The Playbook - February 11, 2019

February 11, 2019 • Playbook

The Playbook

Weekly Commentary – February 11, 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
February 11 GDP Growth Rate Q/Q Adv  Q4 18 2.7% 3.4%
February 11 Personal Spending December 18 0.3% 0.4%
February 14 Retail Sales December 18 0.3% 0.2%
February 15 Manufacturing Production Y/Y January 19 2.1% 3.2%
February 11 Balance of Trade December 18 -$1.70B -$2.06B
February 14 New Housing Price Index December 18 0.10% 0.00%

Key Earnings:
February 11: Fossil Group Inc., GNC Holdings Inc., Loews Corp., Mercury General Corp.
February 12: Alkermes PLC., Azure Power Global Ltd., Red Rock Resorts Inc., TripAdvisor Inc.
February 13: CBRE Group Inc., Fidelity National Financial Inc., NU Skin Enterprises Inc.
February 14: CBS Corp., Coca-Cola Co., Kraft Heinz Co., Zoetis Inc.
February 15: Dana Inc., Olympic Steel, Inc., PepsiCo Inc., Portland General Electric Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian job market opens 2019 on a strong note
Statistics Canada reported a surprise gain of 66,800 new jobs in January. In addition, benchmark revision raised total job growth for 2018 by an additional 32,500 to 195,800. Despite the monthly advance in employment, the unemployment rate also rose from December’s 40-year low of 5.6% to 5.8%. This increase was due almost entirely to a 103,700 rise in the labour force, which pushed Canada’s participation rate (the number of working age people either working or actively looking for work) to 65.6%, the highest level since December 2017. As well, part-time (36,000) and full-time (30,900) employment revealed similar gains while overall private sector employment surged by 111,500, the largest gain on record going back to 1976. Even though this lone report is unlikely to influence the Bank of Canada’s monetary policy, it does suggest that 2019 may be starting with more economic momentum than previously believed.

U.S. trade deficit falls sharply in November
The U.S. Census Bureau reported a $49.3 billion trade deficit for November, the first reading below $50 billion since June. Despite the improved headline figure, details of the report reveal that current U.S. trade policy has not effectively altered the nation’s international position. The sharp decline in the deficit was due to a pull-back in imports, not strength in exports. The $7.7 billion decline in imports reflected a $4.3 billion drop in consumer goods and material price declines for petroleum products. Exports also fell—down $1.3 billion on the month. On a single-country basis, the focus remains on China. The U.S. deficit with China did decline, down $2.8 billion to $35.4 billion, but with imports (down $2.9 billion to $42.8 billion) and exports both falling (down $0.1 billion to $7.4 billion). At this juncture, the Trump administration’s efforts to raise exports to China do not appear to be achieving much success.

Bank of England treads cautiously
At its latest monetary policy meeting, the Bank of England held its key bank rate steady at 0.75%. Nevertheless, the bank’s updated forecast set a far more dovish tone. The bank made its largest near-term forecast revisions since the 2016 EU referendum, by cutting its estimated annual growth rate to 1.2% in 2019, down from its previous estimate of 1.7% and the weakest level since the recession of 2009. Growth is now expected to be 0.2% in each of the first two quarters of 2019, down from the 0.4% forecast in November. The bank also indicates a 25% chance that the GDP growth rate will fall below zero by mid-2019, even with a “smooth” Brexit. Even though the consumer price index inflation is expected to decline to below target levels, prior to returning to the 2.0% mark in 2020, forecasts indicate that the bank believes that a 0.25-point rate hike will be required over the next three years. The next policy announcement is scheduled for March 21, 2019.

Reserve Bank of India cuts rates
The Reserve Bank of India unexpectedly lowered its benchmark “Repo” rate by 25 basis points to 6.25% at its latest policy window. In addition, the bank changed its monetary policy stance to “neutral” from “calibrated tightening” as it downgraded both its growth and inflation forecasts. Even though India’s inflation rate fell to an 18-month low of 2.2% in December, well below the bank’s 4% target, the main contributor to this decline was the notoriously volatile fuel sub-index. The clear policy shift comes on the heels of both the December appointment of new Reserve Bank of India Governor Shaktikanta Das and the Modi administration’s recent tabling of an expansionary budget. With a general election expected in May, the government has been keen to see an easing of monetary policy. The surprise appearance of this easing raises questions with respect to the political neutrality of the new bank governor. Not surprisingly, market participants will view the direction of the Indian rupee more cautiously.

