The Playbook - January 28, 2019

January 28, 2019 • Playbook


The Playbook

Weekly Commentary – January 28, 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
January 30 ADP Employment Change January 19 170 k 271 k
January 31 Continuing Jobless Claims January 19 1740 k 1713 k
February 1 Unemployment Rate January 19 3.9% 3.9%
February 1 Markit Manufacturing PMI Final  January 19 54.9 53.8
January 31 GDP November 18 0.1% 0.3%
February 1 RBC Manufacturing PMI January 19 53.9 53.6

Key Earnings:
January 28: Aetna Inc., Crane Co., Caterpillar Inc., Whirlpool Corp.
January 29: 3M Co., Apple Inc., First Citizens BancShares Inc., Pfizer Inc.
January 30: AT&T Inc., Boeing Co., PayPal Holdings Inc., Sirius XM Holdings Inc.
January 31: Aflac Inc., Inc., Hershey Co., DowDuPont Inc.
February 1: Chevron Corp., Royal Caribbean Cruises Ltd., Weyerhaeuser Co.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian consumers hold back
The latest data from statistics Canada showed that consumers had reduced spending in the run-up to the holiday season. Retail sales slumped 0.9% in November. The decline erased October’s 0.2% advance and sent total retail spending to its lowest level since April. During the month, sales were down in six of 11 subsectors, representing 75% of total retail sales. Downwardly revised data also show that retail activity has been relatively soft since May. Annual growth in retail spending, which stood at 7.0% in November 2017, now stands at 0.5%. The impact of the Bank of Canada’s five interest rate hikes since July 2017 appear to be reflected in this report, raising questions with respect to the bank’s next move. The next monetary policy announcement window is slated for March 9.

Tightening job market raises pressure on Bank of England
The U.K. Office for National Statistics announced a 141,000 (seasonally-adjusted) gain in employment to an all-time high of 32.5 million, in the three months to November. The report also revealed a modest 8,000 increase in the number of unemployed, allowing the unemployment rate to edge back to 4.0%, the cyclical low. It has not been lower since December 1974 to February 1975. Annual growth in average weekly earnings (ex-bonuses) was 3.3%, a 10-year high. Preliminary estimates also showed that job vacancies climbed by 10,000 in the three months ended December to match the record high of 853,000. The strength of this report will refocus attention on the Bank of England (BoE) as it is forced to weigh a robust domestic economy against the looming Brexit, the details of which remain mired in elevated uncertainty. The bank’s next policy meeting is scheduled for February 7.

Economic growth slows in China
China’s National Bureau of Statistics announced that the domestic economy grew by 1.5% in the fourth quarter (quarter-over-quarter). On a year-over-year basis, GDP growth advanced 6.4% in Q4, while economic growth for calendar 2018 stood at 6.6%. This is now the weakest growth pace in 28 years. The high-profile trade dispute with the U.S. was a factor in the slowdown, but China’s economy was also weighed down by government efforts to reduce the nation’s debt burdens at all levels. Despite the slower pace of growth, China’s overall economic output in 2018 reached ¥90.0 trillion for the first time. Nevertheless, even as the Chinese economy has expanded dramatically over the past three decades, its now much greater size will make it far more difficult to repeat the astonishing growth percentages of the past.

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 21
China’s National Bureau of Statistics announced that Chinese GDP experienced a 1.5% advance in the fourth quarter (quarter-over-quarter), easing slightly from the 1.6% pace of expansion seen in the previous quarter. On a year-over-year basis, GDP growth stood at 6.4%, following a 6.5% growth rate (on the same basis) in the prior year. This reading matches consensus forecasts but was the lowest growth rate since the global financial crisis. For calendar 2018, the total economy grew 6.6%, weighed down by weak investment and faltering consumer confidence, as U.S. piled on trade pressure, leaving 2018 growth as the weakest calendar year in 28 years.

January 22
Statistics Canada reported that manufacturing sales tumbled 01.4% in November, after edging 0.1% lower in October. The decline in November mainly reflected lower sales of petroleum and coal products. Excluding this industry, manufacturing sales rose 0.2%. In line with the broader decline, sales on a year-over-year basis are now up only 2.7%, well below the 10.4% figure recorded in July. This report is weaker than the market consensus. These data are closely watched as manufacturing can create high-value employment.

Statistics Canada also announced that wholesale sales dropped 1.0% to $63.0 billion in November, more than offsetting the 0.7% increase in October. At the same time, inventories rose 0.7% during the month, a third consecutive advance. On a year-over-year basis, overall wholesale sales are now up 1.2% while inventories are up 10.1%. The monthly sales advance was significantly weaker than expectations. Activity at the wholesale level can be an indicator of future consumer trends.

Ireland’s Central Statistics Office (CSO) announced that wholesale prices slumped by 9.9% in December 2018 (year-over-year), following a 4.2% decrease in the previous month (on the same basis) and is now the largest decline since June 2003. The annual move was mainly caused by a 10.4% drop in the prices of export sales, which the CSO notes can be influenced by currency fluctuations. Overall, prices received by Irish producers decreased by 2.4% in calendar 2018 following an increase of 0.8% in 2017. This report is considerably weaker than consensus expectation.

The U.K. Office for National Statistics reported that the number of unemployed workers rose by 8,000 to 1.4 million in the three months to November. The unemployment rate edged down 0.1 percentage points to 4.0% in the three months to November, its lowest level since 1975 and comparable to rates seen in mid-2018. However, the unemployment rate reached a record 3.8% trough in November alone. These figures were slightly below market expectations of 4.1%. Average weekly earnings, ex-bonuses and including bonuses, in nominal terms increased by an annual 3.3% and 3.4%, respectively. Earnings, including bonuses, were greater than expected by 0.1 percentage points and the strongest print since the three months ended July 2008. These data signalled a strong labour market and will likely lead to the BoE having a more hawkish perspective on rates heading into the next several policy meetings.

