The Playbook – November 11, 2019

November 11, 2019 • Playbook

The Playbook

Weekly Commentary – November 11, 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 13 Inflation Rate Y/Y Oct 2019 1.6% 1.7%
November 13 Core Inflation Rate Y/Y Oct 2019 2.4% 2.4%
November 14 PPI-FD Oct 2019 0.4% -0.3%
November 14 Initial Jobless Claims Nov. 9, 2019 219k 211k
November 15 Retail Sales Oct 2019 0.2% -0.3%
United Kingdom        
November 11 GDP Q/Q Prel Q3 2019 0.4% -0.2%
November 11 Balance of Trade Sep 2019 -£2.2B -£1.55B
November 13 Inflation Rate Y/Y Oct 2019 1.6% 1.7%
*Source: Trading Economics

Key Earnings Calendar**

November 11: Franco-Nevada Corp., Hewlett Packard Enterprise Co., Tableau Software, Tencent Music Ent. Group
November 12: Advance Auto Parts Inc., CCL Industries Inc., Linde PLC., Tyson Foods Inc., Vodafone Group PLC
November 13: CAE Inc., Cisco Systems Inc., Loblaw Companies Ltd., Sumitomo Mitsui Financial Group Inc.
November 14: Applied Material Inc., Brookfield Asset Management Inc., NVIDIA Corp., Walmart Inc.
November 15: Dream Global REIT, Helmerich and Payne Inc., Hutchison China MediTech Ltd., Inc. ADR
**Source: Seeking Alpha

Market Focus

Canadian job market stalls

Following two solid months of gains, Statistics Canada reported that job growth eased back in October as total employment declined by 1,800. Unfortunately, full-time positions were hit harder with losses of 16,100 while part-time jobs advanced 14,300 during the month. Job declines in both manufacturing (23,100) and construction (21,300) were partially offset by an increase in public sector jobs (28,700). A modest rise in the labour force (7,600) left the unemployment rate flat at 5.5%. As well, average hourly earnings edged 0.3% higher, enough to leave the annual growth rate unchanged at 4.3% in October. Despite the dovish tone recently adopted by the Bank of Canada, this flat employment report may be enough to allow the central bank to remain neutral at its final policy window of 2019, scheduled for December 4.

U.S. and Canadian trade flows soften

The U.S. Census Bureau announced that both imports (1.7%) and exports (0.9%) had declined in September. As a result, the trade deficit averaged US$53.8 billion, monthly, during the third quarter, marginally lower than the US$54.4 billion figure seen in the second quarter. The smaller average trade deficit will help bolster overall gross domestic product (GDP) growth for the quarter. However, at the same time, two-way trade flows (total of all imports and exports) in September recorded the largest annual decline (2.3%) since June 2016 (2.8%). Domestically, Statistics Canada also reported that merchandise imports (1.7%) and exports (1.3%) both declined in September. Despite the narrowing of the deficit that this produced for the month, the average deficit for the quarter stood at C$1.2 billion, significantly wider than the C$0.3 billion recorded in the second quarter. The wider deficit will hamper the GDP results for the third quarter. Even though the immediate effects of the lower trade flows are well understood, the longer-term implications of the ongoing trade disputes are less clear.

Mixed signals from Kiwi labour force

In its latest report, Statistics New Zealand revealed that the nation’s unemployment rate rose from an 11-year low of 3.9% to 4.2% in the three months to September. At the same time, employment growth eased to 0.2% from 0.9% in the third quarter of 2018, the slowest annual pace since 2013. In contrast, wages advanced 2.5% from a year earlier, marking their largest gain since 2009 and the underutilization rate fell from 11.0% to 10.4%, its lowest level since the second quarter of 2008 (9.9%). This latest round of contradictory labour force statistics may present a dilemma for the Reserve Bank of New Zealand (RBNZ), as analysts now expect inflation to drift below the mid-point of the RBNZ’s 1-3% target rate. The bank’s next policy announcement is scheduled for November 13 and the market consensus suggests that the official cash rate will be lowered by 0.25% to a new record low of 0.75%.

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 4
The IHS Markit/BME Germany Manufacturing Purchasing Managers’ Index (PMI) edged higher to 42.1 (seasonally adjusted) in October, following a flash estimate of 41.9 and compared to September’s final reading of 41.7. The latest reading is the 10th straight print below the 50.0 expansion threshold and points to the second-lowest reading since June 2009. The survey stated that new orders “fell markedly” and for the 13th consecutive month. Meanwhile, the rate of “job shedding” also accelerated, reaching the quickest since January 2010. Despite the overall weakening conditions in the sector, the survey’s results are marginally stronger than market consensus.

The IHS Markit Eurozone Manufacturing PMI was revised higher to 45.9 (seasonally adjusted) in October, following a flash estimate of 45.7 and compared to September’s identical final reading of 45.7. The latest reading is the ninth consecutive print below the 50.0 expansion threshold and pointed to the second sharpest contraction in the euro area’s manufacturing sector in the past seven years. Germany remained the primary source of manufacturing weakness in the euro area, despite the slight improvement in its October PMI data. Additionally, Spain saw its manufacturing PMI fall to a 78-month low reading of 46.8. The overall euro area PMI results are slightly above market consensus.