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

February 4
The IHS Markit/CIPS U.K. Construction PMI fell 2.2 points to 50.6 in January, following December’s 52.8 point outturn. This reading came in only 0.6 points above the key 50.0 expansion threshold and was well below market expectations of 52.5. The measure also signalled the smallest expansion in the U.K.’s construction sector in 10 months. All three categories of construction output recorded weaker trends than those reported in December. Job creation was its weakest since July 2016 and new business growth eased to an eight-month low, as firms experienced weaker demand conditions and longer sales conversion times. Brexit concerns are widely cited as a major factor in the negatively reported figures. 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.

Eurostat, the European Union statistical agency, reported that Eurozone producer prices fell 0.8% (month-over-month) in December 2018, following a 0.3% decrease in November. On a year-over-year basis, the index was up 3.0%, slowing from an annual increase of 4.0% the month before. The sharper-than-expected monthly decline was mainly due to a monthly drop in energy prices, which fell 2.6 % in December but rose 7.7% year-over-year. Without the volatile energy component, producer prices fell a more modest 0.1% on the month and were 1.3% higher year-over-year. This overall report is weaker than consensus expectations. Producer prices are an early indication of consumer inflation trends as changes in prices at factory gates impact final prices in shops.

February 5
Eurostat reported that retail sales in the euro area experienced a significant 1.6% (seasonally adjusted) decline in December 2018, erasing an upwardly revised 0.8% gain in November. On a year-over-year basis, sales were up 0.8%, following an upwardly revised 1.8% increase (on the same basis) in November. Among the members of the 19-country euro area, the steepest fall by far was seen in Germany, where retail sales declined by 4.3% month-over-month. The overall decline in December was the largest recorded since May 2011. These results matched consensus estimates.

The IHS Markit/CIPS U.K. Services PMI fell to 50.1 in January, following a 51.2 level in December. These results were well below market expectations of 51.0 and only 1.0 percentage points above the crucial 50.0 no-change value. The latest reading was the lowest in two-and-a-half years and the second weakest since December 2012. Moreover, January data showed a loss of momentum for the U.K. service sector, with a decline for new work reported for the first time since July 2016. Optimism towards this year’s outlook for business activity edged up from December’s 29-month low, however, the latest reading was still one of the lowest seen since early 2009. The survey significantly linked the slowdown in business activity growth to intensified political uncertainty and Brexit-related concerns.

The Australian Bureau of Statistics announced that the country’s trade surplus widely sharpened to A$3.68 billion (seasonally adjusted) in December, following an upwardly revised A$2.26 billion in November. It was the largest trade surplus recorded since December 2016 and easily beat market expectations of a A$2.30 billion surplus. On a month-over-month basis, December exports dropped 2.0% to A$37.9 billion, as sales of non-monetary gold tumbled 57.0% to A$790 million. December imports declined at a faster 6.0% to A$34.2 billion, primarily caused by a 15.0% regression in capital goods to A$5.9 billion and a 7.0% decline in consumption goods to A$0.7 billion. In calendar year 2018, the trade surplus surged to A$22.2 billion from A$9.9 billion over the same period of 2017. The stronger trade figures will likely boost first-quarter GDP results.

The Institute for Supply Management announced that its Non-Manufacturing PMI recorded a 56.7 reading in January. It was down 1.3 points from the revised 58.0 level registered in February but remained above the key 50.0 (generally expanding) level for a 108th consecutive month. This figure is below consensus expectations. This result indicates continued growth, but at a slightly slower rate in the non-manufacturing sector.

February 6
Statistics Canada reported that building permits issued by Canadian municipalities rose 6.0% to $8.8 billion in December, a fourth consecutive monthly advance. The gain was largely due to higher construction intentions for multi-family dwellings and commercial buildings, with both components hitting record levels. On a year-over- year basis, permits are now up 10.6%. These results are stronger than consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services narrowed to US$49.3 in November from a revised US$55.7 billion in October. November exports were $209.9 billion, $1.3 billion less than October exports. November imports were $259.2 billion, $7.7 billion less than October imports. The trade deficit was considerably smaller than expected. The improved net trade results will help bolster overall GDP growth.

