The Playbook - April 15, 2019

April 15, 2019 • Playbook


The Playbook

Weekly Commentary – April 15, 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
April 16 Industrial Production Y/Y March 19 2.9% 3.6%
April 16 Manufacturing Production Y/Y  March 19 1.8% 1.2%
April 17 Balance of Trade February 19 -$50.8B  -$51.1B
April 18 Retail Sales Y/Y March 19 3.2% 2.2%
April 17 Balance of Trade February 19 -$2.80B -$4.25B
April 18 Retail Sales February 19 0.1% -0.3%

Key Earnings:
April 15: Deep Down Inc., M&T Bank Corp., ShiftPixy Inc., SPAR Group Inc.
April 16: Bank of America Corp., Johnson & Johnson Inc., Kinder Morgan Inc., Netflix Inc.
April 17: E*TRADE Financial Corp., Las Vegas Sands Corp, Sleep Number Corp., PepsiCo Inc.
April 18: American Express Co., Honeywell International Inc., Schlumberger NV, Snap-On Inc.
April 19: Adhera Therapeutics Inc., Green Planet Group Inc., Pen Inc., TransCoastal Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian housing market softens further
The Canada Mortgage and Housing Corporation (CMHC) reported that housing starts had recovered to the 192,527-unit level in March following February’s four-year low. However, even with the rebound, the first quarter results were the weakest since the first quarter of 2015. Looking back up the pipeline, Statistics Canada announced that residential building permits plunged -8.5% in February. The monthly decline was led by dramatic drops in both Vancouver (-24.1%) and Toronto (-14.7%), enough to send annual growth nationwide into negative territory (-8.7%). To round out the bad news, StatsCan also reported that its new housing price index was flat again in February. While the annual growth in new housing prices for all of Canada stood at 0.1%, for Vancouver this figure was -0.6% and for Toronto it was -1.0%. This further reinforces the notion that higher interest rates have slowed the Canadian housing market and the Bank of Canada will likely stand pat for some time.

U.S. inflation edges higher
The U.S. Bureau of Labor Statistics reported that its consumer price index (CPI) rose by 0.4% in March, the largest single-month increase since January 2018 (also 0.4%). The advance raised the annual growth rate from 1.5% in February to 1.9% in March. The March increase was led by a 6.5% surge in gasoline prices, the biggest jump since August 2017 (9.2%). Still, the “core” inflation rate (which excludes volatile food and energy components) was reported as 2.0% year-over-year. This measure has been stuck in a 1.7% to 2.4% range for more than four years and remains well below the recently reported gains in average hourly earnings (+3.2% y/y in March). The apparently still-subdued inflationary pressures in the U.S., suggest that the Federal Reserve will likely stick with its “on hold” policy with respect to interest rates over the near term.

China trade surplus widens due to soaring exports
China’s General Administration of Customs, a ministerial-level government border agency, announced that the nation’s trade surplus widened dramatically to $32.64 billion in March from $4.08 billion in February (U.S. dollar terms). Exports increased 14.2% in March (year-over-year), the strongest growth in five months. However, exports have yet to fully recover from the sharp slowdown seen late last year. Meanwhile, imports decreased by 7.6% during the month, a fourth straight decline. Over the first quarter of 2019, the trade surplus widened to $76.31 billion, an increase of 70.6%. On a quarterly basis, exports were up by 1.4% and imports were down by 4.8%. While a U.S.-China trade deal looks increasingly within reach, the reversal of U.S. tariffs would likely provide only a small boost to exports. With global growth set to remain weak in the coming quarters, a material advance in exports would also appear to be unlikely to come from another source. Similarly, the poor import figures raise concerns about consumer demand in China, with stimulus measures yet to filter into the real economy. Even though the outlook for U.S.-China trade tensions has improved, as the prospect of a trade agreement takes shape, the economy in China is still expected to decelerate this 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

April 8
The Canada Mortgage and Housing Corporation announced that housing starts totalled 192,527 units (seasonally adjusted annual rate) in March. This is up 15.8% from the downwardly-revised 166,290-unit level in February (originally reported as 173,153), which was the weakest since February 2015. The gain in housing starts was due to an 18.6% increase in multiple urban starts. Coupled with the revisions, these results are weaker than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities fell 5.7% to $7.8 billion in February, a second consecutive decline. The decline was largely due to lower construction intentions for multi-family dwellings. On a year-over-year basis, permits are down 6.8%. These results are significantly weaker than expected. Permits are an indicator of the future level of activity in the construction sector.

Destatis, the Federal Statistical Office of Germany, reported that the country’s trade surplus widened to €18.7 billion (monthly basis, seasonally adjusted) in February, marginally larger than an upwardly revised €18.6 billion (originally reported as €18.5 billion) in January. Monthly exports shrank 1.3%, their first fall since November. Monthly imports also declined 1.6% in February. Accordingly, on a year-over-year basis, Germany’s trade surplus? narrowed slightly by €400.0 million to €17.9 billion. Despite Monday’s results having been above market expectations, the data show the latest sign that Europe’s largest economy is likely to post weaker Q1 2019 GDP results amid increased headwinds stemming from the slowdown in world business activity.

The Cabinet Office of Japan announced that its consumer confidence index (CCI) fell 1.0 points to 40.5 (seasonally adjusted) in March, following a 41.5 reading in January. This was the lowest reading since February 2016 and its sixth successive monthly decline. These results were below market expectations. The CCI survey highlights consumer sentiment surrounding the current and future Japanese economy, and serves as an indicator of future developments of households’ consumption and saving.

