The Playbook – November 18, 2019

November 18, 2019 • Playbook


The Playbook

Weekly Commentary – November 18, 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 19 Housing Starts Oct 2019 1.320M 1.256M
November 19 Building Permits Oct 2019 1.362M 1.387M
November 21 Philidelphia Fed Manufacturing Index Nov 2019 0.4% -0.3%
November 21 Existing Home Sales Oct 2019 5.48M 5.38M
November 15 Initial Jobless Claims Nov 16 19 205k 225k
November 19 Manufacturing Sales Sep 2019 0.3% 0.8%
November 20 Inflation Rate Y/Y Oct 2019 1.7% 1.9%
November 22 Retail Sales Sep 2019 0.2% -0.1%
*Source: Trading Economics

Key Earnings Calendar**

November 18: Copart Inc., Kohl’s Corp., George Weston Ltd., Home Depot Inc. Medtronic Inc., TJX Companies Inc.
November 19: Lowe’s Companies Inc., Metro Inc., NetEase Inc., Target Corp.
November 20: Intuit Inc., Macy’s Inc., Nordstrom Corp., Ross Stores Inc.
November 21: Foot Locker Inc., JM Smucker Co.
**Source: Seeking Alpha

Market Focus

North American equities hit new highs

North American equites established new all-time highs in November. Continuing its long advance, the U.S. S&P 500 Index closed at a new high on November 13 and has now recorded five new highs during the month. The index stood with a 23.4% advance on a year-to-date basis and a 357.3% gain since the peak of the financial crisis in 2009. Even though the domestic equity market has been overshadowed by its southern neighbor, the S&P/TSX Composite Index recorded a new high close on both November 12 and 13 for the first time since September 19 and 20. The new high represents an 18.4% year-to-date improvement and a gain of 43.2% since the previous bear market on January 20, 2016. Despite worries over ongoing trade disputes and slower economic growth, both globally and domestically, the equity markets continue to reflect investor optimism that these issues will be dealt with and a material slowdown avoided.

U.S. inflation firms in October

The U.S. Bureau of Labor Statistics announced that its consumer price index (CPI) rose a seasonally adjusted 0.4% in October, the largest single-month gain since March (also 0.4%). The increase pushed the annual inflation rate to 1.8%, marginally higher than the 1.7% pace reported in August and September. A 2.7% surge in energy prices during the month was held out as the main culprit behind the broader move higher. The mild up-tick in overall inflation comes on the heels of the latest Federal Reserve (Fed) monetary policy meeting, where it hinted that it may pause the current easing cycle. The continued strength in the labour market coupled with the mild rise in consumer prices may be sufficient rationale for the Fed to leave policy unchanged at their December 10 and 11 meeting.

Labour market slack highlights RBA uncertainty

In its latest report, the Australian Bureau of Statistics (ABS) revealed that the nation’s unemployment rate edged higher in October to 5.3% (seasonally adjusted), from September’s 5.2% level. At the same time, the number of employed persons fell by a surprising 19,000. Highlighting the apparent increase in job market slack, the monthly underutilization rate, which couples unemployment and underemployment (8.5%), ticked up 0.3 percentage points to 13.8%. Since June, the Reserve Bank of Australia (RBA) has cut interest rates by 0.25% on three occasions, virtually mirroring the moves by the U.S. Fed. However, with employment declining and the unemployment rate above 5%, the latest round of data will reinforce the idea that slack in the labour market remains. As a result, there is no general agreement that the RBA will pause in December as the Fed is expected to, leaving the debate open as to the timing of the next move. The bank’s next and final policy meeting for 2019 is scheduled for December 3. The first of 2020 will be held on February 4.

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 11
The National Bureau of Statistics of China reported that consumer prices advanced 0.9% in October, matching the September increase. On a year-over-year basis, the CPI was up 3.8% in October, accelerating sharply from 3.0% in September. This is the strongest annual inflation rate since January 2012, primarily as a result of soaring pork prices (101.3%). The overall figures are well above market expectations.

The U.K.’s Office for National Statistics (ONS) confirmed that the economy contracted 0.1% (M/M) in September, following a steeper revised 0.2% decline in August. This is the first back-to-back fall in real gross domestic product (GDP) in over two years. On a quarterly basis, real GDP expanded by a provisional 0.3% (seasonally adjusted) in Q3 2019, after it shrank by an unrevised 0.2% in the previous quarter. However, this reduced annual GDP from 1.3% to 1.0% in the three months to September, the weakest growth rate since Q1 2010. The overall results were weaker than market expectations.

