The Playbook – October 21, 2019

October 21, 2019 • Playbook


The Playbook

Weekly Commentary – October 21, 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
October 22 Existing Home Sales Sep 2019 5.40M 5.49M
October 24 Durable Goods Orders Sep 2019 -0.6% 0.2%
October 24 Initial Jobless Claims Oct 19, 2019 203k 214k
October 22 Retail Sales Aug 2019 -0.1% 0.4%
October 23 Wholesale Sales Aug 2019 0.3% 1.7%
October 25 Budget Balance Aug 2019 -1.90B -1.47B
October 24 Markit Manufacturing Flash PMI Oct 2019 41.4 41.7
October 25 ifo Business Climate Oct 2019 94.2 94.6
*Source: Trading Economics

Key Earnings Calendar**

October 21: Celanese Corp., Halliburton Co., Logitech International S.A., TD Ameritrade Holding Corp.
October 22: Biogen Inc., McDonald's Corp., Texas Instruments Inc., United Parcel Services Inc., United Technologies Corp.
October 23: AT&T Inc., Eli Lilly and Co., Nasdaq Inc., PayPal Holdings Inc., The Boeing Co., Thermo Fisher Scientific Inc.
October 24: Captial One Financial Corp., Danaher Corp., Dow Inc., Raytheon Co., Valero Energy Corp.
October 25: Aon PLC., Phillips 66 Partners LP., Ventas Inc., Verizon Communications Inc., V.F. Corp.
**Source: Seeking Alpha

Market Focus

Canadian inflation remains neutral

The latest inflation news from Statistics Canada revealed another set of largely neutral data for September. For a second consecutive month, the overall Consumer Price Index (CPI) fell 0.1% (seasonally adjusted) allowing the annual growth rate to remain unchanged at 1.9%. The agency pointed to the continued dampening influence of gasoline prices on the overall index. The Bank of Canada’s own key price measure (CPI Common) edged higher by 0.1% in September to 1.9%, matching the broader index advance. Against a backdrop of material gains in the domestic labour market, the flat inflation results may be sufficient to allow the bank to avoid making any changes to monetary policy over the balance of 2019. The bank’s two remaining policy meetings for 2019 are scheduled for October 30 and December 4.

U.S. consumers back off in September

The U.S. Census Bureau reported a 0.3% (seasonally adjusted) decline in retail and food services sales during September, the first outright drop since February. The report showed that seven of the thirteen main sub-groups recorded lower sales over the month. At the same time, August totals were revised higher while July figures were revised lower. With the changes, annual growth in sales stood at 4.1% in September and the result for the third quarter was an annualized 6.0% gain. This represents solid growth in consumer spending but also reflects a deceleration from the second quarter’s rapid 7.7% pace. Global economic weakness, and the trade headwinds facing the U.S. economy, appear to be dampening consumer momentum heading into the final quarter of the year. Still, the labour market remains firm and the combination will present a dilemma to the Federal Reserve heading into their October 29 to 30 meeting.

India’s trade deficit hits seven-month low

India’s Ministry of Commerce and Industry announced that the nation’s trade deficit in goods narrowed to US$10.86 billion in September, well down from August’s US$13.45 billion and the US$14.95 recorded in September 2018. However, as seen recently in other countries, the narrowing of trade deficits, while positive for gross domestic product (GDP) calculations, reflects the emergence of underlying economic weakness. Ongoing global trade disruptions appear to be influencing output in several sectors. Exports contracted by 6.6% to US$26 billion in September, mainly due to a significant drop in shipments from key sectors, such as petroleum and engineering. Import demand was slashed by an even larger 13.9% during the month, raising concerns over the direction of business and consumer spending.

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

October 15
Germany’s ZEW Indicator of Economic Sentiment fell 0.3 points to -22.8 in October, following a reading of -22.5 in September. Over the same period, a separate gauge measuring investors’ assessment of the economy’s current conditions dropped 5.4 points to -25.3 in October, the lowest mark since April 2010. The overall results are slightly above market expectations; however, the outcome suggests that analysts are still downgrading their assessment of the current situation in Germany. The ZEW Indicator of Economic Sentiment is a leading indicator for the German economy similar to the ifo Index.

