Playbook - September 16, 2019

September 16, 2019 • Playbook


The Playbook

Weekly Commentary – September 16, 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
September 16 NY Empire State Manufacturing Index September 19 5.2 4.8
September 17 Industrial Production (Y/Y) August 19 0.2% 0.5%
September 17 Manufacturing Production (Y/Y) August 19 -1.0% -0.5%
September 18 Building Permits August 19 -3.0% 8.4%
September 17 Manufacturing Sales July 19 0.50% -1.2%
September 18 Inflation Rate (Y/Y) August 19 1.7% 2.0%

Key Earnings:
September 16: Aytu BioScience Inc., Dynagas LNG Partners LP, HeadHunter Group PLC
September 17: Adobe Inc., Bluestem Group Inc., Bristow Group Inc., FedEx Corp.
September 18: General Mills Inc., Herman Miller Inc., United Natural Foods Inc.
September 19: Darden Restaurants Inc., EVI Industries Inc., Research Solutions Inc.
September 20: Alliance Media Holdings Inc., Hycroft Mining Corp., Steelcase Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canada’s Capacity Utilization Gain Mirrors GDP

Given the surge in gross domestic product (GDP) growth to 3.7% in the second quarter of 2019, it came as little surprise when Statistics Canada announced that capacity utilization had climbed to 83.3% during the same quarter, from 81.1% in the first. Even though the utilization rate remained below the 84.0% cyclical peak recorded in the second quarter of 2018, the 2.2 percentage point gain is now the largest single quarter increase since consistent data were first collected in 1987. Despite the magnitude of the change, there appears to be little danger of a material advance in inflationary pressures. During the peak of the previous business cycle, utilization stood at 86.6% (Q4 2005) while overall annual Consumer Price Index (CPI) growth was 2.2% and the Bank of Canada’s CPI Common was 1.9%. Even though the underlying economy has clearly evolved since 2005, it is unlikely that the bank will alter policy based on any sense of capacity constraints.

U.S. Consumer Spending Advances Further

The latest data from the U.S. Census Bureau revealed another 0.4% advance in retail and food services sales during August. The increase was due largely to a 1.8% jump in sales at motor vehicle and parts dealers. The broader gain, which was the sixth consecutive increase, came on the back of an upwardly revised 0.8% improvement in July and was enough to raise annual sales growth to 4.1%, the fastest pace since October 2018. While there has been some apparent moderation in growth in the labour market, even flat sales results for the month of September would point to an annualized 6% gain in retail spending during the third quarter. Nevertheless, with inflation still well contained, the continued gains in consumer spending are unlikely to alter the Federal Reserve’s path to easing monetary policy.

ECB Cuts Rates and Resumes Quantitative Easing

At its latest policy meeting, the European Central Bank (ECB) revealed fresh monetary stimulus by both cutting interest rates and by approving a new round of quantitative easing. The ECB reduced its key deposit rate by 10 basis points to a record low of -0.5%, the first rate cut since March 2016. The bank is also set to resume its asset purchase program on November 1, buying debt at a pace of €20 billion per month. While the bank had previously stated that interest rates were to remain at former levels at least through the first half of 2020, the most recent statement affirms that rates will remain at current or lower levels until the outlook for inflation “robustly” converges on its target of just below 2.0%. Additionally, during the press conference following the announcement, President Mario Draghi stated that “we still think the probability of recession for the euro area is small, but it’s gone up,” reflecting the bank’s policy shift. It remains to be seen what policy “ammunition” will be left to his successor, Christine Largage, when she takes office on November 1.

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 9
Destatis, the federal statistics office of Germany, revealed that Germany’s trade surplus widened to €20.2 billion (calendar and seasonally adjusted) in July, up from a downwardly revised €18.0 billion in June, registering its largest surplus this year and best performance since May 2018. The monthly widening in the seasonally adjusted surplus reflected an unexpected 0.7% increase in exports to €115.2 billion. At the same time, total monthly imports fell -1.5% to €93.7 billion. July’s positive performance may suggest a minor boost in Germany’s third quarter output data. The overall trade figures were stronger than market consensus.