Destatis, the Federal Statistical Office of Germany, reported that price-adjusted new orders in manufacturing decreased 1.6% (seasonally adjusted) in December, following a downwardly revised 0.2% fall in November (originally reported as -1.0%). This was the worst performance since June and the fifth recorded decline in the last seventh months. New orders declined for both intermediate (-1.2%) and capital goods (-2.5%) but increased for consumer goods (4.2%). Annual growth slumped from -3.4% in November (originally reported as -4.3%) to -7.0% in December, recording its seventh consecutive negative print and the weakest outturn since June 2012. The monthly results were significantly below expectations. New orders in manufacturing are a leading indicator of industrial production in the months to come.

February 7
The U.S. Department of Labor announced that initial jobless claims totalled 234,000 (seasonally adjusted) in the week ending February 2, a decrease of 19,000 from the previous week's unrevised level of 253,000. The four-week moving average was 224,750, an increase of 4,500 from the previous week's unrevised average of 220,250. These results are somewhat weaker than consensus estimates.

The Reserve Bank of India unexpectedly lowered its benchmark “Repo” rate by 25 basis points to 6.25% and downgraded its growth and inflation forecast at its latest policy window. The move comes on the heels of both the December appointment of new Reserve Bank of India Governor Shaktikanta Das and the Modi administration’s recent tabling of an expansionary budget. This result is contrary to the market expectations for no change in interest rates and raises questions with respect to the political neutrality of the new bank governor.

Destatis reported that Germany’s industrial production unexpectedly fell 0.4% (month-over-month) in December, following a downwardly revised 1.3% decrease in November (on the same basis). Meanwhile, annual growth slumped further to -7.0% from -3.4 %. Despite a solid 4.2% monthly rise for consumer goods, capital goods were off 2.5% and a 2.3% slide was recorded in foreign demand. This report is significantly weaker than consensus expectations and adds to the negative tone fueled by the soft new orders data reported yesterday.

■ The Bank of England (BoE) left its key bank rate unchanged at 0.75% following its latest meeting, setting its monetary policy to meet its annual inflation target of 2%. Accordingly, the BoE decided to maintain the stock of sterling non-financial investment-grade corporate bond purchases, and the stock of U.K. government bond purchases, financed by the issuance of central bank reserves, at £10 billion and £435 billion, respectively. The unanimous decision to hold the benchmark rate steady was in line with market expectations. However, unexpected declines in recent IHS Markit/CIPS reports, coupled with subdued Q4 GDP growth forecast data, has led the bank’s “nowcasting” model pointing to GDP growth of 0.2% for the first two quarters of 2019. In sending a dovish signal on monetary policy, it seems like the BoE is stepping back from plans for a tightening policy, highlighting concerns about global economic outlook and the U.K.’s anticipated exit from the European Union.

February 8
Statistics Canada announced that 66,800 jobs were added in January. At the same time, the unemployment rate rose by 0.2 percentage points to 5.8% as a surprising 103,700 new workers joined the labour force. In line with the monthly job gains, employment was up 1.8% (+327,200) from 12 months earlier, well above the 0.9% annual rise seen in the December data. These results are dramatically 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.

The Canada Mortgage and Housing Corporation (CMHC) announced that housing starts totalled 207,968 units (seasonally adjusted annual rate) in January. This is down from the 213,630-unit level in December (originally reported as 213,900) but was sufficient to raise the CMHC’s trend rate (six-month moving average) to 208,131 units from 207,171 units. The monthly decline in housing starts was due to a 10.4% drop in single-detached urban starts. These results are marginally above market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Destatis reported that Germany’s trade surplus decreased to €13.9 billion (unadjusted) in December 2018 compared to the €18.4 billion in December 2017, the lowest since January 2016. However, on a seasonally (and calendar-year) adjusted basis, the trade surplus unexpectedly set a new six-month high of €19.4 billion on the back of a 1.5% surge in exports to €112.3 billion, a new record high. This was more than enough to offset a 1.2% increase in imports. The December report puts the calendar 2018 surplus at €227.8 billion, an 8.1% reduction from 2017 but still strong enough to bolster overall GDP in Europe’s largest economy.

■ At its latest monetary policy window, the Reserve Bank of Australia joined the growing ranks of its fellow central banks who have shifted to a more accommodative tone. The bank left its benchmark “cash rate” unchanged but slashed its domestic GDP forecast from 3.25% to 2.50% (for the year ending in June 2019) and specifically warned that Australia’s housing market downturn is a “significant area of uncertainty.” The “no change” result for administered interest rates was expected by the markets, but the announcement sets a far more dovish tone for the bank going forward.


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