The Playbook - February 18 2019

February 18, 2019 • Playbook


The Playbook

Weekly Commentary – February 18, 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 19 NAHB Housing Market Index February 19 54 58
February 21 Markit Services PMI Flash   February 19 53.0 54.2
February 21 Existing Homes Sales January 19 5.10 M 4.99 M
February 22 Budget Balance December 18 -$0.31B -$2.22B

Key Earnings:
February 18: Monarch Casino & Resort Inc., Otter Tail Corp., Precipio Inc., Weibo Corp.
February 19: Athene Holding Ltd., Avangrid Inc., Haverty Furniture Companies Inc.
February 20: Boston Beer Company Inc., Cheesecake Factory Inc., Danaos Corp., Tix Corp.
February 21: Dropbox Inc., Kraft Heinz Co., Marcus Corp., Vonage Holdings Corp.
February 22: Globalstar Inc., Green Planet Group Inc., Wayfair Inc., W. P. Carey Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian manufacturing closes 2018 on a weaker note
According to Statistics Canada, manufacturing sales tumbled 1.3% in December. In addition, data revisions significantly reduced sales totals for each month back to September. As a result, the updated figures show that manufacturing sales in the final quarter of 2018 dropped an annualized 7.1%, the worst quarterly performance since Q4 2015. Nevertheless, for 2018, sales were up 5.4%, a third consecutive annual gain. However, the year-end weakness can be expected to continue. New orders slipped 0.8% lower during December and have now fallen 5.9% since their May peak. Even though the Bank of Canada’s monetary policy is based on its view of the entire economy, continued weakness in manufacturing will likely be reflected in its expectations for the nation’s unused capacity going forward.

U.S. consumers close their wallets
The U.S. Census Bureau announced that retail and food services sales recorded a dramatic 1.2% decline in December, the largest single-month loss since September 2009 (-2.6%). The delayed report revealed that weakness was widespread with eleven of the thirteen major sub-groups posting a monthly decline. The December reversal in consumer spending came against a backdrop that included the U.S. government shutdown and sharply weaker financial markets. However, the backdrop also included strong growth in employment and steady wage gains. The decline in consumer activity can be expected to show in the overall GDP data, which are now scheduled to be release on February 28, again delayed due to the government shutdown. In either case, anecdotal evidence of a rebound in activity in January may mean that the December weakness was simply an anomaly that has now been reversed.

Germany narrowly avoids recession
Germany, Europe’s largest economy, just skirted a technical recession (two consecutive quarters of GDP contraction) by the narrowest possible margin in the final quarter of 2018. Preliminary figures from Destatis, the Statistical Office of Germany, revealed that real GDP was unchanged in the fourth quarter of last year, following a 0.2% contraction in the third quarter. The report showed that this was the first time since Q4 2012/Q1 2013 that real GDP has not expanded for two successive quarters. After a strong opening half of 2018, manufacturers were negatively affected over the third and fourth quarters by weak external demand due to trade disputes and a cooling global economy. However, strong domestic demand led to more investment in the fourth quarter, and growth in government spending helped avoid a subsequent quarterly contraction. Analysts suggest that, with the German economy stalling, the European Central Bank will likely push back plans to normalize monetary policy and may even provide additional stimulus.

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 11
The U.K. Office for National Statistics reported that, on a month-over-month basis, the economy contracted 0.4% in December, following a 0.2% expansion in November. These results were well below market expectations and the worst performance figures recorded since March 2016. The fall in total output resulted in quarterly real GDP expanding by a mere 0.2% in Q4 2018, easing from a 0.6% growth in Q3 2018. The steep slowdown in growth was primarily the result of weakened business investment, as it shrank 1.4% in Q4 2018, following an upwardly revised 1.2% fall in the previous period and its fourth consecutive quarter of declines. The quarterly results were in line with market expectations. In calendar year 2018, real GDP increased by 1.4%, the weakest performance since 2009. The December data indicate the Bank of England is not likely to raise interest rates any time soon, regardless of what the Brexit outcome might be.

The U.K. Office for National Statistics announced that the country’s total trade deficit in goods and services narrowed to £0.32 billion (seasonally adjusted, monthly basis) in December 2018, following an upwardly revised £0.36 billion deficit in the previous month. Total imports declined 1.6% to £55.85 billion, due primarily to a 6.5% decline in imports of goods from non-EU countries, notably from the U.S. (-2.2%) and India (-24.9%). Total exports fell at a slower 1.0% to £52.60 billion, as exports of goods to non-EU countries tumbled 4.8%. The trade deficit was significantly larger than market expectations.

