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The Playbook - January 7, 2019

January 04, 2019 • Playbook


The Playbook

Weekly Commentary – January 7, 2019

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy

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
U.S.        
January 7 Factory Orders November 18 0.5% -2.1%
January 8 Exports November 18 $211.00B $211.05B
January 8 Imports November 18 $264.00B $266.53B
January 10 New Home Sales November 18 3.0% -8.9%
Canada        
January 7 Ivey PMI s.a. December 18 56.7 57.2
January 8 Exports November 18 $49.30B $49.32B

Key Earnings:
January 7: Commercial Metals Co., Environmental Tectonics Corp., TSR Inc.
January 8: AZZ Inc., Bed Bath & Beyond Inc., InspireMD Inc., Supervalu Inc.
January 9: Bank of South Carolina Corp., Delta Air Lines Inc., KB Home, WD-40 Co.
January 10: BlackRock Inc., Loop Industries Inc., Taylor Devices Inc., SYNNEX Corp.
January 11: YRC Worldwide Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian job market cools in December
Even though Statistics Canada reported a fourth consecutive monthly employment gain for the first time in 2018, the December results reflected underlying weakness. The 9,300 advance in jobs left the 2018 calendar year total at 163,300 (+0.9% compared to December 2017). This was well below the 2017 gain of 427,300 and the 2016 rise of 222,200. Unfortunately, the December job creation was also focused on part-time jobs (+28,300) while full-time positions declined (-18,900). In addition, despite an historic low for the unemployment rate at 5.6%, wage growth continued to advance at a slower pace than inflation. The absence of any material wage pressures will raise questions with respect to the likelihood of additional tightening of monetary policy from the Bank of Canada. The bank’s next policy announcement window is scheduled for January 9.

U.S. employment surges close 2018
The latest figures from the U.S. Bureau of Labor statistics revealed a 312,000 surge in non-farm payrolls during December. In addition, the November and October gains were revised upwards a cumulative 58,000. Even though the unemployment rate rose by 0.2 % from its cyclical low to 3.9% in December, much of that increase can be traced to a 419,000 gain in the labour force during the month. Average hourly earnings rose 0.4% for the month, sufficient to raise the annual growth rate to 3.2%, faster than the current pace of inflation. In all, 2.6 million new jobs were added to the U.S. economy during 2018, exceeding both the 2017 and 2016 totals of 2.2 million and 2.3 million, respectively. These data suggest considerable momentum was carried into 2019 and provides further support for the argument for additional rate hikes from the Federal Reserve.

Santa leaves U.S. equity holders a lump of coal
The usually reliable “Santa Claus” rally failed to materialize in 2018, as December proved to be one of the worst months for U.S. stocks on record. The S&P 500 index fell 9.2% during the month, the worst December since 1931. For calendar 2018, the index was down a cumulative 6.2% the biggest annual losses since 2008 (38.5%), at the height of the financial crisis. 2018 also marked the first time since 1948 that the S&P 500 finished out the year in the red after rising over the first three quarters. Technology and energy issues were particularly hard-hit, but broader market concerns weighed on all sectors. Ongoing U.S./China trade tensions, slowing global economic growth and rising interest rates served to dampen market enthusiasm that had characterized most of the year.

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

January 2
The IHS/BME Markit Germany Manufacturing PMI fell to 0.3 points to 51.5 in December, following a 51.8 reading in November. These results were in line with a preliminary flash reading and market expectations, final estimates showed. Moreover, the latest reading pointed to the weakest expansion in the manufacturing sector since March 2016 and was the eleventh fall in the PMI in 2018. With that, business confidence held close to last October’s six-year low as sentiment was curtailed by uncertainty relating to Brexit, trade tensions and the global slowdown in the automotive industry. The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month and is used as a leading indicator for near-term business activity.

The IHS Markit/CIPS U.K. Manufacturing PMI increased 0.6 points to 54.2 in December, following an upwardly revised 53.6 in November. These results beat market expectations of 52.5 and pointed to the strongest expansion in factory activity since June 2018, marking its highest level registered in six months. The advance was led by stronger growth of new orders which achieved a 10-month high, however, this was likely driven by manufacturers’ stockpiling efforts in preparation for a potential no-deal Brexit. The stockpiling of finished goods increased at the second-fasted rate since 1992. With signs of growing stress for the British economy, export orders were pushed higher due to the beaten-down pound. Accordingly, December’s PMI appears to be misleadingly bullish and, despite the monthly increase, the Q4 2018 average was the weakest since Q3 2016. The Manufacturing PMI provides an estimate of manufacturing business activity for the preceding month and is used as a leading indicator for near- term business activity.

