The Playbook - June 10, 2019

June 07, 2019 • Playbook


The Playbook

Weekly Commentary – June 10, 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
June 12 Core Inflation Rate May 19 0.2% 0.1%
June 13 Export Prices May 19 0.4% 0.2%
June 13 Import Prices May 19 -0.3% 0.2%
June 14 Industrial Production May 19 0.2% -0.5%
June 14 New Motor Vehicle Sales April 19 197 k 187 k

Key Earnings:
June 10: Ferrellgas Partners LP, Jupai Holdings Ltd., Limoneira Co., Uxin Ltd.
June 11: Capstone Turbine Corp., HD Supply Holdings Inc., Korn/Ferry International
June 12: Finisar Corp., Fred’s Inc., Lululemon Athletica Inc., Oxford Industries Inc.
June 13: Coda Octopus Group Inc., PURE Biosciences Inc., Ruhnn Holding Ltd.
June 14: Alliance Media Holdings Inc., China Digital TV Holding Co Ltd., Titan Energy LLC
Source: Trading Economics, Yahoo Finance

Market Focus

U.S., Canada continue to see record low unemployment
Updated figures from Statistics Canada revealed a 0.3% drop in the unemployment rate to 5.4% in May. This is now the lowest level recorded since comparable data were first collected in 1976. While this was, in part, due to a 49,200 decline in the labour force during the month, the cumulative employment gains have lifted annual job growth to 2.4%, its strongest pace since November 2007. Similarly, the U.S. Bureau of Labor Statistics reported that unemployment remained steady at 3.6% in May, its lowest level since December 1969. Still, despite these low unemployment rates, there has been little evidence of “tight” labour markets or the wage-driven inflation that has, historically, accompanied them. Even though average hourly earnings in the U.S. stood with an annual 3.1% gain in May, that is down from February’s 3.4% high and is the lowest since September 2018. Domestically, earnings are up 2.8% on a twelve-month basis, but this is down from the 3.9% cyclical high, reported in May 2018.

North American trade deficits narrow
Data from the U.S. Census Bureau showed that the international trade deficit had narrowed to $50.8 billion in April from a revised $51.9 billion in March. The figures reflect the period that immediately preceded President Donald Trump’s escalation in trade rhetoric with China. The report also revealed that the trade deficit with China had narrowed sharply to $80.8 billion in the first quarter of 2019 from $103.7 billion in the final quarter of 2018. Not surprisingly, the direction of this data going forward is highly uncertain. Similarly, Statistics Canada reported that Canada’s merchandise trade deficit had surprisingly narrowed to $966 million in April from $2.3 billion in March, the lowest deficit since October 2018. The shift was due to the combination of a 1.3% advance in exports and a 1.4% contraction in imports. Despite the focus on foreign trade with other regions, exports to the U.S. rose 0.9% while imports climbed 1.9% during April. This left the U.S. as the destination for 74.5% of Canada’s merchandise exports and the source of 65.0% of all imports.

Reserve Bank of Australia cuts rates to record low
Australia became the first major developed country to cut interest rates in 2019. The Reserve Bank of Australia (RBA) ended its prolonged period of monetary policy inaction by lowering its key “cash rate” by 0.25% to a record low of 1.25%, as it aims to reach its medium-term inflation target range of 2-3%. It was the central bank’s first move since August 2016, when it cut it by 0.25% to 1.50%. The action came a day before GDP data showed that economic growth had slowed to an annual 1.8% in the first quarter, the weakest growth rate since 2008. The RBA’s decision comes against the backdrop of the “intensifying” U.S.-China trade spat, plunging housing prices and signs of emerging weakness in Australia's previously booming jobs market. Interestingly, RBA forecasts suggest a cash rate around 1.0% by the end of 2019. The RBA move carries implications for other major central banks as slower global growth appears to be emerging. The Reserve Bank of India (RBI) followed Australia’s lead by lowering rates by 0.25% just two days later.

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

June 3
The IHS Markit/CIPS U.K. Manufacturing PMI dropped 3.7 points to 49.4 (seasonally adjusted) in May, down sharply from 53.1 in April. The latest reading came in below the 50.0 expansion threshold (contraction) for the first time since July 2016 and was much weaker than market consensus. New orders shrank from both domestic and foreign sources, with new exports declining for the second straight month and at the fastest pace in over four-and-a-half years due to lower demand from Asia and Europe. Brexit-related precautionary stockpiling slowed, and manufacturing employment slid for a second consecutive month. The Bank of England will carefully assess the latest PMI data ahead of its next policy meeting on June 20.

The IHS Markit/BME Germany Manufacturing PMI edged lower to a revised 44.3 (seasonally adjusted) in May, following a 44.4 reading in April. The country’s manufacturing sector remained stuck in contraction for a fifth successive month as both new orders and export sales continued to fall. Employment fell for the third straight month and the pace of job losses accelerated at the fastest rate since January 2013. Manufacturers remained downbeat about the outlook of production output over the next 12 months due to trade concerns and the slowdown in the auto sector. These results were in line with market consensus.

