Playbook - September 2, 2019

September 02, 2019 • Playbook


The Playbook

Weekly Commentary – September 2, 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
September 3 Markit Manufacturing PMI Final August 19 49.9 50.4
September 3 IBD/TIPP Economic Optimism September 19 53.9 55.1
September 5 ADP Employment Change August 19 145 k 156 k
September 5 Markit Composite PMI Final August 19 50.9 52.6
September 5 Factory Orders July 19 0.2% 0.6%
September 3 Markit Manufacturing PMI August 19 51.0 50.2
September 4 Labor Productivity Q/Q Q2 19 0.1% 0.3%

Key Earnings:
September 2: Dynagas LNG Partners LP
September 3: Coupa Software Inc., Healthequity Inc., Mitcham Industries Inc.
September 4: Barnes & Noble Inc., FuelCell Energy Inc., U.S. Global Investors Inc.
September 5: ABM Industries Inc., DocuSign Inc., Guidewire Software Inc.
September 6: Ditech Holding Corp., Genesco Inc., Titan Energy LLC, Verint Systems Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian GDP growth lurches higher on trade
Statistics Canada announced that the overall economy grew at an annualized 3.7% pace during the second quarter of 2019. This follows anemic growth that averaged just 1.4% over the prior seven quarters. However, this strong headline figure masks significant underlying sectoral differences. The sharp overall advance was due almost entirely to a narrowly focused rebound in exports, which rose an annualized 13.4% over the three-month period. Household spending slowed from a 2.9% pace in the first quarter to just 0.5% in this report. Similarly, business capital formation, which had expanded by 4.9% in Q1 2019, reversed course and actually contracted by 6.4% in Q2. Questions remain as to what the Bank of Canada will do on the monetary policy front with their next meeting scheduled for September 4.

Surge in trade narrows Canadian current account deficit to an 11-year low
As reflected in the gross domestic product (GDP) figures, a dramatic turnaround in Canada’s international trade position helped narrow the nation’s current account deficit to $6.3 billion in the second quarter of 2019. This is the smallest deficit since this account was actually last in a surplus position during the third quarter of 2008. Much of the quarterly improvement can be traced directly to the U.S., as the goods surplus with the U.S. reached $15.9 billion, the highest in over 10 years. Inflows of funds from abroad, needed to finance the current account deficit, came primarily from transactions in currency and deposits in the second quarter. These transactions generated a net inflow of $27.9 billion, as non-residents considerably increased their holdings of currency and deposits in Canada. The narrowly-focused basis for the improvement in the current account balance suggests that it will likely be short-lived, and Canada will continue to be heavily dependent on foreign investor support as deficits continue.

U.S. consumer spending jumps in July
The U.S. Bureau of Economic analysis announced that personal consumption expenditure (PCE) rose 0.6% in July. This report follows continued evidence of a robust labour market with non-farm payrolls rising for a 106th consecutive month during that period. Personal income grew at an annual 4.6% rate, while PCE expanded 4.1% year-over-year in July. Despite the obvious strength in consumer spending, this pace of growth is actually slower than the average 5.2% rate that prevailed in 2018. Importantly for the market, the core PCE deflator, which is the U.S. Federal Reserve’s key inflation measure, held steady at 1.6% (Y/Y) during the month. It has remained below the Fed’s 2.0% target thus far in 2019. Continued stability in this measure will allow for further easing of interest rates over the balance of 2019.

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

August 26
The U.S. Census Bureau announced that durable goods orders jumped 2.1% in July, following a downwardly-revised 1.8% increase in June (originally reported as 2.0%). Excluding transportation, new orders decreased 0.4% in July. Excluding defence, new orders increased 1.4%. Even with the downward revisions to the previous data, these figures are stronger than market expectations. Orders for durable goods indicate how busy manufacturers will be in the months to come as they work to fill those orders.

Germany’s ifo Business Climate Index dropped 1.5 points to 94.3 in August, following an upwardly revised 95.8 reading in July. The indicator fell to its lowest level since November 2012 and was much weaker than market consensus. It has not fallen in five of the last six months and in 11 of the last 12 months. August’s weakened result was attributable to a further worsening in both current conditions and expectations. Current conditions slid 2.3 points to 97.3, also the lowest mark since November 2012. Business expectations remained marginally steady, falling by only 0.8 points to 91.3, but this was still its third straight monthly decline and lowest print since mid-2009. August’s ifo results generally matched the IHS Markit Flash Germany Composite PMI released last week. The ifo Business Climate Index is a closely watched data point of leading indicators in German economic activity.

