The Playbook – November 4, 2019

November 04, 2019 • Playbook


The Playbook

Weekly Commentary – November 4, 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
November 4 Factory Orders Sep 2019 1.8% -0.1%
November 5 Balance of Trade Sep 2019 -$57.5B -$54.9B
November 5 ISM Manufacturing PMI Oct 2019 51.9 52.6
November 7 Initial Jobless Claims Nov. 02, 2019 204k 218k
November 5 Balance of Trade Sep 2019 -$3.0B -$0.96B
November 6 Ivey PMI Oct 2019 50.2 48.7
November 8 Unemployment Rate Oct 2019 5.8% 5.5%
November 8 Employment Change Oct 2019 10k 53.7k
November 8 Housing Starts Oct 2019 214.5k 221.2k
November 8 Building Permits Sep 2019 -1.0% 6.1%
*Source: Trading Economics

Key Earnings Calendar**

November 4: Franco-Nevada Corp., Occidental Petroleum Corp., Marriott International Inc., Nutrien Ltd., Sysco Corp.
November 5: Allergan PLC., Becton Dickinson and Co., Booking Holdings Inc., Emerson Electric Co., PPL Co.
November 6: Baidu Inc., Barrick Gold Corp., CVS Health Corp., Fiserv Inc., Manulife Financial Corp., Qualcomm Inc.
November 7: Activision Blizzard Inc., Canadian Natural Resources Ltd., Telus Corp., Walt Disney Co., Zoetis Inc.
November 8: Ameren Corp., Duke Energy Corp., Emera Inc., Enbridge Inc., Magna International Inc.
**Source: Seeking Alpha

Market Focus

Bank of Canada sounds cautionary note

Once again, the Bank of Canada left interest rates unchanged following its latest policy deliberations, but also stated that “growth in Canada is expected to slow in the second half of this year to a rate below its potential.” The bank also clearly warned that the domestic economy is not immune to the ongoing international trade headwinds. Their latest Monetary Policy Report highlighted serious concerns that weaker global activity could seriously hamper the domestic economy. Under one scenario, “household spending, business investment and exports would be weaker and real GDP [gross domestic product] would be about 4.5 per cent lower by the end of 2021 relative to the base-case projection.” Under these circumstances, the Canadian dollar would also be expected to drop by approximately 15%. Clearly, the dovish tone expressed by the bank leaves the door open for a possible rate cut at the bank’s next meeting scheduled for December 4.

Fed easing cycle may be set to pause

The U.S. Federal Reserve (Fed) met market expectations and lowered administered interest rates at their latest meeting. This is the third rate cut since the easing cycle began on July 31, 2018. The target range for the federal funds is now set at 1.50% to 1.75%, a decrease of 0.25% and the lowest since June 12, 2018. The mid-point of the Fed range (1.625%) is now lower than in Canada (1.75%) for the first time since December 13, 2016. Interestingly, the divisions within the Fed continued at this meeting, with two dissenting votes reported. In both cases, these votes were for “no change” to interest rates. In addition, the press release dropped the phrase “will act as appropriate to sustain the expansion” that was present in their September 18 release and was widely viewed as a signal for future cuts. If the Fed does cut rates by 0.25% at their December 10 and 11 meeting, all the tightening applied by Jerome Powell since his first meeting as Chair, on March 21, 2018, will have been removed.

Gap between Canadian and U.S. economies remains

The U.S. Bureau of Economic Analysis reported that the overall GDP grew by 1.9% (annualized) during the third quarter. This represents a very mild slow-down from the 2.0% pace of the second quarter. As these are preliminary estimates, some concerns remain over the extent of possible revisions due to the pending international trade data. Nevertheless, year-over-year growth remains at 2.0%. In Canada, while third quarter data is not yet available, Statistics Canada did report GDP results for August, posting a 0.1% (seasonally adjusted) advance for the month. This gain follows a flat result for July and leaves annual growth for the domestic economy at just 1.3%, the slowest pace since March. A modest 0.2% rebound in goods production lead the overall advance. Despite this, goods output remains below the peak recorded in July 2018 even as output the service sector (0.1% in this report) recorded a new high. Ongoing trade issues have clearly weighed on goods production for an extended period.