The International Monetary Fund (IMF) reduced their forecast for global economic growth on Monday, cautioning that the economic momentum seen in recent years is slowing. The IMF now projects a 3.5% growth rate worldwide for 2019 and 3.6% for 2020. These are 0.2% and 0.1% lower, respectively, than the forecast published in October. It is the second downturn revision in three months. The negative effects of the ongoing trade dispute between China and the U.S., the considerable uncertainty surrounding Brexit and a 28-year low for GDP growth in China were all cited as the rationale. The world economy appears to be slowing more quickly than previously anticipated.

According to the U.S. National Association of Realtors, existing-home sales dropped 6.4% to a seasonally adjusted annual rate of 4.99 million units in December from an upwardly revised 5.33 million in November (originally a 5.32 million-unit pace). Sales are now 10.3% below the 5.56 million-unit pace in December 2017. These results are considerably weaker than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

January 23
Statistics Canada reported that retail sales cooled in November, dropping 0.9% (seasonally adjusted) more than sufficient to erase October’s 0.2% monthly increase. Sales were down in six of 11 subsectors, representing 75% of total retail sales with gasoline sales (-5.0%) reporting the largest monthly decline. Electronics and appliance stores (+3.3%) recorded the largest gain. Year-over-year sales growth slowed to 0.5%. These results are below consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

January 24
The U.S. Department of Labor announced that initial jobless claims totalled 199,000 (seasonally adjusted) in the week ending January 19, a decrease of 13,000 from the previous week's revised level. This is the lowest level for initial claims since November 15, 1969 when it was 197,000. The previous week's level was revised down by 1,000 from 213,000 to 212,000. The four-week moving average was 215,000, a decrease of 5,500 from the previous week's revised average. The previous week's average was revised down by 250 to 220,500. These results are stronger than consensus estimates.

According to the IHS Markit Flash Eurozone PMI report, a preliminary ‘flash’ reading from the IHS Markit Eurozone Composite PMI fell to 50.7 in January. It was down 0.4 points, recording a 67-month low and converged dreadfully close to the key 50.0 level. Additionally, the Flash Eurozone Manufacturing PMI dropped to 50.5 in January, following a 51.4 reading in December and was well below market expectations of 51.4. This preliminary estimate pointed to the weakest expansion in the factory sector in 50 months as new orders saw its steepest drop since April 2013 and, accordingly, exports falling for a fourth consecutive month. Moreover, the Flash Eurozone Services PMI Activity Index declined 0.4 points to 50.8 in January and recorded its lowest reading in 65 months. Both the manufacturing and services indexes indicate that the two measures were close enough to the 50-point growth threshold to warn of near stagnation. The January IHS Markit Flash results will likely be in line with quarterly growth of euro area real GDP around the 0.1% mark.

The Governing Council of the European Central Bank (ECB) announced that it has held its benchmark “refinancing rate” unchanged at 0.00% in January. The marginal lending facility and the deposit facility rates were also left unchanged at 0.25% and -0.40%, respectively. The ECB anticipates the key interest rates to remain at their current levels through the summer of 2019, however, the bank has inferred that these levels will remain for as long as necessary to ensure the continued sustained convergence of inflation to levels that are marginally below 2.00% over the medium term. Regarding non-standard monetary policy measures, and as the quantitative easing program has come to a halt, the Governing Council now intends to reinvest, in full, the principal payments from maturing securities under the asset purchase program (APP) for a period of time past the date when it begins raising the key ECB interest rates.

The Australian Bureau of Statistics announced that the unemployment rate inched lower to seasonally adjusted 5.0% in December 2018, 0.1% lower than the previous month. The December reading touches the lowest level since June 2011 and was slightly below market expectations. Part-time job gains of 24,600 drove an overall employment increase of 21,600 during the month. However, the number of people in full-time work dropped by 3,000. The Australian labour market performed well in calendar 2018, but the spare capacity remains, and materially stronger wage growth is unlikely.

January 25
According to Munich’s ifo Institute, the ifo Business Climate Index for Germany fell 1.9 points to 99.1 in January, its steepest decline since April 2013. This was the index’s lowest reading since February 2016 and well below market expectations of 100.6, amid Brexit turmoil and global trade tensions. The downward slide in the headline index was driven by stronger pessimistic business expectations, as the business expectations sub-index dropped to 94.2 in January, following a 97.3 reading in December. The ifo results were considerably weaker than yesterday’s flash PMI survey, however, both reports indicate that the German economy is experiencing a downturn. The ifo Business Climate Index measures company sentiment about current business situations and their expectations for the next six months. These results support the ECB’s recent decision to downgrade its growth risk assessment from broadly balanced to negative.

Credit rating agency DBRS upgraded both Japan’s long-term foreign and local currency debt from A to A (high), and short-term foreign and local currency debt from R-1 (low) to R-1 (middle). At the same time, the trend view on all ratings was changed from positive to stable. This upgrade reflects the view of lower risks relating to Japan's persistent deficits and high public debt load, in line with ongoing policy reforms and continued economic growth. The Japanese economy is expected to grow near potential at about 0.9% in 2018 and 2019, after expanding above potential at 1.2%, on average, between 2013 to 2017. Expansionary monetary and fiscal policies, a synchronized global recovery and consumption demand led by tight labor markets, have helped spur growth in the country.


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