The Playbook - June 3, 2019

June 03, 2019 • Playbook


The Playbook

Weekly Commentary – June 3, 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 3 Markit Manufacturing PMI Final May 19 50.6 52.6
June 4 Factory Orders April 19 -0.7% 1.9%
June 6 Balance of Trade April 19 -$51.2B -$50.0B
June 7 Participation Rate May 19 62.9% 62.8%
June 6 Ivey PMI s.a. May 19 54.7 55.9
June 7 Unemployment Rate May 19 5.9% 5.7%

Key Earnings:
June 3: Careless Inc., Huami Corp., Pacific Coast Oil Trust, Sears Holdings Corp.
June 4: Ferroglobe PLC, Quanex Building Products Corp., Salesforce.Com Inc., Tiffany & Co.
June 5: Advaxis Inc., Campbell Soup Co., REV Group Inc., Secureworks Corp.
June 6: Ciena Corp., DocuSign Inc., Tsakos Energy Navigation Ltd., Vail Resorts Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy sees a hint of improvement
The latest report from Statistics Canada revealed an annualized 0.4% growth rate for GDP in the first quarter of 2019, a small fraction of the 3.1% seen in the U.S. over the same period. At the same time, benchmark revisions lowered the previous quarterly result to 0.3%, yielding the weakest back-to-back quarters since Q2 and Q3 2015 (-1.1%, 1.4%). Still, these same revisions lifted Canada’s GDP growth in calendar 2018 to 1.9% from 1.8%, but this remained well behind the 2.9% figure seen in the U.S. The last time Canada’s economy outperformed the U.S. was the second quarter of 2017. However, monthly GDP by industry surged 0.5% in March, more than enough to offset the downwardly revised 0.2% contraction seen in February. In fact, the March advance pushed overall output to a new high for the first time since October 2018. Even though this is a single month’s worth of data, it does suggest that the Bank of Canada may be correct in its assumption of an improvement in the domestic economy over the balance of 2019.

Key U.S. inflation measure edges higher
Matching the previously announced revisions from within the GDP report, the U.S. Bureau of Economic Analysis confirmed a 1.1% jump in personal consumption expenditure (PCE) in March. This is now the largest single-month gain since August 2009 but was followed by a far more modest 0.3% increase in April. Still, annual growth in consumption (4.3%) continues to outpace growth in income (3.9%). More important to the markets, was news that the core PCE deflator, the Federal Reserve’s key inflation measure, ticked up 0.2% during April. The index increase raised annual growth from 1.5% to 1.6%, but this remains comfortably below the Fed’s 2.0% target. While the White House may continue to call for interest rate cuts, there is little reason to expect any near-term changes to monetary policy.

Risk of recession returns to Brazil
Brazil’s Instituto Brasileiro de Geografia e Estatística (IBGE), a federal agency, announced that the nation’s GDP contracted 0.2% (Q/Q, seasonally adjusted) in the first quarter of 2019, the first outright decline since 2016. This downbeat GDP data came against the backdrop of several individual economic shocks that have seemingly emerged after Brazil had finally put its worst recession on record behind it. The deadly Vale dam disaster strained global growth and trade and, ongoing crises in both Venezuela and Argentina have all served to dampen business investment. In addition, recently elected President Jair Bolsonaro will continue to face considerable opposition as he moves to introduce pension reform that would impose a minimum retirement age and raise contributions. At the end of the first quarter, pension spending amounted for nearly 44% of Brazil’s federal budget, an unsustainable level. Still, some analysts continue to remain optimistic that improvements in private sector strength will spur broader economic growth in the second half of the year.

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

May 28
The European Commission’s Economic Sentiment Indicator (ESI) increased in the euro area by 1.2 points to 105.1 in May, following a downwardly revised 103.9 (originally reported as 104.0) reading in April. The rise was the indicator’s first increase following back-to-back declines that began in July 2018. The improvement in the ESI resulted from higher optimism in industry (+1.4 points), as well as firmer morale in the consumer (+0.8 points) and service (+0.4 points) sectors. Confidence in retail trade (-0.1 points) remained relatively constant, while construction confidence (-2.4 points) fell by the most in over three years as managers’ level of order books and employment expectations deteriorated. The overall results were slightly above market consensus.

The European Commission’s Business Climate Indicator (BCI) for the euro area declined to 0.30 in May, following a 0.42 reading in April. It was the lowest reading since August 2016. The release stated that “Managers’ views on the past production, as well as export order books deteriorated sharply, as did to a lesser extent, their assessments of overall order books.” These results were below market consensus. The BCI measures the current situation of businesses in the euro area and their prospects.

May 29
According to preliminary estimates, Insee, the National Statistics Bureau of France, announced a 0.2% (M/M) advance in its consumer price index (CPI) in May, down from 0.1 percentage points from its April outturn. This pushed annual CPI growth to 1.0%, decelerating from a 1.3% increase in the previous month and its lowest reading since August 2017. The decline in the annual CPI growth rate was driven by a slowdown in prices for services, energy and manufactured products. Both monthly and annual results were slightly below market consensus.