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 30
The Australian Bureau of Statistics revealed that the consumer price index (CPI) rose 0.5% (Q/Q) in Q3 2019, after advancing 0.6% in Q2 2019. Annual CPI inflation advanced 1.7% in the three months to September, up from 1.6% in the three months to June, inching closer to the Reserve Bank of Australia's (RBA) target range of 2.0% to 3.0%. This is now the fifth consecutive quarter that annual inflation has been below the RBA's target range. These results are in line with market consensus forecasts.

Insee, the national statistics office of France, reported that the economy grew 0.3% (Q/Q, seasonally adjusted) in Q3 2019, growing at the same pace as the two previous quarters and coming in above market consensus forecasts of 0.2%. Imports (1.3%) rebounded strongly while exports (0.3%) grew at a stable pace in the quarter. Overall, however, net foreign trade (-0.4%) was a drag on the headline print.

The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 1.9% in the third quarter of 2019. This is the “advance estimate” prepared with preliminary data and is often subject to substantial revision. In the second quarter, real GDP increased 2.0% on the same basis. These results are stronger than expected, as the market was looking for a more pronounced slow-down from the second quarter pace. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The Federal Employment Agency of Germany reported that the number of people out of work rose 6,000 (seasonally adjusted) to 2.28 million in October, following a marginally smaller revised 9,000 decline in September. This left the unemployment rate at 5.0%, unchanged from the previous month and in line with market expectations. Separate data from Destatis, the federal statistics office of Germany, show that the seasonally adjusted harmonized unemployment rate stood at a 39-year low of 3.1% in September, as the number of unemployed and employed was unchanged. These results also matched market expectations.

According to a preliminary estimate, Destatis also revealed that German consumer prices advanced 0.1% (M/M) in October, after being flat in September. Annual CPI inflation rose 1.1% (Y/Y) in October, easing from 1.2% in the previous month and equalling the weakest outturn since November 2016. The results are in line with market expectations.

The Bank of Canada announced that it was, once again, holding the target for its key overnight interest rate steady at 1.75%. 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 clearly left the door open for a rate cut over the near term, stating that “growth in Canada is expected to slow in the second half of this year to a rate below its potential.” With the Fed widely expected to lower interest rates by 0.25% later today, the current divergence in Canadian-U.S. rates is expected to widen further. The Bank of Canada’s final policy meeting of 2019 is scheduled for December 4. 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.

The Fed cut interest rates following its latest two-day monetary policy meeting. This is the third rate cut since the easing cycle began on July 31. The target range for the federal funds is now set at 1.50% to 1.75%, a decrease of 0.25% and the lowest since June 12, 2018. The press release that accompanied the announcement reiterated that strength in both the U.S. job market and household spending were being at least partially undermined by weak business investment and exports. In addition, the release continued to highlight soft 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 economies. Its lead is often followed by policymakers in other countries.

October 31
Statistics Canada announced that, on a monthly basis, real GDP by industry edged up 0.1% in August, following no change in July. Goods-producing industries were up 0.2% after two months of declines, led by a rebound in manufacturing, while services-producing industries rose 0.1%. Overall, there were gains in 14 out of 20 industrial sectors. On a year-over-year basis, GDP growth stands at 1.3%. These results are somewhat weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada also announced that its Industrial Product Price Index (IPPI) edged down 0.1% and its Raw Materials Price Index (RMPI) was largely unchanged in September. On a year-over-year basis, the indexes are down 1.3% and 5.3%, respectively. Lower prices for food products were seen during the month. These figures are weaker than expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

Statistics Canada reported that average weekly earnings increased 0.6% to $1,035 in August. On a year-over-year basis, average weekly earnings rose 2.9%. These results are marginally higher than expectations. As this indicator measures growth in income, it can reveal trends in consumer spending.

