The Playbook - March 4, 2019

March 04, 2019 • Playbook


The Playbook

Weekly Commentary – March 4, 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 5 Markit Composite PMI Final February 19 55.8 54.4
March 6 Balance of Trade December 18 -$56.0B -$49.3B
March 7 Nonfarm Productivity Q/Q Q4 18 1.50% 2.30%
March 8 Unemployment Rate February 19 3.8% 4.0%
March 6 Balance of Trade December 18 -$1.70B -$2.06B
March 8 Unemployment Rate February 19 5.8% 5.8%

Key Earnings:
March 4: Luna Innovations Inc., Raven Industries Inc., Inc., YY Inc.
March 5: Ambarella Inc., BEST Inc., Primo Water Corp., Target Corp.
March 6: Abercrombie & Fitch Co., Dollar Tree Inc., MYR Group Inc., Rosetta Stone Inc.
March 7: Barnes & Noble Inc., Dell Technologies Inc., H & R Block Inc., Tecnoglass Inc.
March 8: Allogene Therapeutics Inc., Daseke Inc., Red Lion Hotels Corp., Vail Resorts Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian economy narrowly avoids negative growth in Q4
Updated figures from Statistics Canada revealed a 0.1% (+0.4% on an annualized basis) advance in overall GDP during the final quarter of 2018. This is the weakest performance since the outright decline (-1.8% on an annualized basis) reported for the second quarter of 2016. These new figures came amid Statistics Canada’s benchmark data revisions back to 1961, which generally raised the overall dollar value of economic output. However, growth results for both Q1 2018 and Q2 2018 were lowered and calendar 2018 came in with overall economic growth at 1.8%. This is below the Bank of Canada’s downwardly revised 2.0% forecast published in January. Statistics Canada also reported that, on a monthly basis, GDP declined 0.1% in December. The bank has anticipated further slowing of economic activity into early 2019 and this report suggests it is likely to hold rates steady at its next policy window on March 6.

U.S. economy cools less than expected
With market participants braced for bad news, the U.S. Bureau of Economic Analysis, an agency of the Department of Commerce, announced that the broader economy grew 2.6% (annualized) in the final quarter of 2018. Given the turmoil seen in the equity markets during that period, the figure appears relatively benign. It does represent a slowdown from the downwardly revised 3.4% (previously reported as 3.5%) third quarter result and the 4.2% figure recorded in the second quarter. Still, calendar 2018 went into the books with 2.9% GDP growth, the best year since 2005 (+3.5%). During the fourth quarter, consumer spending did cool, (+2.8% from +3.5% in Q3) but not as much as had been feared. At the same time, business investment accelerated from 2.5% growth in Q3 to a 6.2% pace in Q4. Elsewhere, inventory investment gave GDP a small boost while government spending and trade were negative contributors. Either way, the U.S. economy appears to be more resilient than anticipated.

North American markets post best start in three decades
The S&P 500 Index and the Dow Jones Industrial Average closed out February with an identical, cumulative 11.1% advance. This is their best two-month start to a year since 1991 (+11.2%) and 1987 (+17.3%), respectively. It is now the 28th time that the S&P had back-to-back gains in the first two months of a year since 1950. GDP growth results for the final quarter of 2018 (+2.6% annualized) proved to be a far less alarming slowdown than analysts had anticipated back in December. Moreover, U.S. stocks were buoyed by rising expectations of a U.S.-China trade resolution. Interestingly, Canadian markets outpaced their U.S. cousins, as the S&P/TSX reported an even stronger 11.7% gain for the first two months of 2019. Nevertheless, the sharper economic slowdown seen in the Canadian economy is likely to provide less enthusiasm for a follow-through in March.

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

February 26
The U.S. Census Bureau announced that housing starts in December were at a seasonally adjusted annual rate of 1,078,000. This is 11.2% below the revised November estimate of 1,214,000 and is 10.9% below the December 2017 rate of 1,210,000. At the same time, the number of building permits issued in December was at a seasonally adjusted annual rate of 1,326,000. This is 0.3% above the revised November rate of 1,322,000 and is 0.5% above the December 2017 figure of 1,320,000. These starts figures are weaker than market expectations, but the permits results are stronger than anticipated. Activity in the housing market has a significant "ripple" effect on the broader economy.

