The Playbook - March 11, 2019

March 13, 2019 • Playbook


The Playbook

Weekly Commentary – March 11, 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
March 12 Inflation Rate February 19 0.1% 0.0%
March 13 Durable Goods Orders January 19 -0.9% 1.2%
March 14 New Home Sales January 19 -1.3% 3.7%
March 15 Industrial Production February 19 0.2% -0.6%
March 15 New Motor Vehicle Sales January 19 123.0 k 118.2 k

Key Earnings:
March 11: Century Casinos Inc., Investors Real Estate Trust, Uranium Energy Corp.
March 12: Dick's Sporting Goods Inc., Northern Oil and Gas Inc., Inc.
March 13: Champions Oncology Inc., Eastman Kodak Co., Jamba Inc., Synacor Inc.
March 14: Adobe Inc., Asure Software Inc., DocuSign Inc., Dynagas LNG Partners LP
March 15: Hanger Inc., Harvest Capital Credit Corp., Kirkland's Inc., Revlon Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Bank of Canada appears more dovish
With analysts having already seen the dismal 0.1% (quarter-over-quarter) GDP growth rate for Q4 2018, no one was surprised as the Bank of Canada held interest rates steady at their latest policy window. In fact, the press release specifically stated that “the slowdown in the fourth quarter was sharper and more broadly based” than the bank had predicted. In addition, “it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.” The release also highlighted reduced expectations for inflationary pressures through most of 2019 due to “the impact of temporary factors, including the drag from lower energy prices and a wider output gap.” Not surprisingly, the Canadian dollar dropped to a new two-month low in the wake of the announcement. Market participants will now await the bank’s next policy window, scheduled for April 24, which coincides with an update to both the bank’s Monetary Policy Report and economic forecasts.

North American job markets switch course
Statistics Canada’s latest jobs report, for February, revealed the best back-to-back monthly job growth (combined 122,700) since March and April 2012 (+187,000) and the best start to a calendar year since 1981 (143,300). At the same time, February’s 55,100 surge in the labour force pushed the participation rate (the percentage of the working-age population that is either employed or actively seeking work) to 62.0%, the highest since the financial crisis in February 2009. In contrast, the U.S. Bureau of Labor Statistics announced a gain in non-farm payrolls of only 20,000. Even though this is the 101st consecutive monthly gain, it is the weakest since September 2017 and only the third time that the advance has been below three figures in the past three years. These data come as a surprise to the market as analysts try to square the employment figures with the recent GDP results.

ECB cuts forecast
The European Central Bank (ECB) conveyed a gloomy outlook for the 19-nation euro area on Thursday as ECB President Mario Draghi downgraded the region’s growth forecast by the largest amount since the start of its quantitative easing program four years ago. The ECB slashed expectations for real GDP growth for 2019 by 0.6 percentage points to 1.1%, after having forecast 1.7% in its December 2018 report. Cuts were also made across the board for 2020 and 2021, as projections were revised downwardly to 1.6% and 1.5%, respectively. In the same report, the bank also promised to leave rates unchanged at their record-low levels of 0.0% and introduced a new series of low rate loans called Long-Term Refinancing Operations (TLTROs). The fresh stimulus suggests that Draghi has now joined a growing number of central bankers in viewing global economic growth in a far less optimistic light.

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

March 4
The IHS Markit/CIPS U.K. Construction Purchasing Managers Index (PMI) fell 1.1 points to 49.5 in February, following January’s 50.6 point outturn. The latest reading came in 0.5 points below the key 50.0-expansion threshold, ending a 10-month period of sustained growth, and pointed to the first contraction since the snow disruptions seen in March 2018. These results were below market expectations of 50.4. Among the three core sub-sectors, residential work continued to expand, albeit at a subdued pace, which could not offset the declines seen in both commercial and civil engineering. Weakness in new orders and a decline in construction output signalled that employment growth remained much softer than seen in Q4 2018. The Construction PMI measures the performance of the U.K. construction sector and is used as a leading indicator for near-term business activity.

Eurostat, the statistical office of the European Union, reported that producer prices in the euro area advanced 0.4% (monthly basis) in January, following a 0.8% decrease in December 2018. On an annual basis, producer price index (PPI) growth stood at 3.0% in January, unchanged from the previous month. Among the major sub-sectors, energy (+0.4%) continued to grow, however, strong monthly gains were also seen in capital goods (+0.6%) and durable consumer goods (+0.5%). As a result, the core PPI grew 0.3% from the year ending 2018, which reduced its 12-month rate from 1.3% to 1.2%, its weakest level since December 2016. Moreover, the underlying picture remains benign and of little help to the ECB, which continues to have its sights on core Harmonized Index of Consumer Prices (HICP) inflation moving up to the 2.0% level. Both the monthly and annual results were only marginally above market expectations.

The U.S. Census Bureau announced that construction spending fell 0.6% in December, following a 0.8% advance in November. On a year-over-year basis, construction was up 1.6%. With the market looking for another monthly gain, the December figure is well below consensus estimates. This result indicates continued softening in the construction sector.