November 12
The U.K. ONS reported that employment decreased by 58,000 (seasonally adjusted) in the three months to September, the largest decline since the three months to May 2015. The number of employed women dropped by 93,000, while the number of employed men rose by 35,000. At the same time, however, economic inactivity rose by 53,000, which ultimately pulled the unemployment rate down from 3.9% to 3.8%, the lowest since the mid-1970s. Total earnings, including bonuses, slowed 0.1 percentage points to an annual 3.6% in the three months to September. Earnings, ex-bonuses, decelerated 0.2 percentage points to 3.6% over the same period. The overall labour report is weaker than market consensus.

The National Australia Bank (NAB) reported that its business confidence index jumped 2.0 points to 2.0 index points in October. The reading beat market consensus forecasts but is still well below its long-run average of 6.0%. Meantime, the report indicated that business conditions edged up 1.0 point to 2.0 index points, driven by an uptick in trading and profitability. The survey measures the expectations of business conditions for the following month.

Germany’s ZEW Indicator of Economic Sentiment spiked 20.7 points to -2.1 in November, its highest reading since May. Over the same period, a separate gauge measuring investors’ assessment of the economy’s current conditions improved slightly by 0.6 points to -24.7 in November, its second-lowest mark since April 2010. The overall results are much stronger than market consensus forecasts. The ZEW Indicator of Economic Sentiment is a leading indicator for the German economy similar to the ifo Business Climate Index.

November 13
The U.K. Office for National Statistics (ONS) announced that the consumer price index including owner occupiers’ housing costs (CPIH) stood at 1.5% on a year-over-year basis in October. This is down from the 1.7% reading in September and is now the slowest growth rate for prices since November 2016. Energy was the largest downward contributor in this report. The overall figures are weaker than market expectations.

The U.S. Bureau of Labor Statistics reported that the CPI increased 0.4% (seasonally adjusted basis) in October, after being unchanged in September. Over the last 12 months, the index increased 1.8%. These results were above expectations. These figures are consistent with the Fed’s expectations of neutral inflationary pressures.

November 14
The U.S. Department of Labor announced that initial jobless claims totalled 225,000 (seasonally adjusted) in the week ending November 9, an increase of 14,000 from the previous week's unrevised level of 211,000. The four-week moving average was 217,000, an increase of 1,750 from the previous week's unrevised average of 215,250. These results are weaker than consensus estimates.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.4% (seasonally adjusted) in October. The index increased 1.1% for the 12 months ended October 2019, the smallest year-over-year advance since an identical 1.1% rise in October 2016. These figures are somewhat higher than consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada announced that its New Housing Price Index rose 0.2% in September. This is the largest increase since September 2017 but was not sufficient to break annual growth out of negative territory. On a year-over-year basis, the index is down 0.1%. These results are nominally stronger than consensus expectations and suggest little change in net worth for homeowners.

Destatis, the federal statistics office of Germany, reported that real GDP grew by a seasonally adjusted 0.1% (Q/Q) in Q3 2019, recovering from a slightly steeper revised 0.2% contraction (originally reported as -0.1%) in Q2 2019. Annual real GDP growth picked up from a revised 0.3% (originally reported as 0.4%) to a calendar-adjusted 0.5% in the three months to September. The overall figures were slightly stronger than market consensus.

The ABS revealed that the number of employed persons unexpectedly dropped by 19,000 (seasonally adjusted) in October, weakening from a downwardly revised increase of 12,500 (originally reported as 14,700). As a result, Australia’s unemployment rate ticked up to 5.3% in October, from 5.2% in September. At the same time, the underemployment rate advanced 0.2 percentage points to 8.5%, while the participation rate fell 0.1 percentage points to 66.1%, a four-month low. The overall labour force data are considerably weaker than market consensus.

The U.K. ONS reported that retail sales unexpectedly declined 0.1% (M/M, seasonally adjusted) in October, following an unrevised flat reading in September. This was the third straight month that retail sales have failed to register a rise. On a year-over-year basis, U.K. retail sales advanced 3.1%, unchanged from September’s reading. These results were below market consensus.

November 15
The U.S. Census Bureau announced that retail and food services sales were up 0.3% (seasonally adjusted) for the month of October and were 3.1% above October 2018 levels. Excluding autos, sales rose 0.2% during the month and were up 2.8% on a year-over-year basis. These figures are marginally stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

Statistics Canada reported that foreign investors added $4.8 billion of Canadian securities to their holdings in September, all corporate securities. Canadians reduced their investment in foreign securities by $2.4 billion, led by a divestment in U.S. instruments. Foreign investment was generally in line with expectations. Strong foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

The U.S. Federal Reserve announced that industrial production contracted by 0.8% in October after declining 0.3% in September. On a year-over-year basis, industrial production was reported to have fallen 1.1%. Capacity utilization for total industry dropped to 76.7% from 77.5% in September and 79.3% a year earlier. These results are considerably weaker than expected. The loss in production should be reflected as a decline in real economic output in the quarterly GDP figures.


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