January 3
The U.S. Department of Labor announced that initial jobless claims totalled 231,000 (seasonally adjusted) in the week ending December 29, an increase of 10,000 from the previous week's revised level. The previous week's level was revised up by 5,000 to 221,000. The four-week moving average was 218,750, a decrease of 500 from the previous week's revised average. The previous week's average was revised up by 1,250 to 219,250. These results are weaker than consensus estimates.

The IHS Markit/CIPS U.K. Construction PMI fell 0.6 points to 52.8 (seasonally adjusted) in December, following November’s unrevised 53.4 outturn. The reading came in a tick below market expectations of 52.9 and signalled only a modest rate of expansion. It was the slowest pace of growth experienced since September, primarily reflecting weaker rises in commercial and housing activity through December, and more than offset a strong performance for civil engineering. With a slight rise in new orders and a softening in overall activity growth, it appears that U.K. firms continued to be impacted by Brexit-related uncertainty and reluctance by consumers to place orders, specifically for commercial projects. Though Brexit uncertainty inevitably continued to weigh on the sector, business confidence still managed to rise to an eight-month high. The Construction PMI measures the performance of the U.K. construction sector and is used as a leading indicator for near-term business activity.

The Institute for Supply Management reported that its PMI moved lower to a 54.1 reading in December. This is a 5.2-point loss from November’s 59.3 figure but remains above the key 50.0 (generally expanding) level for a 28th consecutive month. The reading is below expectations and indicates a deceleration in manufacturing activity.

The U.S. Census Bureau announced that construction spending dipped 0.1% in October, following a 0.1% decline in September. On a year-over-year basis construction was up 4.9%. The monthly growth figure is below consensus estimates. This result indicates continued softening in the construction sector.

January 4
The U.S. Department of Labor announced that initial jobless claims totalled 231,000 (seasonally adjusted) in the week ending December 29, an increase of 10,000 from the previous week's revised level. The previous week's level was revised up by 5,000 to 221,000. The four-week moving average was 218,750, a decrease of 500 from the previous week's revised average. The previous week's average was revised up by 1,250 to 219,250. These results are weaker than consensus estimates.

The IHS Markit/CIPS U.K. Construction PMI fell 0.6 points to 52.8 (seasonally adjusted) in December, following November’s unrevised 53.4 outturn. The reading came in a tick below market expectations of 52.9 and signalled only a modest rate of expansion. It was the slowest pace of growth experienced since September, primarily reflecting weaker rises in commercial and housing activity through December, and more than offset a strong performance for civil engineering. With a slight rise in new orders and a softening in overall activity growth, it appears that U.K. firms continued to be impacted by Brexit-related uncertainty and reluctance by consumers to place orders, specifically for commercial projects. Though Brexit uncertainty inevitably continued to weigh on the sector, business confidence still managed to rise to an eight-month high. The Construction Purchasing Managers' Index (PMI) measures the performance of the U.K. construction sector and is used as a leading indicator for near-term business activity.

The U.S. Bureau of Labor Statistics reported that the unemployment rate rose by 0.2 percentage points to 3.9% in December, and non-farm payroll employment rose by 312,000. Much of the increase in the unemployment rate can be traced to a 419,000 gain in the labour force during the month. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and retail trade. The employment figures are well above consensus expectations while the back-up in the unemployment rate was greater than anticipated. This is the most closely followed set of U.S. statistics as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.

Statistics Canada announced that 9,300 jobs were added in December, while the unemployment rate remained unchanged at 5.6% for calendar 2018. Overall, employment was up only 0.9% (+163,300) compared to the end of 2017. These results are marginally stronger than market consensus. The employment data reflects the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

Statistics Canada also reported that its Industrial Product Price Index (IPPI) declined 0.8%, and its Raw Materials Price Index (RMPI) tumbled 11.7% in November, both led by sharply weaker energy prices. On a year-over-year, basis the IPPI was up 2.8% and the RMPI was down 9.9%. These figures are both below expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

China’s Caixin General Manufacturing PMI decreased to 49.7 in December 2018, following a 50.2 result in November. The December figure was the first contraction in the manufacturing sector since May 2017. The Caixin PMI suggested that new orders declined for the first time since June 2016 and new export business dropped for the ninth consecutive month, due to the trade frictions between U.S. and China. In addition, employment continued to fall, while production rose slightly after two months of stagnation. This overall report was somewhat weaker than market expectations.

 

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Investments Inc. and the portfolio manager believe to be reasonable assumptions, neither CI Investments Inc. nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

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 is subject to change without notice. The authors of this publication are employed by CI Investments Inc. or its affiliates. ®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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