The Playbook - February 4, 2019

February 01, 2019 • Playbook

 


The Playbook

Weekly Commentary – February 4, 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
U.S.        
February 4 Markit Services PMI Final January 19 54.2 54.4
February 6 JOLTs Job Openings December 18 5.800 M 6.888M
February 7 Consumer Credit Change December 18 $15.0B $22.2B
Canada        
February 5 Exports December 18 $52.10B $48.33B
February 8 Unemployment Rate January 19 5.80% 5.60%

Key Earnings:
February 4: Alphabet Inc., Clorox Co., Saia Inc., Sysco Corp.
February 5: Estee Lauder Companies Inc., Spirit Airlines Inc., Walt Disney Co.
February 6: Boston Scientific Corp., Brinks Co., Ceridian HCM Holding Inc.
February 7: Expedia Group Inc., Knowles Corp., News Corp., PG&E Corp.
February 8: Arconic Inc., GrafTech International Ltd., Hasbro Inc., Ventas Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy cools
Updated figures from Statistics Canada revealed a 0.1% contraction in GDP by industry in November. The decline was the second in three months and left year-over-year economic growth at a modest 1.7%, the weakest figure since January 2017. The service sector contracted during the month, but by less than 0.1% while goods production fell by 0.3%. Underlying activity was decidedly mixed, as 13 of the 21 major subgroups reported an advance. Nevertheless, baring a significant rebound in December, the fourth quarter is likely to reveal the weakest growth figure since the second quarter of 2016. This was the last time an outright decline in quarterly GDP was reported and came a full year before the Bank of Canada began its tightening of monetary policy.

U.S. Fed takes a less hawkish stance
The U.S. Federal Reserve met market expectations by holding interest rates steady at their first monetary policy meeting of 2019. However, changes to the text of the press release that accompanied the announcement suggest that there may be less tightening on the horizon than previously believed. Importantly, text that explicitly referred to “further gradual adjustments in the stance of monetary policy” was dropped. The release now states that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” The recently-ended partial closure of the U.S. government, reduced the release of key economic data to a trickle. Until the backlog is cleared, market participants will have to interpret the Fed’s likely course of action against an incomplete backdrop.

Fed shift helps fuel old school January effect
U.S. markets experienced a sea change in January as investors appeared eager to shake off December’s equity debacle. The Dow Jones Industrial Average’s 7.2% gain was its best January performance since 1989. Meanwhile, the S&P 500 Index’s 7.9% advance marked its best start to a calendar year since 1987. January’s resurgence came on the heels of December’s rout, with the S&P having turned in its worst December performance since 1931. Chairman Jerome Powell's decision to take the Fed’s balance sheet off “autopilot” provided support to investors who have long been braced for a downturn in U.S. economic growth, amid erratic geopolitical conditions. Further, the Fed’s apparent willingness to break from expectations of raising short-term interest rates in the coming months, allowed a far more optimistic tone to fuel the January surge.

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

January 30
Eurostat, the statistical office of the European Union, reported the European Commission’s Economic Sentiment Indicator (ESI) fell 1.2 points to 106.2 (seasonally adjusted) in January, following a marginally upwardly revised 107.4 level in December. The reading fell well below market consensus and was at its lowest level since November 2016. The ESI has now declined in twelve of the last thirteen months. The deterioration of euro-area sentiment resulted from lower confidence in industry (-1.8 points), services (-0.12 points) and retail trade (-1.8 points). However, although overall confidence in industry and services declined on a month-over-month basis, both sub-sectors’ figures remained in positive sentiment territory. Moreover, confidence in construction (+0.9 points) was the strongest contributor to the ESI. Consumer confidence indicators (CCI), such as the ESI, were revised by combining survey questions about personal finances with consumers’ expectations with respect to macroeconomic developments which outperform the current CCI. As a result, “the ‘Micro-and-Expectations-Mix Indicator’ is therefore chosen as the European Commission’s new, official CCI, replacing the current CCI as of January 2019.”

The Australian Bureau of Statistics announced that consumer prices rose by 1.8% (annual basis) in the three months to December, following a 1.9% increase in the three months to September. The figure was above expectations of 1.7% and the lowest inflation rate since Q3 2017. The marginal decline in the year-over-year figure was driven primarily by a weaker increase in transportation costs (2.8%) from the previous period. On a quarterly basis, the consumer price index (CPI) edged up 0.1 percentage points to 0.5%, after a 0.4% rise in the three months to September and just above market expectations of 0.4%. This marks the highest quarterly figure since December 2017. The annual figure was only 0.1 percentage points below the 2.0% forecast made by the Reserve Bank of Australia (RBA) in November. The RBA intends to hold CPI in the 2.0%-3.0% range over the medium-term and expects CPI to increase to around 2.25% in the years ending December 2019 and 2020.