The United States’ Institute for Supply Management reported that its Purchasing Managers Index (PMI) moved lower to a 52.1 reading in May. This is a 0.7-point loss from April’s 52.8 figure but remains above the key 50.0 (generally expanding) level for a 33rd consecutive month. The reading was below expectations and pointed to the weakest pace of expansion in the manufacturing sector since October 2016.

June 4
The RBA announced that it had cut its key “cash rate” by 25 basis points (a basis point is 1/100th of one percent) to a new record low of 1.25%. It was the bank’s first adjustment to the cash rate since August 2016, when rates were lowered by 25 basis points to 1.50% which, in turn, was followed by a record 33-month period of policy inaction. The press release that accompanied the announcement highlighted that the decision was to support employment and provide stimulus to a slowing economy amid weak growth in international trade and increased risks stemming from the U.S.-China trade dispute. Subdued growth in household income and tumbling house prices, particularly in Sydney, weighed heavily on consumer spending. Consumer prices were flat (non-seasonally adjusted) in Q1 2019 and core inflation slipped further below the RBA’s medium-term target of 2.0%. The decision to lower interest rates was in line with market expectations. The next policy announcement is scheduled for July 2.

In its flash estimate, Eurostat, the statistical office of the European Union, reported that consumer prices in the euro area increased 1.2% in May (Y/Y), down from a 1.7% increase in April. It was the lowest inflation rate since April 2018. Annual core inflation, which excludes volatile prices of energy, food and alcohol & tobacco, and on which the European Central Bank (ECB) focuses in its policy decisions, slowed by 0.5 percentage points to 0.8% in May, after a 1.3% advance in the previous month and significantly beneath the ECB’s near-2.0% medium-term inflation target. Both readings were well below market expectations. The central bank is under pressure and will need to assess the deepening slowdown in the euro area and discuss the potential need for stimulus. Fresh growth and inflation forecasts for the 19-nation region are scheduled to be released at the bank’s next policy meeting on June 6.

June 5
Statistics Canada announced that labour productivity of Canadian businesses rose 0.3% in the first quarter of 2019, not quite sufficient to recover the 0.4% decline seen in the final quarter of 2018. These figures matched consensus estimates. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 56.9 reading in May. It was up 1.4 points from the revised 55.5 level registered in April and remained above the key 50.0 (generally expanding) level for a 112th consecutive month. This figure is above consensus expectations. This result indicates continued growth, but at a slightly faster rate in the non-manufacturing sector.

The Australian Bureau of Statistics (ABS) reported that the economy expanded 0.4% (Q/Q, seasonally adjusted) in the first quarter of 2019, following a 0.2% advance in the fourth quarter of 2018 and below market consensus of 0.5%. On a year-over-year basis, GDP growth decelerated from 2.3% in the fourth quarter of 2018 to a ten-year low of 1.8% in the first quarter of 2019, its weakest growth rate recorded since the global financial crisis. The annual GDP growth results were marginally above market consensus. The data come after the RBA cut its cash rate by 25 basis points to 1.25% on June 4 and slashed its 2019-2020 average GDP growth forecast by 0.25 percentage points to 2.5%.

Eurostat, the statistical office of the European Union, reported that retail sales in the euro area declined 0.4% (monthly basis, seasonally adjusted) in April, following an unrevised flat performance in March. The monthly sales figure was slightly above market expectations. On an annual basis, calendar-adjusted retail sales increased 1.5% in April, the lowest growth rate in four months, following an upwardly revised advance of 2.0% (originally reported as 1.9%) in March. Although these are still the early days of the current quarter, the data show that retail sales may not provide much help to euro area GDP growth by the quarter end.

June 6
The U.S. Department of Labor announced that initial jobless claims totalled 218,000 (seasonally adjusted) in the week ending June 1, unchanged from the previous week's revised level. The previous week's level was revised up by 3,000 to 218,000. The four-week moving average was 215,000, a decrease of 2,500 from the previous week's revised average. The previous week's average was revised up by 750 to 217,500. These results are in line with consensus estimates.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to $50.8 billion in April from a revised $51.9 billion in March. April exports were $206.8 billion, $4.6 billion less than March exports. April imports were $257.6 billion, $5.7 billion less than March imports. Coupled with the revisions, the trade deficit was broadly in line with expectations. The smaller deficit should provide some support for GDP growth.

Statistics Canada announced that Canada's merchandise imports declined 1.4% in April, while exports rose 1.3%. As a result, Canada's trade deficit with the world fell to $966 million in April from $2.3 billion in March, the lowest deficit since October 2018. Since the market was looking for a widening of the deficit in April, these results are considerably stronger than expected. If maintained, trade will be less of a drag on overall GDP growth in the second quarter.

