The Playbook - April 22, 2019

April 18, 2019 • Playbook


The Playbook

Weekly Commentary – April 22, 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 22 Existing Home Sales March 19 -6.0% 11.8%
April 25 Durable Goods Orders March 19 -1.5% -1.6%
April 25 Durable Goods ex Defense March 19 -0.8% -1.9%
April 26 GDP Growth Rate Q/Q Adv Q1 19 1.8% 2.2%

Key Earnings:
April 22: Dolby Laboratories Inc., Kimberly-Clark Corp., Whirlpool Corp., Wynn Resorts Ltd.
April 23: iRobot Corp., JetBlue Airways Corp., St. Joe Co., TD Ameritrade Holding Corp.
April 24: AT&T Inc., Avangrid Inc., Boston Scientific Corp., Chipotle Mexican Grill Inc.
April 25: Eastman Chemical Co., Ford Motor Co., Bristol-Myers Squibb Co., Raytheon Co.
April 26: Exxon Mobil Corp., Helen of Troy Ltd., IMAX Corp., Portland General Electric Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian manufacturing slump continues
The latest figures from Statistics Canada revealed another 0.2% sales decline in manufacturing during February, the fourth drop in five months. Output in this sector hit a post-recession high in July 2018. However, since that time, activity has drifted downward. The February report revealed that the ongoing inventory accumulation has raised the inventory to sales ratio to 1.51:1, its highest level since the end of the financial crisis in June 2009. As well, a 4.4% annual decline in new orders for February is now the weakest figure since July 2016 and suggests little change for the sector in the near term.

U.S. industry cools in the first quarter
The U.S. Federal Reserve announced that industrial production had edged 0.1% lower in March. The small decline closed out a soft quarter as production dropped 0.3% on an annualized basis during Q1 2019. This was the first outright decline since Q3 2017 (-0.8% annualized). March also marked a third straight month where manufacturing output failed to record a gain. However, mining represented the largest drag on output during March as it fell 0.8%. As production slipped lower, so did capacity utilization, which stood at 78.8%. This is also the lowest level seen since July 2018 (also 78.8%). Given the backdrop of softening global economic growth and untapped domestic capacity, it is likely that the Fed will find little reason here to alter their current policy.

Bank of England feels pressure of record employment
The U.K. Office for National Statistics announced a 179,000 gain in employment in the three months to February. The new level of total employment stood at 32.72 million, an all-time high. Interestingly, the overall increase was driven by a 142,000 gain for employed women and female employment also established a new record high at 15.41 million. A modest 27,000 decline in the number of unemployed forced the unemployment rate down to 3.9%, its lowest since February 1975 and roughly half the euro area average. Standard wages rose 3.4% from a year earlier, near an 11-year high. Wages, including bonuses, maintained an annual 3.5% growth pace, the fastest since 2008. The surprising resilience in the U.K.’s job market continues to put pressure on the Bank of England (BoE) to tighten monetary policy. Nevertheless, the bank, which is scheduled to meet May 2, is likely to hold steady amid the ongoing Brexit delays and uncertainty.

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 16
The U.K. Office for National Statistics reported that the number of unemployed workers fell by 27,000 to 1.34 million in the three months to February. The unemployment rate remained level at 3.9% in the three months to February (or 3.8% month-over-month). It was the lowest rate since November 1974 to January 1975. This figure was in line market expectations. Employment soared 179,000 to equal its record high of 32.72 million in the three months to February. Moreover, the increase was driven by 142,000 women entering employment, therefore increasing female employment to a record high of 15.41 million. Over the same three-month period, average weekly earnings, ex-bonuses and including bonuses, in nominal terms increased by an annual 3.4% and 3.5%, respectively. The data reveal that the U.K.’s labour market is particularly robust and, given sluggish economic growth during the three months to February, suggests that the U.K.’s productivity declined in the beginning months of 2019.

Germany’s ZEW Indicator of Economic Sentiment rose by 6.7 points from March to a 3.1-point reading in April. It was the highest reading since March 2018 and well above market expectations. The current conditions index fell 5.6 points to 5.5, following an 11.1 reading in the previous month. This was its seventh consecutive decline and weakest print since December 2014. It is likely that the recent postponement of the Brexit deadline may have contributed to a more positive longer-term outlook. In contrast, however, the latest industrial production and new orders data point to a relatively soft economic outlook in Germany.

Statistics Canada reported that manufacturing sales fell 0.2% in February, the fourth decline in the past five months. In line with the recent declines, sales on a year-over-year basis are now up only 0.9%. This report is weaker than the market consensus. These data are closely watched as manufacturing can create high-value employment and it has been one of the slowest sectors to recover from the 2008-09 recession.

Statistics Canada reported that foreign investors added $12.0 billion of Canadian securities to their holdings in February, split roughly evenly between stocks and bonds. Canadian investment in foreign securities increased to $5.3 billion and was focused on U.S. corporate bonds. Foreign investment was in line with forecasts. Strong foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

The U.S. Federal Reserve announced that industrial production declined 0.1% in March after rising 0.1% in February. On a year-over-year basis, industrial production was reported to have gained 2.8%. Capacity utilization for total industry fell to 78.8% from 79.0% in February but was up from 78.2% a year earlier. These results are considerably weaker than expected. The dip in production should be reflected as a flat result for real economic output in the quarterly GDP figures.

