Playbook - August 12, 2019

August 12, 2019 • Playbook


The Playbook

Weekly Commentary – August 12, 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
August 12 Consumer Inflation Expectations July 19 2.60% 2.67%
August 13 Inflation Rate July 19 0.2% 0.1%
August 15 Industrial Production Y/Y July 19 1.2% 1.3%
August 15 Manufacturing Production Y/Y July 19 0.2% 0.4%
August 15 ADP Employment Change July 19 28.0 k 30.4 k
August 15 New Motor Vehicle Sales June 19 192 k 207 k

Key Earnings:
August 12: Cyanotech Corp., Evolus Inc., Sysco Corp., Tencent Music Entertainment Group
August 13: China Yuchai International Ltd., DarioHealth Corp., HUYA Inc., Reed's Inc.
August 14: Cisco Systems Inc., Luckin Coffee Inc., Macy's Inc., Progressive Corp.
August 15: Alibaba Group Holding Ltd., Canadian Solar Inc., Globant S.A., NVIDIA Corp.
August 16: Deere & Co., Ditech Holding Corp., Nordic American Tanker Ltd., Qudian Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian employment slips again
In its latest report, Statistics Canada announced that 24,200 jobs were lost in July as both full-time (11,600) and part-time employment (12,600) lost ground. The broader move down followed June’s 2,200 job loss and resulted in the first back-to-back declines since November and December of 2014 (32,700 combined). Annual job growth slipped to 1.9% from 2.3% in June and the unemployment rate rose from 5.5% to 5.7% in July. In addition, average hourly earnings fell 0.1% from $27.83 in June to $27.81 in this report. However, despite this monthly decline, annual wage growth was reported as 4.5%, its strongest pace since January 2009 (4.9%). This is one of the measures monitored by the Bank of Canada, and while the recent spike up appears to be a bit of a statistical anomaly, it is unlikely that it will drop back below 3.0% before the end of 2019. While all the data is important, the bank will not base monetary policy decisions on a single statistic.

Central banks announce surprise rate cuts
The interest rate cut announced by the U.S. Federal Reserve on July 31 was their first since December 16, 2008 and, apparently set the stage for more aggressive easing elsewhere. The Reserve Bank of India cut interest rates for the fourth consecutive time at their latest policy window, lowering the benchmark repo rate to 5.40% from 5.75%, its lowest level since April 2010. A 0.25% reduction was anticipated but this was the first 0.35% move that the Bank has ever made. Analysts suggest that a 0.50% cut may have signaled that the bank was panicking. The Reserve Bank of New Zealand clearly felt no such qualms, as it slashed its official cash rate by an unexpected 0.50% to 1.00%. This is only the third time in the past 20 years that a 0.50% cut has occurred. The Bank of Thailand also made a surprise move, cutting its benchmark interest rate by 0.25% to 1.50%, its first cut since 2015. The global trend to easier monetary policy now appears clear.

Yuan breaks above seven per USD
The U.S. Treasury designated China a currency “manipulator” for the first time since 1994 on August 5, after the People’s Bank of China (PBOC) allegedly allowed the offshore yuan to depreciate 1.9% as it rose to a record of 7.1095 per U.S. dollar (higher values indicate a weakening in USD terms). It was the currency’s largest single-day loss in four years and comes just days after U.S. President Trump threatened new tariffs on an additional US$300 billion worth of Chinese goods. In response, China’s state-run businesses also halted all imports of U.S. agricultural goods, escalating the trade rift between the economic superpowers and sparking concerns over a potential currency war. Continued depreciation of the yuan could dangerously impact exports from both the European Union and Japan and would effectively drive each of the nations to weaken their currencies by cutting interests rates. However, on August 9, China set its daily reference rate for trading onshore yuan at 7.0136, its weakest setting since April 3, 2008 but firmer than analyst expectations of 7.0156. Either way, both parties can be expected to employ all their “tools” as this trade dispute shows no signs of going away.