November 5
■ The Reserve Bank of Australia (RBA) left its key “cash rate” unchanged at a record low of 0.75%, in line with market consensus. This follows cuts of 25 basis points at the central bank’s meetings in May, June and October. The press release that accompanied the announcement reiterated that the outlook for the global economy remains “reasonable,” but the risks are still skewed to the downside. Importantly, with the assessment of labour market conditions playing a major role in the bank’s decision to cut rates in recent months, the statement notes that the easing of monetary policy is “supporting employment and income growth,” with Australia’s unemployment rate remaining at around 5.25%. Officials continue to advise that it is “reasonable to expect” that policy rates will stay low for an “extended period” and that they are prepared to easy policy further, if required. The bank’s next policy meeting is scheduled for December 3.

■ The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to US$52.5 billion in September from a revised US$55.0 billion in August. September exports were $206.0 billion, $1.9 billion less than August exports. September imports were $258.4 billion, $4.4 billion less than August imports. The trade deficit was in line with market consensus.

Statistics Canada announced that Canada's merchandise imports fell 1.7% in September, while exports also declined 1.3%. As a result, Canada's trade deficit with the world narrowed from $1.2 billion in August to $978 million in September. These results were larger than market expectations. They are unlikely to materially influence GDP growth for the quarter.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 54.7 reading in October. It was up 2.1 points from the 52.6 level registered in September and remained above the key 50.0 (generally expanding) level for the 117th consecutive month. This figure is above consensus expectations. This result indicates continued growth at a faster rate in the non-manufacturing sector.

November 6
The U.S. Bureau of Labor Statistics announced that non-farm labour productivity decreased at a 0.3% (annualized) rate during the third quarter of 2019 while unit labour costs rose 3.6% on the same basis. This is the first outright decline in productivity since the final quarter of 2015. These figures are well below market expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

Eurostat, the statistical office of the European Union, reported that retail sales in the euro area edged up 0.1% (M/M, seasonally adjusted) in September, easing from a 0.6% rate of growth in August. This lifted year-over-year calendar-adjusted retail sales from a stronger revised 2.7% to 3.1% in September. The sales data show that the retail sector again contributed to euro area real GDP growth last quarter, however, with consumer sentiment having slipped in October, there are still some downside risks posed for the fourth quarter.

Destatis, the federal statistical office of Germany, reported that factory orders rose 1.3% (M/M, calendar and seasonally adjusted) in September, following a downwardly revised 0.4% decline in August. This was the first monthly increase in industrial orders since June, bolstered by rises in both domestic (1.6%) and foreign orders (1.1%). New orders from other countries improved (3.0%), while those from the euro area continued to slip (-1.5%). These results are much stronger than market consensus. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.

November 7
■ The U.S. Department of Labor announced that initial jobless claims totalled 211,000 (seasonally adjusted) in the week ending November 2, a decrease of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 219,000. The four-week moving average was 215,250, an increase of 250 from the previous week's revised average. The previous week's average was revised up by 250 to 215,000. These results are in line with consensus estimates.

Destatis reported that industrial production dropped 0.6% (M/M, seasonally adjusted) in September, following an upwardly revised 0.4% advance in August. This decline more than reversed August’s gain and placed output at its lowest level since December 2016. As a result, annual industrial production growth dropped from a downwardly revised -3.9% to -4.4% (Y/Y) in September. These results are weaker than market consensus.

■ The Bank of England met market expectations by leaving its key bank rate at 0.75% and its quantitative easing ceiling at £435 billion. However, the vote to keep rates unchanged stood at 7-2. The two dissenting votes were for a 0.25% rate cut. This was the first time there has been any call for lower rates since August 2016. With Brexit uncertainties remaining, it is widely expected that the bank will feel free to move either way going forward. The bank’s next policy meeting is scheduled for December 19.

November 8
Statistics Canada announced that 1,800 jobs were lost in October and the unemployment rate held steady at 5.5%. Despite the modest monthly decline, employment was up 2.4% (442,500) from 12 months earlier. These results are weaker than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, these numbers are indicative of consumer spending trends.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 201,973 units (seasonally adjusted annual rate) in October. This is down 8.7% from the 211,135-unit level in September (originally reported as 221,202). Multiple urban starts decreased by 12.5% to 139,518 units in October while single-detached urban starts increased by 2.4% to 49,786 units. These results are well below 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 slumped 6.5% to $8.3 billion in September, more than enough to reverse August’s 5.6% advance. Six provinces posted declines, led by Prince Edward Island (-25.5%) and Quebec (-20.5%). Nationally, on a year-over-year basis, permits are now up 2.1%. These results are weaker than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

Destatis revealed that Germany’s trade surplus widened to €19.2 billion in September, up from a larger, revised €18.7 billion (calendar and seasonally adjusted) in August and its second-best print since March. Total exports rose 1.5% (M/M, same basis) to €111.6 billion, their fourth increase in five months and largest increase since November 2017. Total imports rose 1.3% to €93.0 billion. These data likely suggest that there will be a slightly positive impact on third quarter real GDP. The overall trade figures are stronger than market consensus estimates.


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