The Playbook – November 25, 2019

November 25, 2019 • Playbook


The Playbook

Weekly Commentary – November 25, 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 26 Wholesale Inventories Adv Oct 2019 0.2% -0.4%
November 26 Durable Goods Orders Oct 2019 0.6% -1.1%
November 27 GDP Growth Rate Q/Q 2nd Est Q3 2019 1.9% 2.0%
November 27 Personal Spending Oct 2019 0.2% 0.2%
November 27 Personal Income Oct 2019 0.2% 0.3%
November 27 Initial Jobless Claims Nov 23, 2019 206k 227k
November 25 Wholesale Sales Sep 2019 0.7% -1.2%
November 29 GDP Growth Rate Sep 2019 -0.1% 0.1%
November 29 GDP Growth Rate Annualized Q/Q Q3 2019 1.5% 3.7%
*Source: Trading Economics

Key Earnings Calendar**

November 25: Alimentation Couche-Tard Inc., Agilent Technologies Inc., Palo Alto Networks Inc.
November 26: Analog Devices Inc., Autodesk Inc., Bank of Nova Scotia, Dollar Tree Inc., HP Inc., VMware Inc.
November 27: Anaplan Inc., BRP Inc., Deere & Co., Hang Seng Bank Ltd., Zai Lab Ltd.
November 28: Elekta AB, Flower One Holdings Inc., Gazprom PAO, TECSYS Inc.
November 29: Dell Technologies Inc., E.ON SE NA, Frontline Ltd., Yext Inc., Zuora Inc.
**Source: Seeking Alpha

Market Focus

Inflation remains steady in Canada

Updated figures from Statistics Canada revealed a 0.3% (seasonally adjusted) increase in the consumer price index (CPI) during October. Even though this followed identical declines of 0.1% in both August and September, the annual pace of growth for CPI was steady at 1.9% for each of the past three months. In fact, except for the blip higher in May (2.4%), year-over-year growth in CPI has been either 1.9% or 2.0% for the last eight months. Perhaps more importantly for the markets, the Bank of Canada’s key core inflation measure (CPI-common) was also steady at 1.9% in October. Despite broader fluctuations in the economy, this specific core reading has been remarkably stable, fluctuating only between 1.8% and 1.9% since January 2018 and between 1.3% and 2.0% since January 2010. With the bank targeting inflation at the 2% midpoint of a 1%-3% range, it appears likely that policy will remain unchanged for the remainder of 2019.

U.S. housing rebounds in October

The latest figures from the U.S. Census Bureau revealed an October surge of 3.8% in housing starts, enough to lift the annualized rate to 1,314,000 units (seasonally adjusted). This is just the fourth time in the past three years that this figure has been above the 1.3 million level. At the same time, building permits rose 5.0% during the month to 1,461,000 units, its highest level since May of 2007. The National Association of Realtors also reported that existing-home sales increased 1.9% to a seasonally adjusted annual rate of 5.46 million units in October. Sales are now 4.6% above the 5.22 million-unit pace in October 2017. The median price also recorded a 6.2% annual gain, the strongest pace since June 2017 and the 92nd straight year-over-year gain. Unsold inventory sits at a 3.9-month supply at the current sales pace, a seven-month low. Strong labour markets and low interest rates can be expected to further support the housing market.

Stagnant inflation may force the Bank of Japan’s hand

The latest figures from Japan’s Ministry of Internal Affairs and Communications, showed that the CPI increased at 0.2% (Y/Y) in October, unchanged from September’s rate and the slowest pace since February. The core CPI, which includes oil costs but excludes volatile fresh food prices, rose 0.4% from a year earlier. The marginal gain in inflation came despite the implementation of a sales tax hike from 8% to 10%. The near-stagnant inflation figures suggest that weak household sentiment is preventing companies from passing on higher costs to consumers. The data highlight the challenge that the Bank of Japan is facing, as it attempts to bolster inflation to meet its 2% target, amid low oil costs and the on-going U.S.-China trade conflict. Even though the bank’s key interest rate stands at -0.1%, the latest inflation results may be sufficient to fuel a move even further into negative territory at the next monetary policy meeting on December 19.

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

November 18
The People’s Bank of China (PBOC) unexpectedly lowered the interest rate on its seven-day reverse repurchase agreements to 2.50% from 2.55% on November 18. This was the first reduction in its seven-day reverse repurchase rate since October 2015, signaling that the bank is prepared to act to support the slowing economy and comes just two weeks after the PBOC cut the borrowing cost on its medium-term lending facility. The bank also injected ¥180 billion of cash into the financial system to alleviate liquidity concerns.