August 29
The U.S. Department of Labor announced that initial jobless claims totalled 215,000 (seasonally adjusted) in the week ending August 24, an increase of 4,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 209,000 to 211,000. The four-week moving average was 214,500, a decrease of 500 from the previous week's revised average. The previous week's average was revised up by 500 from 214,500 to 215,000. These results are in line with consensus estimates.

The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 2.0% in the second quarter of 2019. This figure is the “second estimate” while the original growth estimate was 2.1%. In the first quarter of 2019, real GDP increased 3.1% on the same basis. The revision primarily reflected downward revisions to state and local government spending, exports, private inventory investment, and residential investment that were partly offset by an upward revision to personal consumption expenditures. These results matched expectations as the market was looking for a downward revision of this size. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that Canada's overall current account deficit narrowed by $10.2 billion (on a seasonally adjusted basis) in the second quarter of 2019 to $6.4 billion, the lowest level since Canada returned to a deficit position at the end of 2008. The reduction mainly reflected a much lower deficit on goods. The decline in the deficit was greater than anticipated. Current account deficits must be funded by borrowing from foreign lenders.

Statistics Canada also announced that average weekly earnings fell 0.5% to $1026.07 in June. On a year-over-year basis, average weekly earnings rose 2.5%. These results are below expectations. As this indicator measures growth in income, it can reveal trends in consumer spending.

Destatis, Germany’s federal statistical office, revealed in a preliminary estimate that consumer prices fell 0.2% (M/M) in August, down from 0.5% in July and missing market expectations. Accordingly, this reduced the annual Consumer Price Index (CPI) inflation rate to 1.4% (Y/Y) from July’s final 1.7%, its first fall since May and a five-month low. The dip in annual CPI was reflected by a significant decline in overall goods (1.3% from 1.8%), specifically in energy prices (0.6% from 2.4%). However, the prices of services ticked up from 1.5% to 1.6% on the month. The Harmonized Index of Consumer Prices, which is calculated to make prices comparable with inflation data from other European Union countries, fell 0.1% on the month, but rose 1.0% from the same month a year earlier, each falling short of market expectations.

France’s national statistics bureau (Insee), announced that final real GDP expanded 0.3% (Q/Q, seasonally adjusted) in Q2 2019. This is an upward revision from the 0.1% preliminary estimate and unchanged from the growth rate registered in the first quarter. Annual real GDP growth was up 1.4% in Q2 2019, a tick above the 1.3% figure registered in the previous three-month period. These figures were slightly stronger than market consensus.

The European Commission’s Business Climate Indicator for the euro area increased by 0.22 points to +0.11 in August, following a -0.11 reading in July. The report indicated that managers’ views on past production, production expectation, as well as their assessments on overall and export order books, have all improved sharply. The reading was stronger than market consensus.

The European Commission reported that the euro area’s Economic Sentiment Indicator (ESI) gained 0.4 points to 103.1 (M/M) in August, following an unrevised three-year low of 102.7 in July. However, the ESI is still 7.9 points below its level from the same month a year ago. The upturn in euro area sentiment was driven primarily by a recovery in confidence in industry (-5.9 after -7.3) and retail (0.5 after -0.7). Meanwhile, services (9.3 after 10.6) posted fresh losses, detracting from an overall increase in sentiment. This reading was above market consensus.

Brazil’s federal statistical institute announced that the economy expanded 0.4% (Q/Q, seasonally adjusted) in the second quarter of 2019, after contracting a downwardly revised 0.1% in the first quarter. Annual real GDP growth was up 1.0% in the second quarter, following an upwardly revised 0.9% growth in the previous three-month period. These figures were slightly stronger than market consensus.

August 30
According to the U.S. Bureau of Economic Analysis, personal income increased 0.1% in July. At the same time, personal consumption expenditures (PCE) expanded 0.6%. Based on revised figures, personal income increased 0.5% and PCE increased 0.3% in June. While income figures for July were below expectations, spending results were stronger. Income and spending patterns of consumers are critical factors in the health of the broader economy.

Statistics Canada announced that real GDP surged 3.7% (on an annualized basis) in the second quarter of 2019, following an upwardly revised 0.5% advance in the first quarter (originally reported as 0.4%). Exports were the primary driver in the second quarter as household spending slowed and business investment declined. On a monthly basis, real GDP by industry increased 0.2% in June, suggesting that the economy has likely carried at least some positive momentum into the third quarter. Coupled with the revisions, these results are well above 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) slipped 0.3% lower in July amid widespread declines in commodity prices at the industry level. Meanwhile its Raw Materials Price Index (RMPI) rose 1.2%, mainly as a result of higher energy prices. On a year-over-year basis, the indexes are down 1.7% and 9.0%, respectively. These figures are mixed with industry prices weaker than expected and raw material prices stronger. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.


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