The Playbook – October 7, 2019

October 07, 2019 • Playbook


The Playbook

Weekly Commentary – October 7, 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 8 PPI-FD Sep 2019 0.1% 0.2%
October 9 Wholesale Inventories Aug 2019 0.4% 0.2%
October 10 Inflation Rate Y/Y Sep 2019 1.9% 1.7%
October 8 Housing Starts Sep 2019 200 k 226.6 k
October 8 Building Permits Sep 2019 5.7% 3.0%
October 11 Employment Change Sep 2019 81.1 k 50.0 k
October 11 Unemployment Rate Sep 2019 5.7% 5.7%
United Kingdom        
October 10 Gross Domestic Product Aug 2019 -0.2% 0.3%
*Source: Trading Economics

Key Earnings Calendar**

October 8: AZZ Inc., Helen of Troy Ltd., Domino's Pizza Inc., Levi Strauss & Co.
October 9: EXFO Inc.
October 10: The Buckle Inc., VOXX International Corp.
October 11: Fastenal Co., Lindsay Corp., Neptune Wellness Solutions Inc.
**Source: Seeking Alpha

Market Focus

Canadian economy cools in July

In the wake of the surprise 3.7% (annualized) surge in gross domestic product (GDP) growth during the second quarter of 2019, the latest figures from Statistics Canada suggest that the broader economy failed to carry any real momentum into the third quarter. Overall GDP by industry grew less than 0.1% in July as a sharp 0.7% decline in goods output during the month effectively offset a 0.3% gain in the service sector. The primary source of weakness was the mining, quarrying and oil and gas extraction sector, which contracted by 3.5% in July, the largest decrease seen since May 2016. Wholesale trade was a bright spot, recording a 1.1% gain during the month. On a year over year basis, overall economic output rose 1.3%, the weakest pace since March (also 1.3%). The data suggest that Canada is far from immune to the wider cooling of the global economy. The Bank of Canada’s next policy meeting will take place on October 30, coincidental with the publication of their updated Monetary Policy Report. Analysts will continue to question the bank’s desire to avoid the rate cuts seen at most of the world’s other main central banks.

U.S. unemployment rate falls to new low

September figures published by the U.S. Bureau of Labor Statistics, revealed a 0.2% decline in the unemployment rate, lowering it to 3.5%. The last time it was lower was in March 1969 (3.4%). At the same time, non-farm payrolls increased 136,000 during September, the 108th consecutive monthly gain. Both July and August payroll results were revised higher by a cumulative 45,000. Employment growth remained steady at a 1.4% annual pace in September. However, despite the continued strength in the underlying job market, average hourly earnings were flat during the month and were up 2.9% on a year-over-year basis, the slowest growth rate since July 2018. This latest report continues to show a surprising level of balance in the U.S. labour market, even though it is at, or near, “full employment.” This balance should allow the Federal Reserve to continue with its easing of monetary policy in the near term.

Reserve Bank of Australia cuts interest rates to record low

Australia’s central bank fell further into the global easing trend as it cut interest rates for the third time this year on October 1, after back-to-back reductions in June and July, to boost inflation and stimulate a faltering economy. The Reserve Bank of Australia (RBA) cut its key “cash rate” by 0.25% to an all-time low of 0.75%. The press release that accompanied the announcement revealed an increasingly dovish tone, highlighting the country’s rising unemployment rate, “subdued” inflation and weak economic output. The unemployment rate rose to 5.3% in August, while inflation remained well below the RBA’s target of 2%-3%. Despite an overall dovish tone, RBA President Philip Lowe noted that the central bank sees a “gentle turning point” in the economy after annual economic growth slowed to a decade low of 1.4% in the second quarter of this year. Financial futures are now pricing in a 60% chance of another quarter-point rate cut at the bank’s next meeting on November 5.

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 30
Statistics Canada reported that its Industrial Product Price Index (IPPI) rose 0.2% in August while its Raw Materials Price Index (RMPI) dropped 1.8%. On a year-over-year basis, the indexes are down 1.0% and 6.0%, respectively. Lower prices for energy products were seen during the month, which held back the IPPI and lowered the RMPI. These figures are somewhat weaker than market expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

The U.K. Office for National Statistics confirmed that the economy contracted at a quarterly rate of 0.2% (seasonally adjusted) in Q2 2019, unrevised from the preliminary estimate. This is the first time that total output contracted since Q4 2012 and the economy’s weakest performance since Q2 2012 (also -0.2%). However, the 0.6% advance in Q1 2019 lifted annual GDP growth to 1.3% (Y/Y) in Q2 2019, down from 2.1% in the previous quarter. The quarterly fall in the U.K.’s GDP was largely due to destocking as companies rushed to reduce inventories previously accumulated to cope with a March 31 Brexit. These results are in line with market consensus.

Eurostat, the statistical office of the European Union, reported that the unemployment rate in the euro area dropped to 7.4% (M/M, seasonally adjusted) in August, down from 7.5% in July and from 8.0% in August 2018. This is the lowest unemployment rate recorded in the euro area since May 2008. Notably, however, the unemployment rate in the European Union (EU28) also ticked down by 0.1 percentage points to 6.2% (on the same basis) in August, down from 6.3% in July and from 6.7% in August 2018. This is the lowest rate registered in the EU28 since monthly records began in January 2000. The results were stronger than market consensus.