The U.K. Office for National Statistics (ONS) revealed that the economy expanded 0.3% (M/M, seasonally adjusted) in July, after stagnating in June. The advance was stronger than market consensus and marks the economy’s strongest monthly performance since January 2019. The monthly boost was mainly attributed to growth in services (0.3%), manufacturing (0.3%) and construction (0.5%). Moreover, rolling three-month GDP was unchanged (0.0%) in the three months to July, up from a 0.2% decline in the previous three-month period while leaving annual growth unchanged at 1.0%. The rolling three-month growth data were in line with market consensus.

The ONS also reported that the U.K.’s trade deficit widened to £9.14 billion (seasonally adjusted) in July, following an upwardly revised £8.92 billion (originally reported as -£7.01 billion) deficit in June. The lack in the trade figures’ monthly deviation reflected a 3.5% rise in exports, their best performance since March 2019. This advance was virtually offset by a 3.3% increase in imports, which was their first increase in four months. The trade data were marginally stronger than market consensus.

September 10
The Canada Mortgage and Housing Corporation announced that housing starts totalled 226,639 units (seasonally adjusted annual rate) in August. This is up 1.9% from the 222,467-unit level in July (originally reported as 222,013). The largest advance among the sub-groups was a 13.6% gain in single-detached urban starts. These overall results were above 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 rose 3.0% to $8.3 billion in July, following two consecutive monthly decreases. Five provinces posted increases, led by British Columbia. Nationally, construction intentions rose in three of the five main sub-components with institutional (7.6%) reporting the largest advance. On a year-over- year basis, permits are now up 0.7%. These results are stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The National Bureau of Statistics (NBS) of China reported that the country’s CPI advanced 2.8% (Y/Y) on the year in August, unchanged from its July reading, marking its highest level since February 2018 and beating market consensus of 2.6%. The index rose 0.7% (M/M) on the month in August, following a sluggish 0.4% gain in the previous month. This was the largest monthly advance since February 2019 and above market consensus.

The NBS also reported that China’s Producer Price Index (PPI) declined 0.8% (Y/Y) on the year in August, following a 0.3% drop in July. This was the worst year-over-year contraction since August 2016, when producer prices also fell by 0.8%. The index fell 0.1% (M/M) in August, following a 0.2% decline in the previous month. These results were slightly above market consensus.

The U.K.’s ONS reported that employment increased by 31,000 in the three months to July 2019, well short of the 114,000 gain in the previous period, but still raising total employment to a record high of 32.77 million (seasonally adjusted). This lifted the employment rate to 76.1%. At the same time, the unemployment rate remained steady at 3.8%, narrowly beating market consensus. Total earnings, including bonuses, rose by an annual 4.0%, the highest rate since mid-2008 and well above market expectations. Excluding bonuses, wage growth eased to 3.8%, matching market expectations. The overall report is somewhat stronger than anticipated.

The Reserve Bank of Australia (RBA) met expectations by holding its key “cash rate” at a record low of 1.0%. This follows cuts of 25 basis points at the RBA’s last two meetings in May and June. The statement accompanying the decision stated that the “outlook for the global economy remains reasonable, although the risks are tilted to the downside,” noting that prolonged uncertainty has been caused by global trade and technology disputes. The RBA also cited that growth in Australia is expected to strengthen “gradually” to be around trend over the next couple of years. Importantly, however, bank officials now state that inflation pressures remain “subdued,” which will likely be the case for a protracted period of time. The bank’s next policy announcement is scheduled for October 1.

The IHS Markit/CIPS U.K. Construction Purchasing Managers Index registered a seasonally adjusted 45.0 reading in August, down slightly from 45.3 in July. IHS Markit noted that the headline index remained below the 50.0 expansion threshold for the fourth consecutive month as business optimism slipped to the lowest level since the financial crisis in 2008. Further, lower volumes of construction output contributed to worsening order books and a “lack of new projects to replace completed contracts.” Meanwhile, input cost inflation slowed to its slowest level since March 2016. The latest decline was led by the sharpest reduction in new work since 2009, as fears are heightening with Prime Minister Boris Johnson suggesting that he is committed to leaving the European Union on October 31, with or without a deal. The results are weaker than market consensus.

Eurostat, the European Union’s statistical office, reported that retail sales in the euro area dropped 0.6% (M/M, seasonally adjusted) in July, following an upwardly revised 1.2% pickup (originally reported as 1.1%) in June and matching market consensus. Regionally, Germany (-2.2%) and Croatia (-3.3%) reported the most wounding figures. On an annual basis, calendar-adjusted retail sales decelerated from a revised 2.8% (originally reported as 2.6%) to 2.2% in July, above market consensus and the second best reading since February. The sales data show that next quarter’s GDP growth in the euro area will likely be weaker than expected.