April 17
The U.K. Office for National Statistics announced that consumer prices advanced 0.2% (seasonally adjusted, monthly basis) in March, down from a 0.5% increase in February. On an annual basis, consumer price index (CPI) growth increased 1.9% in March, unchanged from the previous month and slightly below market expectations. This was the third consecutive month that annual CPI registered below the BoE’s medium-term target of 2.0%. The March CPI data suggest inflation is hovering close to target; however, rising wage rate growth in the U.K. may be a key indicator for the BoE to consider at its upcoming monetary policy window.

Statistics Canada reported that consumer prices rose 0.3% (seasonally adjusted, monthly basis) in March, after rising 0.4% in February. On a year-over-year basis, the CPI was up 1.9%, up from 1.5% in February. Not surprisingly, transportation prices (+2.0%), particularly those for gasoline (+11.6%), were largely responsible for the broader increase during March. All three measures of core inflation, established by the Bank of Canada in 2016, showed underlying inflation near their 2.0% target, ranging from 1.8% to 2.1%. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.8%. The overall figures are in line with market expectations.

Statistics Canada also announced that Canada's merchandise imports declined 1.6% in February, while exports dropped 1.3%. As a result, Canada's trade deficit with the world narrowed slightly from $3.1 billion in January to $2.9 billion in this report. StatsCan also indicated that, due to timing on energy-related trade shipments, these figures were likely to be revised. Since the market was looking for another deficit in September, these results are broadly in line with expectations and suggest little change from a GDP growth perspective.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to $49.4 billion in February from a revised $51.1 billion in January. February exports were $209.7 billion, $2.3 billion more than January exports. February imports were $259.1 billion, $0.6 billion more than January imports. The trade deficit was smaller than expected. The somewhat improved trade results may help stabilize overall GDP growth during the quarter.

China’s National Bureau of Statistics announced that Chinese GDP experienced a 1.4% advance in the first quarter (quarter-over-quarter), easing slightly from the 1.5% pace of expansion seen in the previous quarter. On a year-over-year basis, GDP growth stood at 6.4%, following a 6.4% growth rate (on the same basis) in the previous quarter. This reading was marginally above the consensus forecast but was still the lowest growth rate since 2009.

Japan’s Ministry of Finance announced that the country’s merchandise trade surplus widened to ¥528.5 billion in March, following a revised ¥339.0 billion deficit in the previous month. On a year-over-year basis, exports decreased 2.4% in March, following a revised 1.2% drop in February. This was a fourth consecutive decline. Imports rose by 1.1% in March, following a revised 6.7% decrease in the previous month. Exports were slightly stronger than market expectation while the imports were significantly weaker than forecast. The large decline in Japan’s exports was mainly due to the 9.4% decrease in trade with China amid the U.S.-China trade tension.

April 18
The U.S. Department of Labor announced that initial jobless claims totalled 192,000 (seasonally adjusted) in the week ending April 13, a decrease of 5,000 from the previous week's revised level. This is the lowest level for initial claims since September 6, 1969 when it was 182,000. The previous week's level was revised up by 1,000 to 197,000. The four-week moving average was 201,250, a decrease of 6,000 from the previous week's revised average. This is the lowest level for this average since November 1, 1969 when it was 200,500. The previous week's average was revised up by 250 to 207,250. These results are stronger than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in April but at a less robust pace. The Philly Fed general business conditions index eased to 8.5 from 13.7 in March. These results are below market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The U.S. Census Bureau announced that retail and food services sales jumped 1.6% (seasonally adjusted) for the month of March and were 3.6% above March 2018 levels. Excluding autos, sales were up 1.2% during the month and up 3.6% on a year-over-year basis. These figures are considerably stronger 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 retail sales rebounded in February, gaining 0.8% (seasonally adjusted) following three consecutive monthly declines. Sales were up in five of 11 subsectors, representing 73% of total retail sales. Not surprisingly, given the surge in prices, gasoline sales (+1.9%) reported the largest monthly advance in this report. Electronics and appliance stores (-3.5%) recorded the largest decline. Year-over-year sales growth improved to 1.8% from 0.9%. These results are above consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

The U.K. Office for National Statistics reported that retail sales surged 1.1% (monthly basis, seasonally adjusted) in March, following an upwardly revised 0.6% advance in February. On a year-over-year basis, sales climbed 6.7% in March, following a 4.0% growth in the previous month. This was its strongest reading in annual sales growth since October 2016. Both the monthly and annual figures were significantly above market expectations. The strength in this month’s retail data, coupled with the U.K.’s robust labour market, reflects a resilient domestic economy in the face of Brexit and related uncertainties. Though it is unlikely for the BoE to tighten monetary policy at its meeting on May 2, it would not be surprising for the bank to reveal a more hawkish view moving forward.

The Australian Bureau of Statistics reported that employment rose by 25,700 to 12.79 million in March, following a 4,600 gain in February. At the same time, the number of unemployed workers increased by 3,000 to 675,700. As a result, the unemployment rate inched higher to 5.0% in March, reversing the decline to an eight-year low (4.9%) in February. The overall report was broadly in line with consensus estimates. Despite the modest increase in unemployment, the details of the March report are unlikely to prompt the Reserve Bank of Australia to deliver a near-term interest rate cut.

According to a flash estimate, the IHS Markit Germany Manufacturing PMI rose to 44.5 in April, following an 80-month low of 44.1 in March. The latest reading was still well below the 50.0 expansion threshold and pointed to a prolonged period of contraction in the sector. The softness in the index was attributed to a fourth consecutive decrease in inflows of new business. This was led by a steep decline in new export orders, which dropped at the second-fastest rate in the past ten years. This overall reading was somewhat weaker than market expectations.


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