The Playbook - June 17, 2019

June 17, 2019 • Playbook

The Playbook

Weekly Commentary – June 17, 2019

Alfred Lam, MBA, CFA
Senior Vice-President
and Chief Investment Officer
CI Multi-Asset Management
Richard J. Wylie, MA, CFA
Vice-President, Investment Strategy
Assante Wealth Management

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
June 18 Building Permits May 19 1.309 M 1.290 M
June 18 Housing Starts May 19 1.205 M 1.235 M
June 21 Markit Manufacturing PMI Flash June 19 51.0 50.5
June 21 Markit Services PMI Flash June 19 51.5 50.9
June 19 Inflation Rate May 19 -0.1% 0.4%
June 20 ADP Employent Change May 19 10.0 k 61.7 k

Key Earnings:
June 17: Coffee Holding Co Inc., SINTX Technologies Inc., WageWorks Inc.
June 18: Adobe Inc., Hexindai Inc., Jabil Inc., Permianville Royalty Trust
June 19: American Outdoor Brands Corp., Barnes & Noble Inc., Oracle Corp.
June 20: Kroger Co., Park Electrochemical Corp., Red Hat Inc., Steelcase Inc.
June 21: Carmax Inc., Vantage Drilling Company
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian dollar breaks to three-month high
The Canadian dollar moved to 75.38 cents in U.S. dollar terms on June 10, its strongest level since March 1. The buying pressure emerged amid positive economic news and word that the U.S. had dropped plans to impose tariffs on Mexican imports. The recent employment report from Statistics Canada had shown that the nation’s unemployment rate had fallen to 5.4% in May, the lowest level since 1976. The news fueled market speculation that a move to ease monetary policy in Canada could be on hold for longer than in the U.S. Similarly, analysts had feared that a U.S. imposition of new tariffs on Mexican goods would undermine the ratification of the United States-Mexico-Canada Agreement (USMCA) trade deal. Even though a flare-up in global trade disputes remains a risk, the market appears to be somewhat more constructive on the North American deal.

U.S. retail sales bounce back
The U.S. Census Bureau announced that retail and food services sales climbed 0.5% in May. In addition, the report provided substantial upward revisions for both March and April results. May’s gains were broadly-based with advances seen in eleven of the thirteen major sub-groups. The revisions to the previous data coupled with the May advance suggest a strong rebound in consumer spending for the second quarter. Even if no gain is seen in June, the quarter is on pace to be the strongest since the final quarter of 2017. The improvement in retail demand indicates that the broader economy’s deceleration from 3.1% GDP growth in the first quarter, may not be as steep as earlier predicted. These results could allow the Federal Reserve to further delay the anticipated easing of monetary policy.

U.K. manufacturing shrinks under Brexit cloud
The most recent figures from the U.K. Office for National Statistics revealed that industrial production had declined by 2.7% in April. The contraction was led by a 3.9% drop in manufacturing output, its largest single-month loss since June 2002. Transportation equipment slumped 13.4%, the worst showing since January 1974. The broader decline follows a boom in output over the first quarter of the year, as companies worked feverishly to add to inventories ahead of the then Brexit deadline of March 29. However, with Brexit now delayed until at least October, demand is now being met with existing stockpiles. The sharp decline in output raises the risk of a quarterly contraction in overall GDP, as the volatility of the recent economic data highlights the fragility of the economic outlook amid Brexit uncertainties.

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

June 10
The Canada Mortgage and Housing Corporation announced that housing starts totalled 202,337 units (seasonally adjusted annual rate) in May. This is down 13.3% from the 233,410-unit level in April (originally reported as 235,460) but remained above 200,000 for a second consecutive month. The drop in housing starts was led by an 18.5% decline in multiple urban starts. These results are below market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

Statistics Canada reported that building permits issued by Canadian municipalities soared 14.7% to a record $9.3 billion in April, following a 2.8% advance in March. The increase in the value of permits was almost entirely due to a planned change in development costs in Metro Vancouver. On a year-over-year basis, permits are now up 18.3%. These results are well above consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The U.K. Office for National Statistics announced that industrial production slumped 2.7% in April with a 3.9% monthly decline in manufacturing leading the way. The reversal in manufacturing was the largest single-month loss since June 2002. These results are weaker than expected. Brexit uncertainties will continue to add volatility to production and output reports. The decline in this report will likely be reflected as a dampening factor in real economic output in the quarterly GDP figures.