According to a preliminary report released by Destatis, the Federal Statistical Office of Germany, consumer prices eased to 1.4% (annual basis) in January, following a 1.7% increase in December. This reading was only a couple of ticks below market expectations and equalled its lowest outturn since November 2016. On a month-over-month basis, the CPI dropped steeply to -0.8%, from a 0.1% level in December and was marginally below expectations. The report comes just hours after the German government slashed its 2019 growth forecast to 1.0%, nearly half the 1.8% pace projected as recently as October. The preliminary figures are likely citing a deteriorating global trading environment.

The U.S. Federal Reserve left interest rates unchanged following its latest two-day policy meeting. The target range for the federal funds was left at 2.25% to 2.50%. The Fed last raised interest rates by 0.25% on December 19. The press release that accompanied the announcement highlighted the continued strengthening of both the labour market and household spending. The Fed also referred to recent declines in “market-based measures of inflation compensation” but indicated that longer-term inflation expectations were largely unchanged. The announcement of no change to interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economy. Its lead is often followed by policymakers in other countries.

January 31
The U.S. Department of Labor announced that initial jobless claims totalled 253,000 (seasonally adjusted) in the week ending January 26, an increase of 53,000 from the previous week's revised level. This is the highest level for initial claims since September 30, 2017 when it was 254,000. The previous week's level was revised up by 1,000 to 200,000. The four-week moving average was 220,250, an increase of 5,000 from the previous week's revised average. The previous week's average was revised up by 250 to 215,250. These results are weaker than consensus estimates.

Statistics Canada announced that, monthly, real GDP by industry declined 0.1% in November, after rising 0.3% in October. Decreases in wholesale trade, finance and insurance, manufacturing and construction more than offset gains in 13 of 20 industrial sectors. Goods-producing industries were down 0.3%, the third decline in four months, while services-producing industries were essentially unchanged. On a year-over-year basis, GDP growth stands at 1.7%. These results are somewhat stronger than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

China’s National Bureau of Statistics announced that its manufacturing purchasing managers' index (PMI) reversed slightly, edging up to 49.5 in January, following a 49.4 result in December 2018. It was the first increase following four consecutive declines. However, the reading remained near a three-year low and, with the below-50.0 figure, still points to contraction in the sector. This result was marginally stronger than expectations. Meanwhile, the non-manufacturing PMI increased to a four-month high of 54.7 in January from 53.8 in December. This was likely boosted by pre-holiday factors. Overall, the findings suggest the Chinese economy got off to a rough start in the new year.

Eurostat, the statistical office of the European Union, reported that the number of unemployed workers fell by a substantial 75,000 to 12.3 million in December. Accordingly, the unemployment rate in the 19-country euro area remained stable at 7.9% (monthly basis, seasonally adjusted) in December and down from 8.6% a year ago. These results were in line with market expectations and joblessness remained at its lowest rate since October 2008. Despite the jobs market being a lagging indicator, the collective data from this report may likely suggest that business activity across the euro area is still expanding at a fast-enough rate to make further inroads into the current unemployment problem.

According to Eurostat, the statistical agency of the European Union, real GDP in the euro area expanded 0.2% (flash estimate - seasonally adjusted) in the fourth quarter of 2018. The growth figure was in line with market expectations. Year-over-year growth in the euro area declined 0.4 percentage points to 1.2% in December, its weakest print since the fourth quarter of 2013. Moreover, calendar year 2018 growth in the euro area stood at 1.8%. The data confirm the euro area’s subdued economic activity in 2018 and may provide justification for the European Central Bank (ECB) to consider greater downside risks in its economic projections. This could open the door for the ECB to reinstate the quantitative easing program which was halted in December 2018.

February 1
The U.S. Bureau of Labor Statistics reported that the unemployment rate edged up by 0.1 percentage points to 4.0% in January, and non-farm payroll employment rose by 304,000. The nominal increase in the unemployment rate came despite a modest 11,000 drop in the labour force. Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing. The payrolls figure is dramatically stronger than consensus expectations while the change in the unemployment rate still leaves it near the cyclical low. This is the most closely followed set of U.S. statistics as it indicates the relative health of the various sectors of the economy and is suggestive of consumer spending.

Markit Economics reported that Germany’s Manufacturing PMI fell to 49.7 in January from 51.5 in the prior month. The decline was led by the steepest drop in new orders in over six years. The overall reading (below the key 50.0 level) revealed the first contraction in Germany’s manufacturing sector since November 2014. This report is weaker than both the earlier flash reading of 49.9 and consensus estimates. The results reflect the negative impact of the looming Brexit, coupled with trade friction between the U.S and China and uncertainty over the outlook for the domestic economy, as Europe’s largest economy reported the worst year of GDP growth in five years.

 

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