The Bank of Canada announced on May 29 that it was, once again, holding the target for its key overnight interest rate steady at 1.75%. The bank rate was left unchanged at 2.00% and the deposit rate remains at 1.50%. This marked the fifth straight hold by the bank since it last raised borrowing costs on October 24, 2018. The press release that accompanied the announcement noted that inflation data are in line with the projections set forth in the bank’s April Monetary Policy Report. Importantly, the bank stated that “trade restrictions introduced by China are having direct effects on Canadian exports”; in contrast, however, the recent lift on steel and aluminum tariffs and optimism surrounding the ratification of the Canada-United States-Mexico Agreement (CUSMA) should show positive implications for Canadian exports and investment. The bank’s next policy announcement window is July 10. The decision to leave interest rates unchanged was in line with market expectations. Canadian monetary policy, as decided by the Bank of Canada, has significant influence on both the domestic economy and the value of the currency.

May 30
The U.S. Department of Labor announced that initial jobless claims totalled 215,000 (seasonally adjusted) in the week ending May 25, an increase of 3,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 212,000. The four-week moving average was 216,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 250 to 220,500. These results match consensus estimates.

The U.S. Bureau of Economic Analysis announced that real gross domestic product grew at an annual rate of 3.1% in the first quarter of 2019. This figure is the “second estimate” as the original growth estimate was 3.2%. In the fourth quarter of 2018, real GDP increased 2.2% on the same basis. Downward revisions to nonresidential fixed investment and private inventory investment and an upward revision to imports were mostly offset by upward revisions to exports and personal consumption expenditure. The overall results were marginally stronger than expectations, as the market was looking for a slightly larger downward revision. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada reported that Canada's overall current account deficit widened by $0.7 billion (on a seasonally adjusted basis) in the first quarter to $17.3 billion, largely the result of international trade. The rise in the deficit was smaller than anticipated. Current account deficits must be funded by borrowing from foreign lenders.

The IBGE announced that GDP shrank 0.2% (Q/Q, seasonally adjusted) in Q1 2019, slowing from a 0.1% expansion in Q4 2018. It was the economy’s first contraction since Q4 2016. On a year-over-year basis, GDP advanced 0.5%, easing from 1.1% in the previous quarter. Both the quarterly and annual results were in line with market expectations.

The Housing Industry Association of Australia reported that new home sales plunged 11.8% (M/M) in April, following a 0.1% decrease in March. It was the largest decline in new home sales since 2005. Australia’s already ailing housing market was beaten down further as the central bank flagged interest rate cuts, the banking regulator easing lending criteria and proposed changes in capital gains tax which may negatively impact property investment. This is weighing on the country’s weak inflation and consumer spending and will likely play a large role in the central bank’s rate decision at its policy meeting on June 4.

May 31
Statistics Canada announced that real GDP expanded 0.4% (on an annualized basis) in the first quarter of 2019, after growing a downwardly revised 0.3% in the final quarter of 2018 (originally reported as 0.4%). Nevertheless, benchmark revisions did increase the overall GDP growth seen in 2018 to 1.9% from 1.8%. Weaker trade results and softer investment in housing were the key drags on the broader economy during the first quarter. Monthly, real GDP by industry surged 0.5% in March, helping to avoid a negative figure for the first quarter and suggesting that the economy may have carried some positive momentum into the second quarter. Coupled with the revision, these results are generally weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Statistics Canada also reported that its Industrial Product Price Index (IPPI) rose 0.8% in April while its Raw Materials Price Index (RMPI) jumped 5.6%. On a year-over-year basis, the indices are up 1.8% and 3.2%, respectively. Higher prices for energy products were the main contributor in both cases. These figures are broadly in line with expectations. The IPPI and RMPI data are closely watched as they indicate relative inflationary pressures at the industry and raw materials levels.

According to the U.S. Bureau of Economic Analysis, personal income increased 0.5% in April. PCE increased 0.3%. Based on revised figures, personal income increased 0.1% and PCE increased 1.1% in March. The core PCE deflator, the Federal Reserve’s primary inflation bogey, rose 0.2% in this report, matching consensus estimates. However, both income and expenditure figures were above expectations. Income and spending patterns of consumers are critical factors in the health of the broader economy.

The Statistics Bureau of Japan’s Ministry of Internal Affairs and Communications reported that the number of unemployed fell 60,000 from a month earlier to 1.68 million in April. Accordingly, the country’s unemployment rate fell to 2.4% (M/M, seasonally adjusted) in April, following a 2.5% reading in March. Japan’s participation rate increased to 62.1% in April, up from 61.9% in March and above the 61.7% rate recorded a year earlier. The employment data suggest that conditions in Japan’s labour market are tightening, as unemployment remained low and the participation rate at its highest level since 2001. The data reinforce the Bank of Japan’s view that employment gains will boost wages growth and push inflation towards its 2.0% target.

In its provisional estimate, Destatis, Germany’s federal statistical office, revealed that consumer prices increased a meagre 0.2% (M/M) in May, following a 1.0% advance in April. On a year-over-year basis, CPI growth increased 1.4% in May, down from a 2.0% increase in the previous month. Both monthly and annual figures were well below market consensus.


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