Playbook - August 19, 2019

August 19, 2019 • Playbook

The Playbook

Weekly Commentary – August 19, 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

Richard Wylie’s podcast will return the week of August 26, 2019

A PDF version of The Playbook is also available for download.

Economic Calendar

Date Release Period Consensus Previous
August 22 Initial Jobless Claims August 19 219 k 220 k
August 22 Markit Manufacturing PMI Flash August 19 50.0 50.4
August 23 New Home Sales July 19 1.5% 7.0%
August 21 Core Inflation Rate Y/Y July 19 1.7% 2.0%
August 22 Wholesale Sales June 19 1.3% -1.8%

Key Earnings:
August 19: Fabrinet, Qiwi PLC, Red Robin Gourmet Burgers Inc, Regis Corp.
August 20: Cree Inc., Medtronic PLC, Seadrill Partners LLC, TJX Companies Inc.
August 21: Jumia Technologies AG, L Brands Inc., Navios Maritime Acquisition Corp.
August 22: Dick's Sporting Goods Inc., Gap Inc., Opera Ltd., Toro Co.
August 23: National Presto Industries Inc., NIU Technologies, Williams-Sonoma Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

U.S. core inflation hits six-month high
The US Bureau of Labor Statistics announced that the overall Consumer Price Index (CPI) rose a seasonally adjusted 0.3% in July, lifting the annual inflation rate to 1.8%, up from 1.6% in June and matching May’s rate. However, the core CPI (excludes volatile food and energy components) also unexpectedly rose 0.3% during the month. This is the second consecutive month of 0.3% increases. Moreover, the back-to-back gain of 0.6% was the largest two-month increase since early 2006. On a year-over-year basis, this price measure was up 2.2%. This was the sharpest annual advance in the core CPI measure since January 2019. The July gain was attributed to a 1.3% increase in energy prices during the month, which was led by a 2.5% rise in gasoline prices. The data pointed to the latest sign that inflationary pressures in the U.S. may not be as subdued as widely expected. However, the futures markets currently suggest that the Federal Reserve will cut rates by another quarter point at its September 17 and 18 meeting.

Yield curve inversion in the U.S. and U.K.
U.S. and U.K. bond markets sent their biggest recession warnings since the global financial crisis and investors rushed to haven assets following weak economic data from China and Germany. On August 14, the yield on the 10-year U.S. Treasury note dipped below the 2-year, triggering the yield curve of these bonds to invert for the first time since 2007. A yield curve “inversion,” the typical harbinger of an economic contraction, occurs when the yields on shorter-dated instruments rise above longer-dated ones. Overseas, the global pull from risk assets also inverted the 2- to 10-year U.K. yield curve for the first time since 2008. Underscoring the flight to safety, the yield on the 30-year U.S. Treasury, the longest type of U.S. government debt and the most sensitive to changes in expectations and long-term growth, sunk below 2% on August 15, an all-time low. Investor demand for bonds may well linger as the dispute between the U.S. and China hinders global growth and a no-deal Brexit remains a substantial threat to the U.K. economy.

German economy cools for the second time in four quarters
Europe’s largest economy slowed in the second quarter of 2019 as exports fell faster than imports and foreign trade weighed heavily on growth prospects. Preliminary figures from Destatis, the statistical office of Germany, revealed that real gross domestic product (GDP) decreased by 0.1% (Q/Q, seasonally and calendar adjusted) in July, matching market consensus. This is the economy’s second contraction in the last four quarters. These GDP figures, coupled with prolonged weakness in business conditions and expectations, increases the risk that Germany is on the edge of falling into a recession. Moreover, European Central Bank (ECB) President Mario Draghi indicated last month that the central bank is prepared to cut short-term interest rates for the first time since 2016 and restart bond purchasing under its quantitative easing program. As a result of the latest data from Germany, along with plunging industrial production in the euro area, additional pressure will likely amass on the ECB to ease policy and launch its stimulus package at the bank’s next policy meeting on September 12.

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 13
The U.S. Bureau of Labor Statistics reported that the CPI increased 0.3% (M/M, seasonally adjusted basis) in July after rising 0.1% in June. Over the last 12 months, the index increased 1.8% before seasonal adjustment, a larger increase than the 1.6% in the previous month. These figures are consistent with market expectations of easing inflationary pressures.

Destatis, the federal statistical office of Germany, revealed in their final report that consumer prices advanced 0.5% (M/M) in July, matching provisional estimates and up from 0.3% in June. Accordingly, annual CPI rose to 1.7% (Y/Y) in July, a tick above the 1.6% advance in the previous month and in line with provisional estimates. The rise in the annual CPI was driven by an acceleration in food prices (2.1% vs. prior 1.2%). The prices of services (1.5% vs. prior 1.8%) and energy (2.4% vs. prior 2.5%) slowed the overall annual increase and detracted from July’s final CPI figure. The Harmonized Index of Consumer Prices (HICP), which is calculated to make prices comparable with inflation data from other European Union countries, matched its provisional estimate with a 0.4% monthly increase and a 1.1% yearly rate. This was its lowest reading since December 2016.