June 11
The U.S. Bureau of Labor Statistics reported that its Producer Price Index – Final Demand (PPI-FD) rose 0.1% (seasonally adjusted) in May. The index increased 1.8% for the 12 months ended May 2019, the smallest year-over-year advance since a 1.7% rise in January 2017. These figures are slightly below consensus expectations. The PPI data are closely watched as they indicate relative inflationary pressures at the industry level.

The U.K. Office for National Statistics reported that employment increased by 32,000 in the three months to April 2019, raising total employment to a record high of 32.75 million. At the same time, the unemployment rate remained steady at 3.8%. Total earnings, including bonuses, rose by an annual 3.1%, slowing from an upwardly revised 3.3% increase in the previous period. The overall report is somewhat stronger than anticipated.

June 12
The U.S. Bureau of Labor Statistics reported that the consumer price index (CPI) increased 0.1% (seasonally adjusted basis) in May. Over the last 12 months, the index increased just 1.8%, down from 2.0% in April. These results were marginally lower than expectations. These figures are consistent with the U.S. Federal Reserve's anticipation of soft inflationary pressures.

China’s National Bureau of Statistics reported that the CPI increased 2.7% (year-over-year) in May. This is now the largest annual increase since February 2018. The bulk of the advance was attributed to a rise in food prices. These results matched expectations. Rising inflation may present a dilemma, as there are increasing projections of a move to ease monetary policy to help offset the negative impact of the China/U.S. trade dispute.

June 13
The U.S. Department of Labor announced that initial jobless claims totalled 222,000 (seasonally adjusted) in the week ending June 8, an increase of 3,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 219,000. The four-week moving average was 217,750, an increase of 2,500 from the previous week's revised average. These results are in line with consensus estimates.

■ Statistics Canada announced that its New Housing Price Index (NHPI) remained unchanged in April for a third consecutive month. On a year-over-year basis, the index is up 0.1%. This index has been virtually stagnant since February 2018. These results match consensus expectations and point to no change in net worth for homeowners.

June 14
The U.S. Census Bureau announced that retail and food services sales were up 0.5% (seasonally adjusted) for the month of May and were 3.2% above May 2018 levels. Excluding autos, sales saw the same 0.5% increase during the month and were also up 3.2% on a year-over-year basis. The April data were also revised higher, with overall sales up 0.3% after initially being reported as a 0.2% decline. Given the extent of the revisions, these figures are stronger than expected. Since consumer spending accounts for roughly two-thirds of U.S. economic activity, it is critical to overall GDP results.

China’s Bureau of National Statistics announced that industrial output rose 5.0% (year-over-year) in May after gaining 5.4% (on the same basis) in April. The advance was the weakest since 2002. Even though softer domestic demand was held out as the main reason for the decline, the ongoing trade dispute with the U.S. continues to dampen economic activity. These results are weaker than expected. The weaker growth in output will prompt further calls for additional fiscal and monetary stimulus.

The U.S. Federal Reserve announced that industrial production expanded 0.4% in May after declining 0.4% in April. On a year-over-year basis, industrial production was reported to have gained 2.0%. Capacity utilization for total industry rose to 78.1% from 77.9% in April, matching the May 2018 level. These results are stronger than expected. The improvement in production should be reflected as a gain in real economic output in the quarterly GDP figures.

The U.S. Census Bureau announced that business sales fell 0.2% in April but were up 2.8% from April 2018 levels. At the same time, inventories climbed 0.5% and were up 5.3% on a year-over-year basis. As a result, the total business inventories/sales ratio at the end of April was 1.39. The April 2018 ratio was 1.36. These results matched consensus expectations. Softer business sales suggest less stable economic growth while rising inventories/sales ratios suggest a business need to allow stockpiles to diminish.


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