In its final estimate, Eurostat reported that its economy expanded 0.4% (Q/Q, seasonally adjusted) in Q1 2019, up from a 0.2% advance in Q4 2018. The largest contributors to GDP growth over the quarter included household total consumption expenditure (+0.5%) and gross fixed capital formation (1.1%). Among the euro area’s largest economies, Germany’s GDP increased 0.4% and Italy’s economy advanced 0.1%, emerging from its third recession in a decade. On a year-over-year basis, GDP advanced 1.2% in the first three months to March, unchanged from the upwardly revised rate (originally reported as 1.1%) in the previous period. Both results were in line with market estimates.

The RBI announced that it had cut its benchmark policy “repo” rate by 25 basis points to 5.75% in June. Accordingly, the reverse repo rate was adjusted lower by 25 basis points to 5.5%, and the marginal standing facility rate and the bank rate to 6.0%. The decision was made in order to reach India’s 4.0% medium-term inflation target (within a band of +/- 2.0%), while supporting growth amid a slowing of the global economy. It was the third straight rate cut this year due to a sharp slowdown in investment activity and flat private consumption. Importantly, the bank stated that they have “decided to change the stance of monetary policy from neutral to accommodative. This shift in policy is to boost aggregate demand and, particularly, “reinvigorate private investment activity.” The bank’s dovish tone suggests that more policy easing will follow. The next policy meeting is scheduled for August 7.

At its latest policy window, the ECB met expectations by holding steady its key “refinancing” rate at 0.0% in June. The marginal lending facility and deposit facility remained unchanged at 0.25% and -0.40%, respectively. Importantly, the press release accommodating the announcement was amended to state that key “interest rates will remain at their present levels at least through the first half of 2020,” compared to its previous release that rates would remain unchanged “at least through the end of 2019.” The bank also announced details of its new targeted longer-term refinancing operations (“TLTRO III”) which aim to provide favourable bank lending conditions and support current policy. The TLTRO III is set to begin in September 2019. ECB President Mario Draghi sent an increasingly dovish tone as he indicated that the bank’s next move would be less likely to hike rates than to cut them. The bank’s next policy meeting is scheduled for July 27.

The ABS reported that Australia’s trade surplus slightly narrowed to A$4.87 billion in April, following a downwardly revised A$4.89 billion (originally reported as A$4.95 billion) in March. It was the smallest monthly trade surplus since January and fell marginally below market expectations. Total exports rose 2.5% (seasonally adjusted) in April, up from a revised -1.6% in March. Total imports advanced 2.8% in April, also up from a revised -1.4% in the previous month. The trade balance was below market consensus and will likely hurt Australia’s GDP growth.

June 7
Statistics Canada announced that 27,700 jobs were added in May, and the unemployment rate fell by 0.3 percentage points to 5.4%, the lowest since comparable statistics were first collected in 1976. However, this was due, in part, to a 49,200 decline in the labour force. In line with the recent monthly gains, employment was up 2.4% (+453,100) from 12 months earlier. These results are stronger than market consensus. The employment data reflect the strength of the broader economy and individual sectors. As well, the figures are indicative of consumer spending trends.

Statistics Canada also reported that Canadian industries operated at 80.9% of their production capacity in the first quarter, down from 81.1% in the previous quarter. This was the third consecutive quarterly decline. These results are weaker than expected and suggest that the economy is running below a level that would be consistent with any capacity constraint.

The U.S. Bureau of Labor Statistics reported that the unemployment rate held steady at 3.6% in May, and non-farm payroll employment edged higher by 75,000. Employment continued to trend up in professional and business services and in health care. The employment figure was weaker than anticipated but the unemployment rate met expectations. These are the most closely followed U.S. statistics as they indicate the relative health of the various sectors of the economy and are suggestive of consumer spending.

According to preliminary data, Destatis, the federal statistics office of Germany, reported that output in the manufacturing sector plunged 1.9% (price, calendar and seasonally adjusted) in April, following an unrevised 0.5% monthly gain in March. This was the largest drop in output since August 2015 and its first decline since January. The monthly contraction was driven primarily by capital goods (-3.3%) and energy (-1.1%), however, the overall weakness was broad-based. Total industrial production, which excludes volatile prices of energy, fell by 2.5% (on the same basis), after registering a 0.7% increase in March. These results were significantly below market consensus.

Destatis also revealed that Germany’s trade surplus narrowed to €17.0 billion (calendar and seasonally adjusted) in April, following a downwardly revised €19.9 billion (originally reported as €20.0 billion) surplus recorded in March. This was the first contraction in three months and the lowest surplus since July 2018. The headline deterioration reflected reduction in both imports and exports. Total monthly exports fell 3.7%, easily offsetting March’s 1.6% gain. Total monthly imports declined at a slower pace of 1.3%. The discouraging April results warn that the small boost provided by total net exports to real GDP in the previous quarter will likely not be repeated in the current period.


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