that durable goods orders rose 0.2% in August, a third consecutive gain. Excluding transportation, new orders decreased 0.5% in August. Excluding defence, new orders decreased 0.6%. With the market braced for a significant decline, these figures are 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 European Commission reported that the euro area’s Economic Sentiment Indicator dropped 1.4 points to 101.7 (M/M) in September, following an unrevised 103.1 reading in August. This was the weakest print since February 2015. The decline was led by a decrease in industrial confidence (-8.8 from -5.8). Additionally, expected selling prices in manufacturing (1.6 after 2.3) and services (7.7 after 8.7) were trimmed, and household inflation expectations (19.5 after 20.7) fell to a five-month low. The overall readings were well below market consensus.


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