The S&P 500 Index, Dow Jones Industrial Average (DJIA) and S&P/TSX Composite Index (TSX) closed at record highs on November 15, bolstered by fading recession fears and renewed optimism surrounding a U.S.-China trade deal, extending the decade-long bull market rally. The S&P 500 finished higher on the week (0.77% to 3,120.46), its sixth straight week of gains, while the DJIA closed above 28,000 (up 0.80% to 28,004.89 at close) for the first time. At the same time, the Canadian equity benchmark index breached the 17,000 level (up 0.33% to 17,028.50 at close) for the first time and has now posted 11 records this year. The TSX climbed for 11 straight days, registering its longest streak of gains since January 21.

November 19
The U.S. Census Bureau announced that housing starts in October were at a seasonally adjusted annual rate of 1,314,000. This is 3.8% above the revised September estimate of 1,266,000 and is 8.5% above the October 2018 rate of 1,211,000. At the same time, the number of building permits issued in October was at a seasonally adjusted annual rate of 1,461,000. This is 5.0% above the revised September rate of 1,391,000 and is 14.1% above the October 2018 figure of 1,281,000. These figures are stronger than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that manufacturing sales fell 0.2% in September, following a 0.8% increase in August. Sales were down in 10 of 21 industries, representing 62.2% of the Canadian manufacturing sector. In line with the monthly decline, sales on a year-over-year basis are now down 1.2%. With the market braced for an even larger decline in September, this report is stronger than consensus estimates. These numbers are closely watched as the manufacturing sector can create high-value employment.

Eurostat, the statistical office of the European Union, reported that construction output in the euro area increased 0.7% (M/M, seasonally adjusted) in September, following a 0.8% decrease in August. On a year-over-year basis, production in construction decreased 0.7%, following a downwardly revised 0.8% growth in the previous month. It was the first month of contraction in construction output since January 2017. The overall results are weaker than market consensus.

November 20
Statistics Canada reported that consumer prices rose 0.3% (seasonally adjusted, monthly basis) in October, after declining 0.1% in September. On a year-over-year basis, the CPI was up 1.9%, matching the increase in August and in September. Recreation, education and reading recorded the largest monthly increase (1.6%) within the eight gaining sub-sectors. Both health and personal care and clothing and footwear were unchanged during the month. The Bank of Canada’s three measures of core inflation remained near their 2.0% target, ranging from 1.9% to 2.2%. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.9%. The overall figures matched market expectations.

Destatis, the federal statistical office of Germany, reported that its Producer Price Index (PPI) fell 0.2% in October, following a 0.1% advance in September. This reduced annual PPI inflation by a further 0.5 percentage points to -0.6%, its lowest mark since September 2016 (-1.3%). However, weakness in the monthly PPI figure was focused on intermediaries and energy, where prices declined 0.7% and 0.1%, respectively. The overall results are weaker than market consensus.

Trade Statistics of Japan, a division of the Ministry of Finance, revealed that Japan’s merchandise trade balance swung from a slightly higher revised deficit of ¥124.8 billion in September to a surplus of ¥17.3 billion in October. Total exports fell 9.2% (Y/Y) in October, after declining 5.2% in September. Total imports fell 14.8% in October (on the same basis), following a 1.5% decrease in the previous month. Japan’s merchandise trade balance is significantly below market consensus forecasts for a surplus of ¥335 billion.

November 21
The U.S. Department of Labor announced that initial jobless claims totalled 227,000 (seasonally adjusted) in the week ending November 16, unchanged from the previous week's revised level. The previous week's level was revised up by 2,000 to 227,000. The four-week moving average was 221,000, an increase of 3,500 from the previous week's revised average. The previous week's average was revised up by 500 to 217,500. These results are somewhat weaker than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in November and at a more robust pace. The Philly Fed general business conditions index climbed to 10.4 from 5.6 in October. These results are above market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

According to the U.S. National Association of Realtors, existing-home sales increased 1.9% to a seasonally adjusted annual rate of 5.46 million units in October from a downwardly revised 5.36 million in September (originally a 5.38 million-unit pace). Sales are now 4.6% above the 5.22 million-unit pace in October 2017. With the downward revisions, these results are below consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The European Commission reported that its flash estimate of the consumer confidence indicator edged up in the euro area by 0.4 points to -7.2 in November, following a -7.3 reading in October. Considering the European Union as a whole, consumer sentiment rose by 0.6 points to -6.7 in November. Both indicators remain on a broadly horizontal trajectory, well above their long-term averages. The overall results are stronger than market consensus.

November 22
Statistics Canada reported that retail sales cooled in September, edging down 0.1% (seasonally adjusted), following an upwardly revised 0.1% gain in August (previously reported as a 0.1% decline). The neutral results for August and September left the quarterly gain in retail spending at 1.8%, on an annualized basis. This is well below the 4.6% growth figure (on the same basis) recorded in the second quarter of 2019. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall gross domestic product (GDP) expansion and these figures suggest a material moderation. These results matched consensus expectations.


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