The Playbook - April 8, 2019

April 08, 2019 • Playbook


The Playbook

Weekly Commentary – April 8, 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
April 8 Factory Orders February 19 -0.5% 0.1%
April 10 Inflation Rate Y/Y March 19 1.67% 1.50%
April 10 Wholesale Inventories February 19 0.5% 1.2%
April 11 PPI Y/Y March 19 2.0% 1.9%
April 8 Housing Starts March 19 200.0 k 173.1 k
April 8 Building Permits February 19 -1.7% -5.5%

Key Earnings:
April 8: DGSE Companies Inc., Kenon Holdings Ltd., Legacy Education Alliance Inc., ReneSola Ltd.
April 9: Argan Inc., Levi Strauss & Co., PriceSmart Inc., Washington Federal Inc.
April 10: Bed Bath & Beyond Inc., Century Bancorp Inc., Delta Air Lines Inc., Command Center Inc.
April 11: Corporacion America Airports S.A., Fastenal Co., Rite Aid Corp., SemiLEDs Corp.
April 12: Alliance Media Holdings Inc., JPMorgan Chase & Co., Pen Inc., Wells Fargo & Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy loses jobs in March
Running counter to the U.S. data, figures from Statistics Canada revealed a 7,200 decline in employment during January. This was the first outright drop since August 2018, but it closed off what was otherwise, a respectable quarter for employment growth (115,500). A decline in the labour force (11,300) that was largely in line with the job losses, left the unemployment rate at 5.8%, unchanged from February. Unfortunately, the private sector took a substantial hit losing 17,300 jobs during the month. Most of the total job losses (6,400) were in full-time positions leaving annual growth in this category at 1.3%, below overall employment growth of 1.8%. Given the cooling of the Canadian labour market, analysts will likely solidify their view that the Bank of Canada will remain on hold at their next policy window on April 24 that will coincide with the release of its updated economic forecast.

U.S. job market returns to strength
The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased 196,000 in March, following an upwardly revised 33,000 advance in February (originally reported as 20,000). Even with the revisions, the February advance remains the weakest since September 2017. However, the March gain was the 102nd consecutive increase and is in line with the average monthly advance seen over the preceding three years (199,000). The news of the rebound in jobs comes on the back of an announcement from the U.S. Department of Labor that initial jobless claims had fallen to a new 49-year low at the end of March. While annual wage growth (+3.2%) continued to outpace consumer price index (CPI) inflation (+1.5%), there do not appear to be material concerns over a “tight” labour market. This is likely, in part, due to the participation rate (currently 63.0%), which remains well below the historic peak of 67.3% in 2000.

Rising gloom overshadows German economy
Germany’s industrial slump showed little signs of deceleration, as factory orders plunged for a second consecutive month in February. In its latest report, Destatis revealed that new orders decreased by 4.2% in February. On a year-over-year basis, orders were down 8.4%, the largest annual decline since 2009. This is expected to continue as weak export demand, particularly from a Brexit-sensitive U.K., shows little evidence of firming. These data point to the increasing likelihood that Europe’s flagship economy could fall into contraction territory in the first half of 2019. Not surprisingly, given the headwinds caused by global trade disputes, German research organization CESifo Group Munich slashed Germany’s economic growth forecast to a mere 0.8% for 2019, from the 1.9% figure anticipated in September 2018. Of note, this report comes just two months after Germany narrowly skirted a technical recession (two consecutive quarters of GDP contraction).

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

April 1
The U.S. Census Bureau announced that retail and food services sales were down 0.2% (seasonally adjusted) for the month of February and were 2.2% above February 2018 levels. The December 2018 to January 2019 percentage change was revised upward from 0.2% to 0.7%. Excluding autos, sales in February were down 0.4% during the month and up 2.2% on a year-over-year basis. Given the scale of the revisions, these figures are generally in line with consensus expectations. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, retail sales data are critical to overall GDP results.

The Institute for Supply Management reported that its Purchasing Managers Index (PMI) moved higher to a 55.3 reading in March. This is a 1.1-point gain from February’s 54.2 figure, and remains above the key 50.0 (generally expanding) level for a 31st consecutive month. It was its lowest reading since November 2016. The reading was above market expectations and indicates an acceleration in manufacturing activity.

The U.S. Census Bureau announced that business sales increased 0.3% in January and were up 2.8% from January 2018 levels. At the same time, inventories advanced 0.8% and were up 5.3% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of January was 1.39, up by 3.0 basis points from the January 2018 ratio. These results were somewhat stronger than consensus expectations. Stronger business sales suggest more stable economic growth, on a relative basis, while a slight increase in inventories/sales ratios suggest a sign of an expanding GDP.

