The Playbook - January 21, 2019

January 21, 2019 • Playbook

 


The Playbook

Weekly Commentary – January 21, 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.        
January 22 Existing Home Sales December 18 5.27 M 5.32 M

Key Earnings:
January 21: Costamare Inc., Sify Technologies Ltd., Wynn Resorts Ltd., Zions Bancorp
January 22: Dolby Laboratories Inc., Ethan Allen Interiors Inc., TD Ameritrade Holding Corp.
January 23: Kimberly-Clark Corp., Raytheon Co., Texas Instruments Inc., Waters Corp.
January 24: Alaska Air Group Inc., Bristol-Myers Squibb Co., Intel Corp., Starbucks Corp.
January 25: AbbVie Inc., Colgate-Palmolive Co., IBERIABANK Corp., Lear Corp.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian inflation heats up in December
The latest data from Statistics Canada revealed a surprise 2.0% (year-over-year) increase in the consumer price index in December. In November, the pace of growth was a more modest 1.7% (on the same basis). For 2018, inflation stood at 2.3%, following gains of 1.6% in 2017 and 1.4% in 2016. StatsCan stated that “the increase in 2018 was the largest since 2011 and coincided with strong labour market conditions, including a low unemployment rate throughout the year and strong wage growth in the first half of the year.” Paradoxically, the latest Monetary Policy Report from the Bank of Canada reflected a lower forecast for overall inflation in both 2018 (to match the actual 2.3% result) and for 2019 (to 1.7%). Regardless of the overall consumer price index (CPI) measure, core inflation remained steady and the bank is expected to tread cautiously in terms of changes to monetary policy as the economy is widely believed to have already entered a phase of weaker growth.

Pound hit by speculative volatility
On January 15, British Prime Minister Theresa May suffered an historic (230 vote margin) defeat in parliament over her proposed Brexit deal. The tide turned one day later as she won a non-confidence vote and political chatter began to focus on an equally uncertain "Plan B." Not surprisingly, the Pound Sterling was whipsawed with heavy speculation raising volatility as the currency ranged from a two-month high of US$1.3000 to a low of US$1.2696 over the course of two trading sessions. There is no doubt that uncertainty for pound investors will continue as the "Plan B" deal is set to be debated January 29. As market sentiment shifts back and forth between expectations of a “hard” and “soft” exit from the European Union, the March 29 deadline continues to steadily approach.

Weak Chinese trade reflects slower growth
China’s General Administration of Customs announced that exports fell 4.4% in December 2018 (U.S. dollar terms, year-over-year), the biggest drop in two years. Meanwhile, imports decreased by 7.6%, the largest decline since July 2016. Despite the broader decline, the politically-sensitive surplus with the U.S. grew 17% over the year to hit US$323.32 billion for 2018, the highest on record dating back to 2006. The overall results underscored slowing economic growth in the world’s second largest economy. China is now experiencing weakening investment and consumption, following Beijing’s drive to reduce debt levels. Given the recent economic results, China’s Bureau of Statistics is planning to lower its growth forecast to 6.3% after an expected 6.6% in 2018, the slowest pace in 28 years. Softening demand in China has already contributed to a deteriorating outlook for global growth, and market participants will continue to closely monitor trade and GDP data.

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 14
Eurostat, the statistical office of the European Union, reported that industrial production in the euro area fell 1.7% (monthly basis, seasonally adjusted) in November, following a downwardly revised 0.1% gain in October. It was the biggest monthly decline in industrial output since February 2016. On a year-over-year basis, industrial output declined 3.3% in November, following a 1.2% rise in October. This was the first annual decrease in industrial output since January 2017 and the largest since November 2012. The monthly and yearly results came in well below market expectations.

China’s General Administration of Customs announced that exports from China fell 4.4% in December 2018 (U.S. dollar terms, year-over-year), following a 5.4% increase in November. This is now the biggest drop in two years. Meanwhile, imports decreased by 7.6% (year-over-year) in December, the largest decline since July 2016. For calendar 2018, imports were up 15.8% and exports up 9.9%. The politically-sensitive surplus with the U.S. grew 17% from a year ago to hit US$323.32 billion in 2018, the highest on record dating back to 2006. Both the overall export and import figures are significantly weaker than the consensus estimates. These results reinforce concerns that the world’s second largest economy is experiencing a material economic slowdown against the backdrop of ongoing trade tensions with the U.S.