The U.K. Office for National Statistics reported that employment decreased by 56,000 to 32.69 million (seasonally adjusted) in the three months to September, the first quarterly decrease since August to October 2017. This pulled down the employment rate 0.2 percentage points to 75.9%. Meantime, the number of people out of work rose by 22,000 to 1.31 million over the same period, compared to a 51,000 decline in the three months to May and was large enough to lift the unemployment rate to 3.9% from 3.8%, which had been its lowest since the three months to January 1975. Total earnings, including bonuses, rose by an annual 3.8%, a tick less than a downwardly revised 3.9% in the previous month. The overall labour report was significantly weaker than market consensus.

October 16
The U.S. Census Bureau announced that retail and food services sales were down 0.3% (seasonally adjusted) for the month of September but were 4.1% above September 2018 levels. Excluding autos, sales slipped 0.1% lower during the month but were up 3.7% on a year-over-year basis. August figures were revised higher; however, with the market looking for another advance, the September results are weaker 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 consumer prices fell 0.1% (seasonally adjusted, monthly basis) in September, matching the August decline. On a year-over-year basis, CPI was up 1.9%, also unchanged from the annual pace reported in August. All three of the Bank of Canada’s core inflation measures edged higher during the month and ranged from 1.9% to 2.2%. CPI common, which the central bank says is most closely correlated with the output gap, moved up 0.1% to 1.9%. The overall figures are weaker than market expectations.

Statistics Canada announced that its foreign investors acquired $5.0 billion of Canadian securities in August, following divestments in each of the previous two months. Canadian investors' holdings of foreign securities declined $4.7 billion, the largest reduction since January. The foreign acquisition of Canadian securities was well above expectations. Foreign investment flows can significantly influence the relative strength of the Canadian dollar.

The U.K. Office for National Statistics (ONS) revealed that consumer prices advanced by a smaller-than-expected 0.1% (M/M) in September, after rising 0.4% in September. On a year-over-year basis, CPI inflation rose at an annual rate of 1.7% in September, matching August’s rate, which was the lowest since December 2016, and a tick below market consensus. As a result, the core CPI, which excludes the volatile prices of energy, food and tobacco, recorded a 0.2% monthly gain that lifted the underlying annual rate to 1.7% from 1.5%, its thirteenth straight sub-2.0% outturn. The overall CPI figures suggest the Bank of England’s (BoE) forecast in August that inflation would average 1.6% in the final quarter of 2019 looks on track; however, annual inflation is still comfortably below the Bank of England’s 2.0% medium-term target. The bank’s next policy meeting is scheduled for November 7.

Eurostat, the statistical office of the European Union, revealed that consumer prices rose by 0.2% in September, following a 0.1% advance in August and in line with market consensus. On a year-over-year basis, CPI inflation rose at an annual rate of 0.8% in September, the lowest recorded level since November 30, 2016 and marginally below a preliminary estimate of 0.9%. Annual inflation in the euro area is still well below the European Central Bank’s (EBC) inflation target of just under 2.0%. The ECB’s next policy meeting is scheduled for October 24.

The U.S. Census Bureau announced that business sales rose 0.2% in August and were up 1.1% from August 2018 levels. At the same time, inventories were largely unchanged during the month but were up 4.2% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of August was 1.40. The August 2018 ratio was 1.35. These results matched consensus expectations. Rising business sales suggest stable economic growth, while increasing inventories/sales ratios suggest limited business need to add to existing stockpiles.

October 17
The U.S. Department of Labor announced that initial jobless claims totalled 214,000 (seasonally adjusted) in the week ending October12, an increase of 4,000 from the previous week's unrevised level of 210,000. The four-week moving average was 214,750, an increase of 1,000 from the previous week's unrevised average of 213,750. These results are in line with consensus estimates.

The U.S. Census Bureau announced that housing starts in September were at a seasonally adjusted annual rate of 1,256,000. This is 9.4% below the revised August estimate of 1,386,000 but is 1.6% above the September 2018 rate of 1,236,000. At the same time, the number of building permits issued in September was at a seasonally adjusted annual rate of 1,387,000. This is 2.7% below the revised August rate of 1,425,000 but is 7.7% above the September 2018 figure of 1,288,000. The starts figures are below expectations while permits were stronger than consensus estimates. Activity in the housing market has a significant "ripple" effect on the broader economy.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in October but at a less robust pace. The Philly Fed general business conditions index tumbled to 5.6 from 12.0 in September. These results are below market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

Statistics Canada reported that manufacturing sales rose 0.8% in August, following two consecutive monthly declines. Transportation equipment and fabricated metal industries were mainly responsible for the growth in August. The petroleum and coal product industry posted the largest decline. On a year-over-year basis, overall manufacturing sales were still down 0.5%. This report is somewhat stronger than market consensus. These numbers are closely watched as this sector can create high-value jobs and it continues to run with employment below the level seen before the 2008-09 recession.