March 5
The U.S. Census Bureau announced that new home sales totalled 621,000 units (seasonally adjusted annual rate) in December 2018. This is 3.7% above the revised November rate of 559,000 units (previously reported as 657,000) but 2.4% below the December 2017 level of 636,000 units. Given the scale of the revisions, the overall report is broadly in line with expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The Institute for Supply Management announced that its non-manufacturing PMI recorded a 59.7 reading in February. It was up 3.0 points from the 56.7 level registered in January and remained above the key 50.0 (generally expanding) level for a 109th consecutive month. This figure is above consensus expectations. This result indicates continued growth, and at a slightly faster rate in the non-manufacturing sector.

Eurostat, the statistical office of the European Union, reported that retail sales in the euro area surged 1.3% (seasonally adjusted, monthly basis) in January, following a downwardly revised 1.4% drop in December. This was the largest monthly advance since November 2017. On a year-over-year basis, sales were up 2.2%, following a downwardly revised 0.3% increase in the previous month. The monthly recovery was broad-based and led by discretionary spending. Gains in electrical goods (+2.0%) and mail order and internet (+2.8%) were notable, but the headline data were also helped by sales of auto fuel (+1.6%). The advance in retail sales may present a respectable contribution to the current quarter’s GDP growth figure. Both the monthly and annual results were slightly above market expectations.

At its latest monetary policy window, the Reserve Bank of Australia (RBA) announced that it will leave its benchmark “cash rate” unchanged at a record low of 1.5%, extending its record period policy inaction for the 31st consecutive month. The report indicated that the RBA retains its forecast that the domestic economy will grow by 3.0% by year-end 2019. It also stated that the bank expects headline inflation in the short term to decline in response to fuel prices and there is forecast for underlying inflation to increase from current levels to 2.0% this year and 2.25% in 2020. Australia has continued to extend its streak with a strong labour market, coupled with “some” pickup in wage rate growth; however, the primary domestic uncertainty remains to be the weak growth in household income and falling housing prices. The “no change” result for administered interest rates was expected by the markets, but the announcement continues to set forth a dovish tone for the bank going forward.

March 6
Statistics Canada announced that Canada's merchandise imports rose 1.6% in December, while exports fell 3.8%. As a result, Canada's trade deficit with the world widened from $2.0 billion in November to $4.6 billion in December, a new record. These results are considerably weaker than expected. They are a negative sign for overall GDP growth.

Stats Can also announced that labour productivity of Canadian businesses decreased 0.4% in the final quarter of 2018, after increasing in each of the previous two quarters. With analysts looking for another gain, these figures are significantly weaker than consensus expectations. Productivity growth is important for longer-term economic stability, as it allows for higher wages and faster economic growth without inflationary pressures.

The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to US$59.8 billion in December from a revised $50.3 billion in November. December exports were $205.1 billion, $3.9 billion less than November exports. December imports were $264.9 billion, $5.5 billion more than November imports. The trade deficit was larger than expected. The weaker trade results will hamper overall GDP growth.

The Australian Bureau of Statistics (ABS) announced that GDP slowed to 0.2% (quarterly basis, seasonally adjusted) in the three months to December, after gaining 0.3% in the three months to September. This was the weakest pace of expansion since the third quarter of 2016 and below market expectations of 0.3%. GDP growth stood at 2.3% (annualized) in the three months to December, down from the 2.8% rate in the third quarter of 2018. The decline in GDP growth was primarily driven by weaker business investment, with gross fixed capital formation (-1.0%) and private investment (-1.3%), both experiencing particularly sharp declines. The data show that household consumption (0.4%) remained subdued on a relative basis, which was likely reflected by concerns of continuously high household debt levels and the largest decline in housing prices since the 1980s. The central bank held rates steady at 1.5% at Tuesday’s policy window, however, Philip Lowe, governor of the RBA, reiterated that the next moves in policy rates being higher or lower remain “evenly balanced.”

The Bank of Canada announced that it was, once again, holding the target for its key overnight interest rate steady at 1.75%. The Bank Rate was left at 2.00% and the deposit rate remains at 1.50%. The bank has not altered administered interest rates since it raised them by 0.25% on October 24, 2018. The press release that accompanied the announcement focused on the weaker-than-anticipated performance of the domestic economy, while noting the headwinds faced by the global economy, in particular the ongoing China-U.S. trade dispute. The bank will release an updated Monetary Policy Report and economic forecast at its next policy window on April 24. The tone of the current announcement suggests further downgrades to that forecast should be expected. 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.

March 7
The U.S. Department of Labor announced that initial jobless claims totalled 223,000 (seasonally adjusted) in the week ending March 2, a decrease of 3,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 226,000. The four-week moving average was 226,250, a decrease of 3,000 from the previous week's revised average. The previous week's average was revised up by 250 to 229,250. These results are in line with consensus estimates.

The U.S. Bureau of Labor Statistics announced that non-farm labour productivity increased at a 1.9% (annualized) rate during the fourth quarter of 2018 while unit labour costs rose 2.0% on the same basis. These figures are generally in line with market expectations. Productivity growth is important for longer-term economic stability as it allows for higher wages and faster economic growth without inflationary pressures.