January 15
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) declined 0.2% (seasonally adjusted) in December. The index increased 2.5% for the 12 months ended December 2018, matching the 2.5% result for 2017. These figures are below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

According to initial calculations, Destatis, the Federal Statistical Office of Germany, reported that real GDP grew 1.5% in calendar year 2018, following a 2.2% expansion in 2017. Despite the German economy growing for its ninth consecutive year, it was the weakest rate of expansion recorded in five years amid headwinds from a global economic slowdown, continuing trade tensions with the U.S. and the risk of the U.K. departing from the EU without a deal intact. Positive contributions to economic growth came on the heels of domestic demand, as both household final consumption expenditure (+1.0%) and government expenditure (+1.1%) were up from the previous year. Meantime, according to preliminary estimates, Germany’s government budget surplus widened to a record £59.2 billion (1.7% of GDP) in calendar year 2018, following a £34.0 billion surplus (1.0% of GDP) posted in 2017. The GDP results were in line with market expectations.

January 16
The U.K. Office for National Statistics reported that consumer prices declined to a 23-month low of 2.1% (annualized) in December, down from a 2.3% increase in November. It was the lowest inflation rate recorded since January 2017. On a month-over-month basis, CPI growth advanced 0.2%, unchanged from the previous month. The annual and monthly figures were in line with market consensus. Accordingly, the annual core inflation rate, which excludes prices of energy, food, alcohol and tobacco, went up by 1.9%, easing from a 2.2% gain registered in November and was above market consensus of 1.8%. It appears that the year-end inflation data were at the weak end of the Bank of England’s expectations and may likely increase the probability of sustaining stable interest rates for a prolonged period.

January 17
The U.S. Department of Labor announced that initial jobless claims totalled 213,000 (seasonally adjusted) in the week ending January 12, a decrease of 3,000 from the previous week's unrevised level of 216,000. The four-week moving average was 220,750, a decrease of 1,000 from the previous week's unrevised level of 221,750. These results are somewhat stronger than consensus estimates.

Eurostat, the statistical office of the European Union, confirmed in their final data that annual inflation in the euro area increased by 0.3 percentage points to 1.6%, unchanged from preliminary estimates and below November’s final reading of 1.9%. December’s final inflation figure pointed to the lowest rate since April 2018 and was in line with market estimates. The highest contribution to the annual euro area inflation rate came from services (+0.6 percentage points), followed by energy (+0.5 percentage points) and food, alcohol and tobacco (+0.3 percentage points). Annual core inflation, which excludes volatile prices of energy, food, alcohol and tobacco, and at which the European Central Bank (ECB) looks in its policy decisions, stood at 1% in December, unchanged from November’s figure. These results were in line with early estimates. Ahead of the ECB’s monetary policy meeting set to take place on January 24, the confirmed annual inflation figures paint a disappointingly weak picture of underlying inflation in the euro area. Coupled with increasing signs of slowing growth, the ECB will likely be forced to acknowledge that economic risks have further transferred to the downside.

January 18
The U.K. Office for National Statistics reported that retail sales fell 0.9% (monthly basis, seasonally adjusted) in December, following a downwardly revised 1.3% advance in November. It was the steepest decrease in monthly retail trade since May 2017. These results were marginally below market expectations. Excluding auto fuel, purchases declined a sharper 1.3% compared to their mid-quarter levels and were 2.6% weaker than a year ago, recording a third decline in the last four months and well below market expectations. On a year-over-year basis, sales eased to 3.0% in December, following a downwardly revised 3.4% in November, missing market estimates of 3.6%. These data indicate that U.K. consumers ended 2018 with a pessimistic outlook and low sentiment. The contraction in sales volume will likely subtract from quarterly real GDP growth in the U.K.

Statistics Canada reported that consumer prices rose 0.2% (seasonally adjusted, monthly basis) in December, after falling 0.1% in November. On a year-over-year basis the CPI was up 2.0%, up from 1.7% in the previous report. The food index (+0.6%) and the health and personal care index (+0.6%) posted the largest increases, while the transportation index (-0.1%) declined. All three of these core inflation measures, established by the Bank of Canada, showed no change from the November report and ranged from 1.8% to 1.9%, near the mid-point of the bank’s 1% to 3% target band. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.9%. The overall figures are higher than market expectations.

Statistics Canada also announced that its foreign investors acquired $9.5 billion of Canadian securities in November, primarily fixed income instruments. Canadian investors' holdings of foreign securities declined $4.1 billion, predominantly U.S. equities. The foreign acquisition of Canadian securities was above expectations. Foreign investment flows can significantly influence the relative strength of the Canadian dollar.

The U.S. Federal Reserve announced that industrial production expanded 0.3% in December after rising a downwardly revised 0.4% in November (originally reported as 0.6%). On a year-over-year basis, industrial production was reported to have gained 3.8%. Capacity utilization for total industry rose to 78.7% from 78.6% in November and 77.3% a year earlier. These results are somewhat stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

 

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