The Australian Bureau of Statistics revealed that employment increased 14,700 (seasonally adjusted) to 12,944,000 in September. Contradictory to August’s labour report, full-time employment positions made up all the gains with a rise of 26,200 to 191,700, while part-time employment decreased by 11,400 to 119,900. This helped pull the unemployment rate down a tick to 5.2%, after logging a one-year peak of 5.3% in August, the first decline since February when it dropped 0.2 percentage points to 4.9%. Though this may sit well with the Reserve Bank of Australia (RBA) which had earlier this year cut interest rates to a record low of 0.75%, the unemployment rate still resides well above the RBA’s 4.5% target. The overall results figures are stronger than market consensus.

The U.K. ONS reported that retail sales were flat (seasonally adjusted) in September, following an upwardly revised 0.3% decline (originally -0.2%) in August. On an annual basis, sales growth climbed from 2.6% in the previous month to 3.1% in September. Excluding auto fuel, purchases increased 0.2%, nearly reversing August’s 0.3% drop and unexpectedly lifting the annual rate to 3.0%. The retail sales report leaves sales growth at 0.6% in Q3 2019, matching the previous quarter’s rise. The ONS also suggests that the quarterly retail sales will add 0.03 percentage points to GDP in Q3 2019. The sales figures show mixed signals; however, the overall results are in line with market consensus.

The U.S. Federal Reserve announced that industrial production fell back 0.4% in September after advancing 0.8% in August. On a year-over-year basis, industrial production was reported to have declined 0.1%. Capacity utilization for total industry fell to 77.5% from 77.9% in August and 79.3% a year earlier. These results are weaker than expected. The softening in production should be reflected as a dampening factor for real economic output in the quarterly GDP figures.

October 18
China’s National Bureau of Statistics (NBS) revealed that the country’s economic growth slowed more than expected to 6.0% (Y/Y) in Q3 2019, slowing from a 6.2% rate of growth in the previous quarter. It was the weakest annual growth rate since the current measure of GDP was adopted by China in 1992, as domestic and foreign demand faltered amid the persisting U.S.-China trade war. On a quarterly basis, GDP was up 1.5% in the three months to September, easing from a 1.6% rate of growth in the previous quarter and matching market consensus. These data may highlight the need for China to roll out additional stimulus to fuel growth and counter the effects of the costly ongoing trade spat.

The NBS of China also reported that industrial production increased 5.8% (Y/Y) in September, following a 4.4% gain in August. This was the largest annual gain in industrial output since June, as production advanced further for both manufacturing (5.6% after 4.3%) and mining (8.1% after 3.7%). Utilities output growth remained steady at 5.9%. These results are stronger than market consensus.

The Statistics Bureau of Japan’s Ministry of Internal Affairs and Communications reported that CPI rose 0.2% (Y/Y) in September, down from 0.3% in August. Annual inflation has now fallen in four of the last five months and is at its lowest level since February. On a month-over-month basis, CPI growth was unchanged at 0.0%, highlighting that price increases have stalled. Core CPI, which excludes fresh food prices, advanced 0.3% (Y/Y) in September, decelerating from 0.5% in the previous month. This is the fourth decline in five months, and it is now at its lowest level since April 2017. The overall inflation figures are well below market consensus.


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Although the above information has been compiled from sources believed to be reliable, as at the date indicated, we cannot guarantee its accuracy or completeness. The information is provided solely for informational and educational purposes and is not to be construed as advice in respect of securities or as to the investing in or buying or selling of securities, whether express or implied. All data provided are subject to change without notice. The authors of this publication are employed by CI Investments Inc. or its affiliates. CI Multi-Asset Management is a division of CI Investments Inc. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc. Assante Wealth Management and/or Assante Wealth Management and design are trademarks of CI Investments Inc. Neither CI Investments Inc. nor any of its affiliates or their respective officers, directors, employees or advisors is responsible in any way for damages or losses of any kind whatsoever in respect of the use of this information. © 2019 CI Investments Inc.


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