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

August 7
A number of Asian central banks cut interest rates in the latest shift to ease monetary policy in the region. The Reserve Bank of India cut rates for the fourth consecutive time, lowering its benchmark repo rate by a larger than expected 0.35% to 5.40%, its lowest level since April 2010. Similarly, The Reserve Bank of New Zealand slashed its official cash rate by an unexpected 0.50% to 1.00%. This is only the third time in the past 20 years that a 0.50% cut has occurred. The Bank of Thailand also made a surprise move, cutting its benchmark interest rate by 0.25% to 1.50%, the first cut since 2015. Even though a trend to easier monetary policy has been broadly anticipated, each of these moves contains an element of surprise.

August 8
The U.S. Department of Labor announced that initial jobless claims totalled 209,000 (seasonally adjusted) in the week ending August 3, a decrease of 8,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 217,000. The four-week moving average was 212,250, an increase of 250 from the previous week's revised average. The previous week's average was revised up by 500 to 212,000. These results are somewhat stronger than market expectations.

Statistics Canada announced that its New Housing Price Index fell 0.1% in June, following an identical decline in May. On a year-over-year basis, the index is now down 0.2%, the largest annual decline since January 2010 when the housing market was recovering from the financial crisis. These results are weaker than consensus expectations and suggest continued weakening in net worth for homeowners.

The General Administration of Customs of China, a ministerial-level government border agency, reported that China’s trade surplus narrowed to US$45.06 billion (M/M) in July from US$50.98 billion in June, well above market consensus of US$41.9 billion. Exports unexpectedly advanced 3.3% (Y/Y) in July after falling 1.3% in June, significantly stronger than market consensus. Meanwhile, imports declined 5.6% (on the same basis) in July, following a larger 7.3% fall in the previous month, also beating market consensus. Year-over-year exports growth was largely driven by stronger demand from the European Union (+6.5%) and Southeast Asia (+15.6%), while exports to the U.S. remained soft (-6.5%).

August 9
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.2% (seasonally adjusted) in July. The index increased 1.7% for the 12 months ended July 2019, the smallest year-over-year advance since an identical 1.7% increase in January 2017. These figures match consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada announced that 24,200 jobs were lost in July, and the unemployment rate rose by 0.2 percentage points to 5.7%. In line with the two consecutive monthly declines, employment was up 1.9% (+363,000) from 12 months earlier. These results are weaker 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.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 222,013 units (seasonally adjusted annual rate) in July. This is down 9.6% from the 245,455-unit level in June (originally reported as 245,657). The largest decline among the sub-groups was a 12.0% drop in multiple 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 also reported that building permits issued by Canadian municipalities declined 3.7% in June, largely due to a decrease in the value of multi-family and institutional permits. Six provinces declined, with Alberta accounting for over one-third of the national decrease. On a year-over- year basis, total permits are now down 5.7%. These results are considerably weaker than expected. Permits are an indicator of the future level of activity in the construction sector.

Destatis, the federal statistics office of Germany, revealed that Germany’s trade surplus narrowed to €18.1 billion (calendar and seasonally adjusted) in June, down from an unrevised €18.7 billion in May. Unadjusted, the surplus stood at €16.8 billion in June, from €22.0 billion in the same month of the previous year. German exports plunged 8.0% (Y/Y) to €106.1 billion in June, registering their sharpest annual decline since July 2016. At the same time, imports dropped 4.4% (on the same basis) to €89.3 billion in June. The narrowing surplus underscores the ongoing troubles in Germany’s manufacturing sector, which are primarily export-reliant businesses, as global trade tensions escalate. After the latest industrial production data were down the most in nearly a decade, Germany is now forecast to expand a meager 0.5% in 2019.

The U.K. Office for National Statistics reported that the economy unexpectedly contracted 0.2% in the second quarter of 2019, following a 0.5% advance in the previous quarter. It was the first quarterly contraction since the last quarter of 2012 and below market expectations of flat growth, or stagnation. Industrial output fell 1.4%, driven by the largest decline in manufacturing since the first quarter of 2009 amid large amounts of stockpiling at the beginning of the year in preparation for Brexit. Services output growth decelerated to 0.1%, its weakest quarterly level in three years. Traders are now pricing in a 25-basis point reduction in the Bank of England’s interest rates for January 2020. Additionally, recently elected U.K. Prime Minister Boris Johnson has also announced plans to introduce fiscal stimulus to boost the economy whether there is a deal or no-deal Brexit which is currently set for October 31.


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