The IHS Markit/CIPS U.K. Markit Manufacturing PMI rose 3.0 points to 55.1 (seasonally adjusted) in March, following an upwardly revised 52.1 (originally reported as 52.0). The latest reading pointed to the strongest pace of expansion in the sector PMI in 13 months and was well above market expectations. The PMI has remained above the key 50.0 benchmark for 32 months in a row. Manufacturing output improved in March as U.K. companies stepped up production to build inventories in advance of a possible no-deal Brexit and to meet rising demand for new orders, reflecting panic stockpiling by other manufacturers. Although the latest PMI report suggests that manufacturing in March may make a positive contribution toward Q1 2019 real GDP growth, it is difficult to determine the accuracy of underlying economic trends due to Brexit-inspired volatility.

The IHS Markit/BME Germany Manufacturing PMI declined to a revised 44.1 reading in March, following a 47.6 reading in February. This was the sharpest contraction in factory activity since July 2012, during the euro area sovereign debt crisis, and also below the “flash” figure of 44.7. Both new orders and business from abroad fell at the fastest rate since April 2009, mainly due to uncertainty surrounding Brexit and trade tensions, a weak automotive sector and generally softer global demand. These results were weaker than market expectations.

Eurostat, the statistical office of the European Union, reported that the number of unemployed workers fell by a substantial 77,000 to 12.7 million in February. Accordingly, the unemployment rate in the 19-country euro area remained stable at 7.8% (monthly basis, seasonally adjusted) in February and down from 8.5% a year ago. Joblessness remained at its lowest rate since October 2008. These results were in line with market expectations.

According to a flash estimate, Eurostat also announced that, on a year-over-year-basis, CPI growth edged lower to 1.4% in March, following a 1.5% advance in February. It was the lowest inflation rate recorded since April 2018. Meanwhile, the harmonized index of consumer prices (HICP), a measurement of core inflation, fell 0.2 percentage points to 0.8% in March, from the 1.0% advance registered in the previous month. These results were weaker than consensus estimates and well below the European Central Bank’s medium-term inflation target of 2.0%.

China’s Caixin General Manufacturing PMI increased to 50.8 in March, following a three-year low of 49.9 in February. This reading came in 0.8 points above the key 50.0 expansion threshold and the highest level seen since July 2018. This was the first growth in manufacturing activity in four months. The increase was driven by sharp gains in new orders, while new export orders returned to expansionary territory. These results were stronger than market expectations.

April 2
The U.S. Census Bureau announced that durable goods orders fell 1.6% in February, following a downwardly revised 0.1% increase in January (originally reported as 0.4%). Excluding transportation, new orders increased 0.1% in August. Excluding defence, new orders decreased 1.9%. Given the revisions and that the market was braced for a larger decline, this report is broadly in line with market expectations. Orders for durable goods indicate how busy manufacturers will be in the months to come, as they work to fill those orders.

The Reserve Bank of Australia (RBA) met expectations by holding its key “cash rate” unchanged at a record low of 1.5%, extending its period of policy inaction for a 32nd consecutive month. Rates were last changed in August 2016, when they were slashed by 25 basis points. Importantly, text that explicitly stated “the central scenario is still for the Australian economy to grow by around 3.0% this year” was dropped. The release now states that “GDP data paint a softer picture of the economy than do the labour market data. GDP rose by just 0.2% in the December quarter to be 2.3% higher over 2018.” Also added to the release was a statement which cited, “household consumption is being affected by the protracted weakness in real household disposable income” despite a near-capacity labour market. As the demand for credit by investors in the housing market has slowed noticeably, and despite improvements in the housing market, inflation still stands at 1.8%, below the RBA’s inflation medium-term target of 2.0%-3.0%. The data suggest that the RBA has little wiggle room in terms of rate movements and may be under pressure to cut current rates in order to achieve their 2.0% and 2.25% inflation targets in 2019 and 2020, respectively.

Eurostat, the statistical office of the European Union, reported that producer prices in the euro area advanced 0.1% (monthly basis) in February, following a 0.4% increase in January. On an annual basis, producer price index (PPI) growth stood at 3.0% in January, unchanged from the previous month. The monthly change in overall prices was boosted by energy (+0.2%). However, excluding energy, the PPI growth figure would have remained approximately flat and only 1.2% higher than the same month a year earlier. Both monthly and annual results were marginally below market expectations.

