The Playbook – October 14, 2019

October 15, 2019 • Playbook

The Playbook

Weekly Commentary – October 14, 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 16 Retail Sales Sep 2019 0.3% 0.4%
October 17 Housing Starts Sep 2019 -6.7% 12.3%
October 17 Building Permits Sep 2019 -8.6% 7.7%
October 17 Initial Jobless Claims Oct 12, 2019 202K 210K
October 17 Industrial Production Sep 2019 0.1% 0.4%
October 16 Inflation Rate Y/Y Sep 2019 1.8% 1.9%
October 17 Manufacturing Sales Aug 2019 -0.2% -1.3%
October 17 Inflation Rate Y/Y Sep 2019 0.4% 0.3%
*Source: Trading Economics

Key Earnings Calendar**

October 15: Aphria Inc., BlackRock Inc., Citigroup Inc., Interactive Brokers Group Inc., Johnson & Johnson, JP Morgan Chase & Co., The Goldman Sachs Group Inc., United Health Group Inc., Wells Fargo & Co.
October 16: Bank of America Corp., International Business Machines Corp., Netflix Inc., The Bank of New York Mellon Corp., United Rentals Inc.
October 17: E*TRADE Financial Corp., Honeywell International Inc., Morgan Stanley, PPG Industries Inc.
October 18: Acme United Corp., American Express Co., IBERIABANK Corp., State Street Corp., The Coca-Cola Co.
**Source: Seeking Alpha

Market Focus

Canadian job market reveals surprising strength

Despite worries of slower economic growth, both globally and domestically, Statistics Canada reported a solid 53,700 job gains in September. This advance, coupled with the August increase, have produced the best back-to-back monthly gains (134,800 combined) since March and April of 2012 (187,000 combined). The September increase was primarily in full-time positions (70,000) while part-time jobs declined (16,300). Meanwhile, the unemployment rate fell to 5.5%, near May’s 43-year low (5.4%). As well, wage growth accelerated with average hourly earnings rising 1.7% in September to stand with a 4.3% annual gain, well above the current pace of inflation. The surprising strength of the Canadian job market comes at a time when the Bank of Canada appears to be standing alone among the major central banks, holding steady, as most of them move to ease monetary policy. The bank’s next policy meeting is scheduled for October 30.

U.S. inflation data may open the door for the Fed

Fresh figures from the U.S. Bureau of Labor Statistics showed that the Consumer Price Index (CPI) rose less than 0.1% (seasonally adjusted) in September, the weakest monthly reading since January. Excluding volatile food and energy components (core CPI), the index rose 0.1%, the smallest gain since May. On a year-over-year basis, overall CPI rose 1.7% and core CPI was up 2.4%. The news came on the back of an earlier report, which showed that producer prices had posted their largest one-month decline (0.3%) in four years, during September. At the same time, annual growth in producer prices slipped to 1.4%, the slowest pace since September 2016. The combination paints a picture of broadly easing price pressures in the U.S. Headline CPI had been generally above the Federal Reserve’s (Fed) preferred inflation measure since the beginning of 2018. These latest figures may result in less resistance within the Fed to further reductions in interest rates.

Germany’s export decline reflects broader concerns

Destatis, the federal statistical office of Germany, reported that Germany’s exports dropped to €109.2 billion (seasonally adjusted) in August, a 1.8% monthly decline that is now the steepest since April. On a year-over-year basis, exports fell by a substantial 3.9%. At the same time, imports rose by a modest 0.5% to €91.1 billion. As a result, Germany’s trade surplus narrowed to €18.1 billion. Despite the modest monthly gain, German imports have declined for a third straight month on a year-over-year basis. This move may be the beginning of a trend that suggests weakening domestic demand. As well, softening exports may be the precursor to unwanted inventory accumulation, particularly with key manufacturers. As the economy shrank by 0.1% in the second quarter, and recent data have pointed to sustained weakness in manufacturing, the risk of another quarterly contraction has grown.

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 7
Destatis, the federal statistics office of Germany, reported that industrial orders dropped 0.6% (M/M, seasonally and calendar adjusted) in August, following a downwardly revised decline of -2.1% (originally reported as -2.7%) in July. This was their third decline in the last four months. Annual growth dropped from -4.7% (originally reported as -5.3%) in the previous month to -6.6% in August. Importantly, the monthly fall was strongly attributable to Germany’s domestic market, which shrank -2.6%, its sixth contraction recorded in 2019. These results are weaker than market consensus.