September 11
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.1% (seasonally adjusted) in August. The index increased 1.8% for the 12 months ended August 2019, up marginally from the 1.7% pace recorded in both June and July. These figures matched consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada announced that Canadian industries operated at 83.3% of their production capacity in the second quarter, up from 81.1% in the previous quarter. This was the highest capacity utilization rate since the second quarter of 2018. The mining, quarrying and oil and gas extraction sector was the main source of this increase. These results are stronger than expected. Nevertheless, the current level of utilization does not suggest any material capacity constraints and does not represent a material risk to inflation.

September 12
The U.S. Department of Labor announced that initial jobless claims totaled 204,000 (seasonally adjusted) in the week ending September 7, a decrease of 15,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 219,000. The four-week moving average was 212,500, a decrease of 4,250 from the previous week's revised average. The previous week's average was revised up by 500 to 216,750. These results are somewhat stronger than consensus estimates.

The U.S. Bureau of Labor Statistics reported that CPI increased 0.1% (seasonally adjusted basis) in August. Over the last 12 months, the index increased 1.7%. At the same time, core CPI (excludes volatile food and energy components) rose 0.3% during the month and 2.4% on a year-over-year basis, the strongest annual gain since July 2018. While core inflation was marginally higher than expected, the headline figures matched consensus estimates. The increase in the core measure is unlikely to alter expectations for easier monetary policy from the U.S. Federal Reserve.

Statistics Canada announced that its New Housing Price Index fell 0.1% for the third consecutive month in July. On a year-over-year basis, the index is now down 0.4%, the weakest pace since December 2009 (-0.9%). These results are marginally weaker than consensus expectations and suggest continued softening in net worth for homeowners.

The ECB cut its key interest rate and announced that it will resume bond purchases following its latest policy meeting. The ECB cut its key deposit rate by 10 basis points to a record low of -0.5% and revealed that it will resume its asset purchase program (APP) at a monthly pace of €20 billion beginning on November 1. This was the first rate cut on the deposit facility since March 2016. Rates on the main refinancing operations and the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The press release that accompanied the announcement stated that ECB expects interest rates to remain at their present or lower levels until it has seen the inflation outlook “robustly” converge to a level sufficiently close to, but below, the bank’s 2.0% inflation target. This is ECB President Mario Draghi’s last attempt to revive inflation in the euro area prior to his departure on October 31, and binds the hands of his successor, former International Monetary Fund Managing Director Christine Lagarge, who is scheduled to take office on November 1.

September 13
The U.S. Census Bureau announced that retail and food services sales were up 0.4% (seasonally adjusted) for the month of August and were 4.1% above August 2018 levels. Excluding autos, sales were largely unchanged during the month and up 3.5% on a year-over-year basis. The overall growth in sales is higher than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

Eurostat, the statistical office of the European Union, reported that the merchandise trade balance in the euro area widened to €19.0 billion (Y/Y, seasonally adjusted) in July, up from a smaller revised €17.7 billion in June. Unadjusted, the surplus stood at €24.8 billion, a near €6.0 billion increase from the same month a year ago. The headline gain was primarily attributed to a 0.6% rise in exports on the month to €195.2 billion, nearly offsetting the previous period’s decline and their third advance in the last four months. Meanwhile, monthly imports were unchanged for the second consecutive month. Unadjusted, exports are up 6.2% on the year, while imports are up 2.3% over the same period. The increasing trend of zero or negative growth in imports reflects sluggish domestic demand in the euro area. Moreover, the rising trend in low imports is sending warning signals that euro area domestic demand is concerningly low and reflects the depreciation of the euro over the past year. These results are significantly stronger than market consensus.

Destatis, the federal statistics office of Germany, reported that wholesale prices fell 1.1% (Y/Y) in August, following a trivial 0.1% drop in July. On a monthly basis, wholesale prices declined 0.8% (M/M) in August, after recording a 0.3% fall in the previous month. The year-over-year decline was attributed to significant declines in petroleum products (-6.1%) and waste and residual materials (-10.0%). In contrast, there were increases in prices for livestock (+13.7%) and meat products (+5.4%). The results are in line with market expectations.


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