February 12
The National Australia Bank (NAB) reported that its Business Confidence Index edged up to a +4.0 reading in January, following a near three-year low of +3.0 in December. It was the highest reading since October 2018 and above market consensus of +3.0. However, the headline index has remained below its long-run average of +6.0 for the fourth consecutive month. Business conditions advanced 4.0 points to register a +7.0 reading in January, following a +2.0 reading in December and just point above its long-run average of +6.0. Despite the deteriorating backdrop for businesses, and the small improvement seen in January, it appears that the NAB may vacate its forecasts for rate hikes in 2020, suggesting the possibility of downward movement in business conditions for the near-term.

The Central Statistics Office of India’s Ministry of Statistics and Program Implementation announced that consumer prices declined to 2.05% (annual basis) in January, following a downwardly revised 2.11% (originally reported as 2.19%) in the previous month. This reading was below market expectations of 2.48%. It is the lowest inflation rate since June 2017 and the fourth consecutive decrease in headline inflation levels. The decline was largely driven by deflation in food and beverages (-1.29%), weaker charges in fuel and light (-4.54%) and slowed housing costs (5.20%). Meantime, industrial production in India increased 2.4% in December, following a 17-month low of 0.3% in November and was marginally above market expectations. Lead indicators for industrial production in India remain sluggish, though a relatively favorable base and a seasonally strong month contributed to the uptick.

February 13
The U.S. Bureau of Labor Statistics reported that the consumer price index was unchanged (seasonally adjusted basis) in January. Over the last 12 months, the index increased 1.6%, the slowest pace of growth in a year and a half. These results were below expectations. These figures continue to show very limited inflationary pressures and may allow the U.S. Federal Reserve to hold interest rates steady for an extended period.

The U.K. Office for National Statistics announced that consumer prices declined a sharp 0.8% (seasonally adjusted, monthly basis) in January, down from a 0.2% increase in December. It was the biggest decline in the monthly inflation rate since January 2016 and below market expectations of -0.7%. On an annual basis, the consumer price index (CPI) growth eased to 1.8% in January, following a 2.1% increase in the previous month and was below market expectations of 1.9%. This the first time that the 2.0% medium-term inflation target that was undershot since January 2017 and the fourth decline in the CPI growth rate over the same period. January’s inflation data coupled with Monday’s Q4 GDP accounts, is likely to put further pressure on the Bank of England (BoE) to keep a hold on monetary policy decisions in the foreseeable future.

The Research and Statistics Department of the Bank of Japan announced that its producer price index (PPI) increased by 0.6% (annual basis) in January, slowing from a 1.5% increase in the previous month. It was the lowest producer inflation rate since January 2017 and notably weaker than market expectations of 1.1%. On a month-over-month basis, producer prices declined 0.6%, unchanged from the prior month and below market expectations of -0.6%. Even though prices for food and beverages increased (+1.2%), the overall decline was primarily driven by the cost of petroleum and coal products (-5.0%) and chemicals (-1.7%). Meanwhile, the USD/JPY pair traded with a positive bias for the third consecutive session and touched a one-and-a-half month high of 110.8. The softer Japanese PPI further dented the already weaker sentiment surrounding the domestic currency.

The Westpac-Melbourne Institute Index of Consumer Sentiment for Australia jumped 4.3% (seasonally adjusted, monthly basis) to 103.8 in February, following a 99.6 reading in January. The surprise rebound in confidence followed shortly after the Reserve Bank of Australia announced last week that it had cut its forecasts for economic growth, citing weak consumption growth and declining housing prices. The “Economic conditions next 12mths” sub-index rebounded 7.0%, offsetting the greater part of January’s 7.8% decline, which was the biggest fall in over three years. The “Economic conditions next 5yrs” sub-index also advanced 3.8%, reversing a sizeable portion of the 5.9% decline seen in January. Both sub-indexes remain slightly below their December levels but are comfortably above longer-run averages. However, the headline Sentiment Index remained unnervingly close to both the long-run average of 101.3 and the normalized level of 100.0. Despite the softer tone and shaky start to 2019, views on the economy remain in support of consumer sentiment.

February 14
The U.S. Department of Labor announced that initial jobless claims totalled 239,000 (seasonally adjusted) in the week ending February 9, an increase of 4,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 235,000. The four-week moving average was 231,750, an increase of 6,750 from the previous week's revised average. This is the highest level for this average since January 27, 2018 when it was 234,000. The previous week's average was revised up by 250 to 225,000. These results are somewhat weaker than consensus estimates.