The ZEW Indicator of Economic Sentiment for Germany plunged to -44.1 in August, down 19.6 points from a -24.5 reading in July. This was significantly below market consensus and marked the index’s weakest print since December 2011. The indicator’s long-run average is 21.6 points. Over the same period, the current situations gauge slumped 12.4 points to -13.5 (vs. prior -1.1), its weakest reading since May 2010. The most recent print points to a substantial deterioration in the outlook for the German economy. ZEW indicated that the most recent escalation in the U.S.-China trade dispute, the risk of competitive devaluations and the increased likelihood of a no-deal Brexit put additional pressure on Germany’s already weak economic growth.

The National Australia Bank (NAB) reported that its business confidence index edged up to 4.0 points in July, following a 2.0 reading in June. The reading beat market consensus but was still below its long-run average. Over the same period, business conditions fell 2.0 points to 2.0, driven by a decline in the employment sub-index.

The U.K. Office for National Statistics reported that employment increased by 115,000 to a record high of 32.81 million in the three months to July. At the same time, the number of unemployed increased by 31,000 on the quarter to 1.33 million. Accordingly, the unemployment rate increased 0.1 percentage points 3.9%. The overall report is slightly weaker than market expectations.

August 14
■ The U.K. Office for National Statistics (ONS) reported that monthly consumer prices were flat for the second straight month in July, above market expectations of negative price growth. The unchanged price levels in July lifted the annual CPI rate to 2.1%, up a tick from its June reading and confirming that the yearly rate has held within +/- 20 basis points of the Bank of England’s 2.0% inflation target through 2019. The annual CPI results were well above market expectations of 1.9%. Additionally, the U.K.’s consumer price index including owner occupiers’ housing costs (CPIH), the inflation measure preferred by the ONS, was unchanged on the month but up marginally on the year at 2.0%.

Destatis revealed in a flash estimate that real GDP in Germany shrank by 0.1% (Q/Q, seasonally and calendar adjusted) in Q2 2019, after expanding 0.4% in Q1 2019 and in line with market expectations. This is the economy’s second contraction in four quarters. Compared with the same quarter a year earlier, the economy expanded 0.4% (Y/Y, calendar-adjusted) in Q2 2019, slowing from an upwardly revised 0.9% in the previous quarter. The annual results were slightly above market expectations.

The National Bureau of Statistics of China reported that industrial production advanced 4.8% (Y/Y) in July, down sharply from 6.3% in June. This was the slowest growth in industrial output since February 2002 and well below market expectations, on the back of weak domestic demand and the escalating trade dispute with the U.S. On a month-over-month basis, production rose 0.19% in July, following a downwardly revised 0.67% in the previous month.

The National Bureau of Statistics of China also revealed that retail sales increased 7.6% in July, well down from the 9.8% advance in June. The weak figures came as annual auto sales fell 2.6% in July, after growing 17.2% in June. Sales of oil and oil products also declined 1.1%, after increasing 3.5% in the previous month. The results were weaker than market expectations.

August 15
The U.S. Census Bureau announced that retail and food services sales were up 0.7% (seasonally adjusted) for the month of July and were 3.4% above July 2018 levels. Excluding autos, sales were up the same 1.0% during the month and up 3.7% on a year-over-year basis. These figures are stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results

The U.S. Department of Labor announced that initial jobless claims totalled 220,000 (seasonally adjusted) in the week ending August 10, an increase of 9,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 211,000. The four-week moving average was 213,750, an increase of 1,000 from the previous week's revised average. The previous week's average was revised up by 500 to 212,750. These results are somewhat weaker than market expectations.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region was mixed in August. The Philly Fed General Business Conditions Index fell to 16.8 from 21.8 in June. These results are slightly above market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The Australian Bureau of Statistics reported that employment increased 41,100 (seasonally adjusted) to 12,908,200 in July, well above market forecasts of 14,000. Full-time employment increased 34,500 to 8,847,100 in the month, while part-time employment increased 6,700 to 4,061,000. At the same time, the unemployment rate remained steady at 5.2%, significantly stronger than consensus estimates, and the participation rate edged up to 66.1% during the month. In line with recent gains, overall employment was up 2.6% from 12 months earlier. However, despite the strong report, the stability seen in the unemployment rate suggests that there is spare capacity in Austalia’s labour market. These results are stronger than market consensus.

August 16
The U.S. Census Bureau announced that housing starts in July were at a seasonally adjusted annual rate of 1,191,000. This is 4.0% below the revised June estimate of 1,241,000 but is 0.6% above the July 2018 rate of 1,184,000. At the same time, the number of building permits issued in July was at a seasonally adjusted annual rate of 1,336,000. This is 8.4% above the revised June rate of 1,232,000 and is 1.5% above the July 2018 figure of 1,316,000. These figures are weaker than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.


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