The U.S. Department of Labor announced that initial jobless claims totalled 218,000 (seasonally adjusted) in the week ending October 26, an increase of 5,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 213,000. The four-week moving average was 214,750, a decrease of 500 from the previous week's revised average. The previous week's average was revised up by 250 to 215,250. These results are in line with consensus estimates.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.3% in September. Personal consumption expenditures (PCE) increased 0.2%. Based on revised figures, personal income increased 0.5% and PCE increased 0.2% in August. With the upward revisions, this release is stronger 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 at around 0.0%. The BOJ, however, introduced new forward guidance to clarify the future likelihood of an interest rate cut, underlining its concerns over heightened downside risks “overseas.” The press release that accompanied the announcement further added that the BOJ “expects short- and long-term interest rates to remain at their present or lower levels, as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.” In addition, the press release dropped the statement that the bank will be committed to keep “current ultra-low rates for an extended period of time, at least until the spring of 2020.” The decision came hours after the Fed lowered rates again, but signalled a pause in further cuts. The bank’s next meeting is scheduled for December 19.

Eurostat, the statistical office of the European Union, announced in a flash report that the euro area economy expanded 0.2% (Q/Q, seasonally adjusted) in Q3 2019, a tick above market consensus and equating the 0.2% growth in Q2 2019. The results are in line with market expectations, but also equalled the weakest performance since the first quarter of 2013 when the economy contracted -0.3%. Accordingly, annual GDP growth dropped to 1.1% in Q3 2019, easing from a 1.2% expansion in the previous quarter. It is the weakest annual growth rate recorded since the final quarter of 2013. The annual outturn is in line with market consensus.

Eurostat revealed in a flash report that the CPI inflation rose at an annual rate of 0.7% in October, slowing from September’s final reading of a 0.8% advance and matching market consensus. Annual core inflation, which excludes volatile prices of energy, food, alcohol and tobacco, advanced to 1.1%, a tick higher than its final September price (1.0%) and slightly firmer than market consensus. Both inflation measures in the euro area remain well below the European Central Bank’s (ECB) inflation target of just under 2.0%. The ECB’s next policy meeting is scheduled for October 24.

Eurostat also reported that the unemployment rate in the euro area stood at 7.5% (M/M, seasonally adjusted) in September, weaker than market consensus and matching its upwardly revised reading in August (originally reported as 7.4%). This is the lowest unemployment rate recorded in the euro area since July 2008. Additionally, the unemployment rate in the European Union (EU28) was unchanged at 6.3% (on the same basis) in September, the lowest level registered in the EU28 since monthly records began in January 2000. Interestingly, however, the labour market seems to be performing relatively well in the face of the euro area’s sluggish economic growth.

Insee reported in a preliminary estimate that consumer prices provisionally dipped 0.1% (M/M) in October, following a decline of -0.3% in September. The fall reduced annual inflation from September’s final 0.9% to 0.7% in October, marking its fourth consecutive decline since peaking at 1.2% in June and equalling its weakest reading since December 2016. The overall inflation results are marginally below market consensus.

November 1
The U.S. Bureau of Labor Statistics reported that the unemployment rate edged up by 0.1 percentage points to 3.6% in October, and non-farm payroll employment rose by 128,000. The uptick in the unemployment rate was attributed to a 325,000 surge in the labour force. The labour force advance pushed the U.S. participation rate (the percentage of the working age population that is either working or looking for work) to 63.3%, its highest level since August 2013. Notable job gains occurred in food services and drinking places, social assistance, and financial activities. The employment figures are stronger than expectations while the nominal weakening in the unemployment rate was due to the relative attractive job market. 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 United States’ Institute for Supply Management reported that its Purchasing Managers Index (PMI) rose to a 48.3 reading in October. This is a 0.5-point gain from September’s decade-low 47.8 figure but remained below the key 50.0 (generally expanding) level for a third consecutive month. The reading is weaker than market consensus and pointed to the second-weakest print since January 2016.

The Caixin China General Manufacturing PMI rose to 51.7 in October, up 0.3 points from a 51.4 reading in September. This is 1.7 points above the key 50.0 (generally expanding) level and the strongest pace of expansion in the manufacturing sector since February 2017. The reading is stronger than market consensus and the index has now signaled an improvement in operating conditions for three months running.


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