The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) declined 0.1% (seasonally adjusted) in January. The index increased 2.0% for the 12 months ended January 2019, the smallest year-over-year advance since July 2017. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.S. Census Bureau announced that retail and food services sales fell 1.2% (seasonally adjusted) for the month of December but were 2.3% above December 2017 levels. Excluding autos, sales were down 1.8% during the month but up 2.0% on a year-over-year basis. These figures are significantly weaker than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

Statistics Canada announced that its New Housing Price Index (NHPI) remained flat (on a seasonally adjusted basis) in December for a fifth consecutive month. On a year-over-year basis, the index was also unchanged. These results are in line with consensus expectations and reflect the generally weaker housing market that has emerged over the past year.

Statistics Canada reported that manufacturing sales declined 1.3% in December, a third consecutive monthly decline. The decline was mainly attributable to lower sales of petroleum and coal products. On a year-over-year basis, manufacturing sales rose a very modest 0.8%. This is much weaker than market consensus. These data are closely watched as they can create high-value employment, but manufacturing sales remains one of the weakest sectors following the 2008-09 recession.

According to a preliminary flash estimate, Destatis, the Federal Statistical Office of Germany, reported that the economy stalled in the fourth quarter of 2018, after shrinking 0.2% (seasonally adjusted) over the previous three-month period. This was the first time since Q4 2012/Q1 2013 that real GDP has not expanded for two successive quarters. As a result, annual real GDP growth fell 0.5 percentage points to 0.6% in Q4 2018, following a 1.1% growth in Q3 2018. These data show that the German economy avoided recession by the narrowest of margins to end calendar year 2018. Both the quarterly and annual growth figures were below market expectations.

The U.S. Census Bureau announced that business sales fell 0.3% in November but were up 4.2% from November 2017 levels. At the same time, inventories slipped 0.1% but were up 4.6% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of November was 1.35, matching the November 2017 ratio. These results were somewhat weaker than consensus expectations. Weak business sales suggest less stable economic growth, while flat inventories/sales ratios suggest no business need to add to stockpiles.

China’s General Administration of Customs announced that trade surplus narrowed to $39.16 billion in January from a $57.10 billion in December 2018 (U.S. dollar terms, year-over-year). Export surged by 9.1% in January (year-over-year), rebounding from a 4.4% fall in December 2018. Meanwhile, imports decreased by 1.5% (year-over-year) in January, strengthening from a decline of 7.6% in the previous month. Both the overall export and import figures are significantly stronger than the consensus estimates. It may suggest that China’s economy could be holding up better than expected as it tries to negotiate an end to the trade war with the U.S.

According to a preliminary estimate, the Cabinet Office of Japan announced that the economy grew 0.3% (quarterly basis, seasonally adjusted) in the fourth quarter of 2018, following an upwardly revised 0.7% contraction in the previous three-month period. This reading was marginally weaker than market expectations of 0.4%. Accordingly, real GDP growth advanced 1.4% (annualized) for the three months to December, after an upwardly revised 2.5% contraction in the previous quarter. These results were above market expectations.

February 15
Statistics Canada reported that foreign investors reduced their holdings of Canadian securities by $19.0 billion in December, led by a record divestment in Canadian bonds. Canadian investors reduced their holdings of foreign securities by $425 million, on sales of U.S. Treasury instruments. Foreign investment was far below consensus expectations. Weak 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 0.6% in January after rising a downwardly revised 0.1% in December. On a year-over-year basis, industrial production was reported to have gained 3.8%. Capacity utilization for total industry fell to 78.2% from 78.8% in December but was up from the 77.0% figure a year earlier. These results are considerably weaker than expected. The drop in production should be reflected as a softening in real economic output in the quarterly GDP figures.

China’s National Bureau of Statistics reported that, on a year-over-year basis, consumer price inflation slowed to 1.7% in January, following a 1.9% reading in December 2018. This was the lowest inflation rate since January 2018. At the same time, reports indicate that China’s PPI increased by 0.1% in January (year-over-year), far slower than the 0.9% rise in the previous month. It was the lowest reading since September 2016. CPI eased due to a decline in food prices while the decline in PPI was attributed to production materials and weaker fuel prices. These results were somewhat weaker than market expectations and raise concerns that the world's second largest economy may see the return of deflation.


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