Destatis, the federal statistics office of Germany, revealed in a preliminary estimate that consumer prices were flat in September, following a 0.2% decline in August. On an annual basis, the Consumer Price Index advanced 1.2% (Y/Y) in September, slowing from 1.4% in August. This is the lowest annual reading since November 2016 (0.8%). Additionally, the preliminary Harmonized Index of Consumer Prices rose 0.9% (Y/Y) on the year and was down 0.1% on the month. The results were weaker than market consensus.

The Institute for Supply Management reported that its Chicago Purchasing Managers’ Index (PMI) fell to a 47.1 reading in September. This is down from August’s 50.4 figure and moves the index back below the key 50.0 (generally expanding) level. With the market looking for no change, this reading is below consensus expectations and indicates a deceleration in manufacturing activity within the region.

October 1
Statistics Canada announced that, on a monthly basis, real GDP by industry was virtually flat in July, after rising for four consecutive months. Goods-producing industries were down 0.7% in July as output from all subsectors declined, except for utilities. Services-producing industries were up for the fifth consecutive month, rising 0.3%. On a year-over-year basis, GDP growth stands at 1.3%. These results are weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The RBA announced that it reduced its key “cash rate” by 25 basis points (a basis point is 1/100th of one percent) to a new record low of 0.75%, in line with market consensus. This follows cuts of 25 basis points at each of the central bank’s June and July policy windows. The statement accompanying the announcement noted that the outlook for the global economy remains reasonable, but “the risks are tilted to the downside.” Importantly, however, the RBA also stated that it is “prepared to ease monetary policy further if needed,” reflecting its views on subdued economic output and inflation, slower wage growth and rising unemployment. Financial futures are now pricing in a 60% chance of a fourth cut to 0.50% in November, compared with below 30% before the bank’s previous decision. The bank’s next policy meeting is scheduled for November 5.

The Institute for Supply Management reported that its PMI edged lower to a 47.8 reading in September. This is a 1.3-point loss from August’s 49.1 figure and remains below the key 50.0 (generally expanding) level for a second consecutive month. The reading is below expectations and indicates a further deceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending rose 0.1% in August, following a downwardly revised flat result for July (originally reported as 0.1%). On a year-over-year basis, construction was down 1.9%. The monthly growth figure is below consensus estimates. This result indicates continued softening in the construction sector.

October 3
The U.S. Department of Labor announced that initial jobless claims totalled 219,000 (seasonally adjusted) in the week ending September 28, an increase of 4,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 215,000. The four-week moving average was 212,500, unchanged from the previous week's revised average. The previous week's average was revised up by 500 to 212,500. These results are in line with consensus estimates.

The Australian Bureau of Statistics reported that the nation’s trade surplus narrowed from a downwardly revised A$7.25 billion surplus (originally reported as A$7.27 billion) in July to A$5.93 billion (M/M, seasonally adjusted) in August. The value of exports decreased 3.4% on the month in August, down from growth of 0.4% in July. Total imports also fell 0.4% in August after a gain of 2.5% in July. Year-over-year growth in total exports slowed from 16.3% in July to 9.9% in August. Total imports rose 1.3% on the year in August after advancing 4.4% in July. The overall trade data are weaker than market consensus.

Eurostat, the European Union’s statistical office, reported that retail sales in the euro area advanced 0.3% (M/M, seasonally adjusted) in August, following a slightly smaller revised 0.5% decline (originally reported as -0.6%) in July. On an annual basis, calendar-adjusted retail sales decelerated from 2.2% in July to 2.1% in August. The sales data show that retail sales in the euro area remain on a gentle upturn and will likely make a positive contribution toward third quarter GDP.

The U.S. Census Bureau reported that factory orders fell 0.1% in August. This followed two consecutive monthly increases. Excluding transportation, new orders were flat in August. Given that the market was braced for a larger decline, these results are stronger than expected. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 52.6 reading in September. It was down 3.8 points from the 56.4 level registered in August but remained above the key 50.0 (generally expanding) level for a 116th consecutive month. This figure is below consensus expectations. This result indicates continued growth, but at a slower rate in the non-manufacturing sector.

October 4
The U.S. Bureau of Labor Statistics reported that the unemployment rate fell by 0.2 percentage points to 3.5% in September, a near 50-year low. Meanwhile, non-farm payroll employment rose by 136,000 and the August advance was revised upward from 130,000 to 168,000. Employment continued to trend up in health care and in professional and business services. With the revisions, the employment figures are broadly in line with expectations, while the improvement in the unemployment rate was greater than anticipated. This is the most closely followed set of U.S. statistics as they indicate the relative health of the various sectors of the economy and are suggestive of consumer spending.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to US$54.9 billion in August from US$54.0 billion in July. August exports were $207.9 billion, $0.5 billion more than July exports. August imports were $262.8 billion, $1.3 billion more than July imports. The trade deficit was somewhat larger than expected. The weaker trade results will hamper overall GDP growth.

Statistics Canada announced that Canada's merchandise imports rose 1.0% in August, while exports climbed 1.8%. As a result, Canada's trade deficit with the world narrowed from $1.4 billion in July to $955 million in August. These results match consensus expectations. They are unlikely to materially influence GDP growth for the quarter.

At its latest policy window, the Reserve Bank of India (RBI) cut rates for the fifth consecutive time, lowering its benchmark repo rate by an expected 25 basis points to 5.15%, the lowest level since March 2010 when it stood at 5.0%. India’s cumulative rate cuts equating 135 basis points, make it the most aggressive central bank in Asia with respect to monetary easing. Additionally, the reverse repo rate was also reduced by a quarter of a percent to 4.9%. Futures markets currently suggest that the RBI will cut its repo rate by another 15 basis points at its December 5 policy meeting.


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