The IHS Markit/CIPS U.K. Construction PMI gained 0.2 points to 49.7 in March, following February’s 49.5 point outturn. The latest reading came in 0.3 points below the key 50.0-expansion threshold, and the sustained decline in total construction activity pointed to the first back-to-back fall in output levels since August 2016. These results were in line with market expectations. The Markit/CIPS Construction PMI measures the performance of the U.K. construction sector and is used as a leading indicator for near-term business activity.

April 3
Eurostat, the statistical office of the European Union, reported that retail sales in the euro area increased 0.4% (seasonally adjusted, monthly basis) in February, following a downwardly revised 0.9% (originally reported as 1.4%) increase in January. The monthly sales figure beat market expectations and marked a fourth increase in the last five months. On an annual basis, calendar-adjusted retail sales increased 2.8% in February 2019. The strength seen in the first two months of 2019 indicates that the sector will boost Q1 2019 real GDP growth.

The Australian Bureau of Statistics (ABS) reported that the country’s trade surplus surged A$250 million to A$4.80 billion in February (monthly basis, seasonally adjusted), following a downwardly revised A$4.35 billion posted in January. It was the largest monthly trade surplus on record. February exports rose 0.2% to a new record high. February imports fell 1.1% after increasing a revised 3.9% in January. In the first two months of 2019, Australia’s trade surplus soared to A$9.15 billion from A$2.72 billion in the same period a year earlier. These results easily beat market expectations. The widening in the trade surplus will reflect stronger Q1 2019 GDP results.

April 4
The U.S. Department of Labor announced that initial jobless claims totalled 202,000 (seasonally adjusted) in the week ending March 30, a decrease of 10,000 from the previous week's revised level. This is the lowest level for initial claims since December 6, 1969 when it was 202,000. The previous week's level was revised up by 1,000 from 211,000 to 212,000. The four-week moving average was 213,500, a decrease of 4,000 from the previous week's revised average. The previous week's average was revised up by 250 to 217,500. These results are stronger than consensus estimates.

Destatis, the Federal Statistics Office of Germany, reported that price-adjusted new orders in manufacturing decreased sharply by 4.2% (monthly basis, calendar and seasonally adjusted) in February, following a revised -2.1% (originally reported as -2.6%) fall in January. This was the second consecutive month of declines and the steepest since January 2017 amid a plunge in domestic orders (-1.6%) and foreign demand (-6.0%). Accordingly, annual growth in manufacturing orders slumped to -8.4% in February, its ninth successive negative print and worst reading over the period. These results were significantly below market expectations. New orders in manufacturing are a leading indicator for industrial production in the months to come.

At its latest policy window, the Reserve Bank of India (RBI) met expectations by cutting its benchmark “Repo” rate by 25 basis points to 6.0%, setting its medium-term inflation target to 4.0%. This was the bank’s second successive rate cut since December 2018 and reverses the 50 basis points of increases delivered by the RBI in 2018. Today’s decision comes on the heels of negative incoming data, specifically subdued inflation and weaker projected growth in industrial production. However, the RBI retained its GDP growth forecast at 7.4% for the first half of the fiscal year, while reducing its near-term inflation forecasts to 2.9%-3.0%. Today’s decision suggests that further rate cuts are likely to occur should inflation remain below the mid-point of the bank’s target range.

April 5
Statistics Canada announced that 7,200 jobs were lost in March, the first decline since August 2018. At the same time, the unemployment rate was steady at 5.8% as the labour force fell by 11,300. In line with the monthly decline, annual growth in employment slipped to 1.8% in March from 2.0% in February. These results are weaker 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.

The U.S. Bureau of Labor Statistics reported that the unemployment rate was unchanged at 3.8% in March, and non-farm payroll employment rose by 196,000. Notable job gains occurred in health care and professional and technical services. The employment figures are stronger than expected. 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.

Destatis reported that Germany’s industrial production unexpectedly rose 0.7% (monthly basis, seasonally and calendar adjusted) in February, after a significant upwardly revised 0.0% (originally reported as -0.8%) in January. On a year-over-year basis, production growth declined by 0.4% in February, following a downwardly revised 2.7% fall in the previous month. The monthly change in overall prices was driven by strong growth in the construction sector (+6.8%). However, production in industry excluding the volatile energy and construction sectors, was down 0.2%. These results were somewhat above market expectations.


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