Statistics Canada reported that building permits issued by Canadian municipalities tumbled 5.5% to $8.4 billion in January, following December’s record high. Five provinces posted increases, led by Newfoundland and Labrador. Construction intentions for commercial buildings were largely responsible for the national decline. On a year-over- year basis, permits are now down 0.1%. These results are in line with consensus estimates. Permits are an indicator of the future level of activity in the construction sector.

The Australian Bureau of Statistics reported that the country’s trade surplus surged A$780 million to A$4.55 billion in January (monthly basis, seasonally adjusted), following an upwardly revised A$3.77 billion in December. It was the second largest monthly surplus on record, the first (A$4.67 billion) having been recorded in December 2016. These results easily beat market expectations of A$3.00 billion. On a month-over-month basis, January exports soared 5.0% to a new all-time high of A$37.9 billion, driven by a sharp increase in non-rural goods (+2.0%), which accounts for an approximate 60.0% of the total, and non-monetary gold (+174%). January imports advanced 3.0% to A$35.39 billion, primarily boosted by capital goods (+12.0%) to A$6.69 billion and consumption goods (+6.0%) to A$8.88 billion. After posting slower-than-expected GDP growth figures for December, the widened surplus may reflect stronger Q1 GDP results.

At its latest policy meeting, the Governing Council of the ECB announced that it has left its benchmark “refinancing rate” unchanged at 0.0% in March. The marginal lending facility and the deposit facility interest rates were also left unchanged at 0.25% and -0.40%, respectively. These record-low rates are expected to remain at their present levels through the end of 2019 to ensure the continued sustained convergence of inflation to levels that are just below 2.0% over the medium term. The decision to leave interest rates unchanged was in line with market expectations. The report indicated that the ECB had introduced a new series of auctions of multi-year loans at low rates, called TLTROs, set to be launched in September 2019 and to end in March 2021. These operations are an attempt to help preserve favourable bank lending conditions and the smooth transmission of monetary policy.

Eurostat, the statistical office of the European Union, announced that, in its third estimate, economic growth in the euro area was unrevised at 0.2% (quarterly basis, seasonally adjusted) in the three months to December 2018, following a downwardly revised 0.1% in the third quarter. The three-month GDP growth figure was in line with market expectations. However, annual GDP in the euro area advanced 1.1% in the same three months to December, one percentage point below a flash estimate of 1.2%. This was its weakest print since the fourth quarter of 2013. Despite net foreign trade (+0.2%) and investment having a positive impact on the latest released GDP figures, sluggishness in the consumer sector has proved to be a concern to the growth of the 19-nation euro area economy.

March 8
Statistics Canada announced that 55,900 jobs were added in February, and the unemployment rate was unchanged at 5.8%. In line with the recent sharp gains, total employment was up 2.0% (+369,100) from 12 months earlier. These results are much stronger than market consensus. The employment data reflects the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.

Statscan also announced that Canadian industries operated at 81.7% of their production capacity in the fourth quarter, down from 82.8% in the third quarter. This was the second consecutive quarterly decline. The manufacturing and construction sectors were the main sources of this decline. These results are weaker than expected. The current level of utilization does not suggest any material capacity constraints and does not represent a material risk to inflation.

The Canada Mortgage and Housing Corporation announced that housing starts totalled 173,100 units (seasonally adjusted annual rate) in February. This is down 16.3% from the 206,809-unit level in January (originally reported as 207,968) and is the weakest seen since December 2015. The decline in housing starts was greatest for multiple urban starts. These results are well below market consensus. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.S. Bureau of Labor Statistics reported that the unemployment rate fell by 0.2 percentage points to 3.8% in February. However, non-farm payroll employment rose by only 20,000. The drop in the unemployment rate was due largely to the 45,000 drop in the labour force. Employment in professional and business services, health care, and wholesale trade continued to trend up, while construction employment decreased. The employment figures are weaker than expectations while the improvement in the unemployment rate was greater than anticipated. This is the most closely followed set of U.S. statistics as they indicate the relative health of the various sectors of the economy and is suggestive of consumer spending.

The U.S. Census Bureau announced that housing starts in January were at a seasonally adjusted annual rate of 1,230,000. This is 18.6% above the revised December estimate of 1,037,000 but is 7.8% below the January 2018 rate of 1,334,000. At the same time, the number of building permits issued in January was at a seasonally adjusted annual rate of 1,345,000. This is 1.4% above the revised December rate of 1,326,000 but is 1.5% below the January 2018 figure of 1,366,000. These figures are stronger than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

China’s General Administration of Customs announced that the nation’s trade surplus narrowed dramatically to $4.12 billion in February from $39.16 billion in January (U.S. dollar terms, year-over-year). It was the smallest trade surplus since a rare deficit in March 2018. Exports fell 20.7% in February (year-over-year), the weakest reading in three years. Meanwhile, imports decreased by 5.2% (year-over-year) in February, a third straight decline. These results were significantly weaker than the consensus estimates. Despite the impact of timing of lunar new year holidays, the overall results still indicate an impending slowdown in China’s international trade.


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