October 8
The Canada Mortgage and Housing Corporation announced that housing starts totalled 221,202 units (seasonally adjusted annual rate) in September. This is down 2.5% from the 226,871-unit level in August (originally reported as 226,639). The decline in housing starts was led by single-detached urban starts (-9.2% to 48,761 units). With the market braced for a bigger decline, the results are above market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities rose 6.1% to $9.0 billion in August, largely because of increases in multi-family and industrial permits. Seven provinces posted increases, led by Quebec. On a year-over-year basis, overall permits are now up 11.1%. These results are considerably stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) declined 0.3% (seasonally adjusted) in September. The index increased 1.4% for the 12 months ended September 2019, the smallest year-over-year advance since a 1.3% rise in November 2016. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The National Australia Bank reported that its business confidence index fell to 0.0 points in September, following a reading of 1.0 in August. This is well below its long-run average of 6.0. In contrast, however, business conditions advanced 1.0 points to a reading of 2.0 in September as trading (4.0 points after 3.0), profitability (-2.0 points after -3.0) and employment (3.0 points after 2.0) increased. The overall results are below market consensus.

Destatis reported that industrial production in Germany advanced 0.3% (M/M, price, seasonally and calendar adjusted) in August, following a sharp decline of -0.4% in July. During the month, production in industry, excluding energy and construction, was up by 0.7%. Within industry, both the production of intermediate goods and capital goods advanced 1.0% and 1.1% in August, respectively. However, energy production and construction decreased 1.7% and 1.5%, respectively. These figures are well above market consensus; however, the results are unlikely to positively impact an ominously weak trend.

October 9
Brazil’s Instituto Brasileiro de Geografia e Estatistica, a federal geographic and statics office, announced that its CPI slipped 0.04% (seasonally adjusted basis) lower in September. Over the last 12 months, the index increased 2.89%, the lowest reading since May of 2018 and below the central bank's target, which is likely to strengthen expectations of another cut in interest rates. These results were below expectations.

October 10
The U.S. Department of Labor announced that initial jobless claims totalled 210,000 (seasonally adjusted) in the week ending October 5, a decrease of 10,000 from the previous week's revised level. The previous week's level was revised up by 1,000 220,000. The four-week moving average was 213,750, an increase of 1,000 from the previous week's revised average. The previous week's average was revised up by 250 to 212,750. These results are somewhat stronger than consensus estimates.

The U.S. Bureau of Labor Statistics reported that the CPI rose less than 0.1% (seasonally adjusted basis) in September. Over the last 12 months, the index increased 1.7%, matching the August result. Excluding volatile food and energy components, the index rose 0.1% for the month and 2.4% on a year-over-year basis. These results were marginally lower than expectations. These figures should provide a consistent backdrop for further easing of monetary policy from the U.S. Federal Reserve.

Statistics Canada announced that its New Housing Price Index rose 0.1% in August. This is the first increase since July 2018. On a year-over-year basis, the index is down 0.3%. These results are slightly stronger than consensus expectations and suggest a possible stabilization in new home prices.

The U.K. Office for National Statistics revealed that the economy contracted 0.1% (M/M) in August, following a slightly stronger revised monthly rise of 0.4% in July. It is the second monthly contraction recorded in 2019 and stemmed from the goods-producing sector where output was down 0.6%. Gross domestic product (GDP) was up 0.3% in the three months to August, after growing by an upwardly revised 0.1% in the three months to July. However, annual GDP growth fell from 1.3% in July to 1.1% in August, equalling its lowest mark since June 2012.

Destatis revealed that Germany’s trade surplus narrowed to €18.1 billion (calendar and seasonally adjusted) in August, down from a slightly larger revised €20.5 billion in July. The deterioration in the seasonally adjusted balance reflected an unexpected 1.8% monthly decline in exports to €109.2 billion, their steepest drop since April, compounded by a 0.5% rise in imports to €91.1 billion. These data likely suggest that Germany may experience a contraction in GDP in Q3 2019. The overall trade figures were weaker than market consensus.

October 11
Statistics Canada announced that 53,700 jobs were added in September, and the unemployment rate fell by 0.2 percentage points to 5.5%. In line with the recent gains, employment was up 2.4% (455,900) from 12 months earlier. These results are stronger than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.


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