April 10
The U.S. Bureau of Labor Statistics reported that the consumer price index increased 0.4% (seasonally adjusted basis) in March after rising 0.2% in February. Over the last 12 months, the index increased 1.9%. These results were above expectations. These figures suggest a modest acceleration in consumer prices after slowing during the fourth quarter of 2018.

The Westpac Melbourne Institute’s Index of Consumer Sentiment for Australia increase by 1.9% (seasonally adjusted) to 100.7 in April from a 98.8 reading in March. While the month-over-month rise in sentiment is fairly muted, the survey detail suggests the federal budget was well-received, with tax relief as a key feature. Meanwhile, sentiment amongst those surveyed post-budget is 7.7% higher than sentiment amongst those surveyed pre-budget. It was the largest turnaround since Westpac began tracking pre and post budget responses in 2011. This result exceeded analyst forecasts and was above the normalized level of 100.0.

The Cabinet Office of Japan announced that its core machinery orders (excluding volatile items) increased by 1.8% (month-over-month, seasonally adjusted) in February, after a 5.4% decrease in January. It was the first increase following four consecutive declines. However, on a year-over-year basis, machinery orders fell 5.5% in February, following the 2.9% drop in the previous month. These results were weaker than consensus forecast. Although machinery orders showed a rebound, it is unclear whether capital spending will remain firm amid growing uncertainties over the course of the global economy.

At its latest policy meeting, the governing council of the European Central Bank (ECB) met expectations by holding steady its key “refinancing” rate at 0.0% in April. The press statement accompanying the announcement stated that “these record-low rates are expected to remain at their present levels through the end of 2019, amid global growth concerns,” but also added to its statement that it will hold rates constant for as long as necessary to ensure the continued sustained convergence of inflation levels that are below, but close to, 2.0%, over the medium term. The bank indicated that it will keep its QE stance unchanged by reinvesting principal payments from maturing securities under the asset purchase program (APP), even subsequent to any future rate hikes. Further, in today’s press conference, ECB President Mario Draghi indicated that downside risks persist due to “geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.”

The U.K. Office for National Statistics announced that the economy expanded 0.2% (monthly basis) in February, following an unrevised 0.5% in January. Accordingly, real GDP growth advanced 0.3% in the three months to February, matching the upwardly revised three-month rate posted in January. On an annual basis, the economy grew at 2.0% in February, 0.5 percentage points above the January figure and equalling the strongest performance since October 2017. These results were above market estimates. Today’s data estimate suggests that the U.K. economy has surprisingly held strong amidst the severe Brexit uncertainties.

The U.K. Office for National Statistics announced that the country’s total trade deficit in goods and services narrowed to £4.86 billion (seasonally adjusted, monthly basis) in February, following an upwardly revised £5.35 billion in January. Total monthly exports increased a mere 0.1% to £54.79 billion in February, while total imports declined 0.7% to £59.65 billion. The trade deficit was larger than market expectations.

April 11
The U.S. Department of Labor announced that initial jobless claims totalled 196,000 (seasonally adjusted) in the week ending April 6, a decrease of 8,000 from the previous week's revised level. This is the lowest level for initial claims since October 4, 1969 when it was 193,000. The previous week's level was revised up by 2,000 to 204,000. The four-week moving average was 207,000, a decrease of 7,000 from the previous week's revised average. This is the lowest level for this average since December 6, 1969 when it was 204,500. The previous week's average was revised up by 500 to 214,000. These results are stronger than expected.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.6% (seasonally adjusted) in March. The index increased 2.2% for the 12 months ended March 2019, the largest year-over-year advance since a 2.5% rise in December 2018. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

Statistics Canada announced that its New Housing Price Index (NHPI) was unchanged in February, following a 0.1% decline in January. On a year-over-year basis, the index is up just 0.1%. These results are in line with consensus expectations and suggest a stagnation in net worth for homeowners.

China’s National Bureau of Statistics reported that, on a year-over-year basis, consumer price inflation rose to 2.3% in March, following a 1.5% reading in February. This was the highest inflation rate since October 2018 and the biggest jump since January 2018. Nevertheless, this result was somewhat weaker than market expectations. At the same time, reports indicate that China’s PPI increased by 0.4% in March (year-over-year), after the 0.1% reading in the previous month. This is the first increase in nine months and was in line with the consensus forecast. As the inflation rebound was driven by food price increases that may prove temporary, the central bank is unlikely to abandon its policy of keeping cheap money flowing to the private sector for now.

Destatis, Germany’s Federal Statistical Office, announced that consumer prices advanced 0.4% (final, monthly basis) in March, unchanged from February’s final figure. On a year-over-year basis, CPI growth ticked lower by 0.2 percentage points to 1.3% in March, following a 1.5% advance in February. This was the lowest annual figure since February 2018. These results were unchanged from provisional reading and in line with consensus forecast.

April 12
China’s General Administration of Customs announced that the nation’s trade surplus widened dramatically to $32.64 billion in March from $4.08 billion in February (U.S. dollar terms). Exports increased 14.2% in March (year-over-year), the strongest growth in five months. Meanwhile, imports decreased by 7.6% during the month, a fourth straight decline. Even though the trade surplus and exports readings were well above consensus estimates, imports were weaker than the market expectations. The overall recovery in the trade balance was due more to seasonal factors (the timing of the lunar new year) than an underlying change in fundamentals.


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