GfK SE, Germany’s largest market research institute, announced their consumer climate indicator for Germany stood at 10.8 points heading into March, unchanged from February’s nine-month high and in line with market expectations. The report states that “consumer climate in Q1 2019 shows a stable trend at a good level and is so far bracing itself successfully against the tangible economic slowdown.” However, the economic expectations sub-index continued to spiral in a downward manner as the indicator lost a further 6.5 points in February, dropping to 4.2 points as a result. This is its fifth consecutive decline and the weakest level since March 2016. This was borne by a near “technical recession” in Q4 2018, which was indicated in Germany’s latest GDP growth report.

February 27
Statistics Canada reported that consumer prices fell 0.1% (seasonally adjusted, monthly basis) in January, after rising 0.2% in December. On a year-over-year basis, the consumer price index (CPI) was up 1.4%, the smallest annual gain since October 2017 (also 1.4%). The shelter index (+0.5%) and the alcoholic beverages, tobacco and recreational cannabis index (+0.5%) reported the largest increases, while the transportation index (-0.7%) declined the most during the month. All three measures of core inflation established by the Bank of Canada, showed that underlying inflation remained stable and was below their 2.0% target, ranging from 1.8% to 1.9%. CPI common, which the central bank says is most closely correlated with the output gap, was steady at 1.9%. The overall figures are somewhat weaker than market expectations.

The European Commission reported that the Economic Sentiment Indicator (ESI) for the euro area decreased to 0.2 points to 106.1 in February, following an upwardly revised 106.3 reading in January. This was the weakest reading since November 2016 and extended the indicator’s downward trend to eight consecutive months. The marginal downward movement was due to weaker industry and construction confidence, coupled with more upbeat signals from the service sectors, retail sector and consumers. These results were above market consensus. The ESI report contains data similar to the latest purchasing managers’ index (PMI) surveys and points to continued subdued GDP growth for the first quarter of 2019. The ESI provides a broad measure of both business and consumer sentiment for each of the euro area and European Union.

February 28
The U.S. Bureau of Economic Analysis announced that real GDP grew at an annual rate of 2.6% in the fourth quarter of 2018. This data release replaces both the “advance” and second estimates, so is less likely to be subject to the same revisions as would traditionally be the case. In the third quarter, real GDP increased 3.4% on the same basis. These results are stronger than expected as the market was looking for a more rapid deceleration at the end of the year. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The U.S. Department of Labor announced that initial jobless claims totalled 225,000 (seasonally adjusted) in the week ending February 23, an increase of 8,000 from the previous week's revised level. The previous week's level was revised up by 1,000 to 217,000. The four-week moving average was 229,000, a decrease of 7,000 from the previous week's revised average. The previous week's average was revised up by 250 to 236,000. These results matched consensus estimates.

Statistics Canada reported that Canada's overall current account deficit expanded by $5.4 billion (on a seasonally adjusted basis) in the fourth quarter to $15.5 billion, largely the result of a higher international trade deficit. The results for the current account deficit were weaker than anticipated. Current account deficits must be funded by borrowing from foreign lenders.

According to provisional estimates, Destatis, the Federal Statistical Office of Germany, reported that consumer prices advanced 0.5% (monthly basis) in February, nearly reversing a 0.8% decline in January. On a year-over-year basis, CPI was up 1.6%, rising from an 11-month low of 1.4% in the previous month, and its first increase since October 2018. These results were in line with market expectations.

According to preliminary estimates, Insee, the national statistics bureau of France, announced that consumer prices were unchanged (monthly basis) in February, following January’s 0.4% decline. On a year-over-year basis, CPI edged up 1.0 percentage points to 1.3% from January’s final 1.2%, its first annual increase since July 2018. The acceleration in annual inflation was prompted by energy prices (+3.1%) and food (3.0%). Both the monthly and annual results were weaker than market expectations.

China’s National Bureau of Statistics announced that its manufacturing purchasing manager’s index (PMI) fell to 49.2 in February, following a 49.5 reading in January. This reading came in 0.5 points below the key 50.0 expansion threshold and was somewhat below the market expectation of 49.5. This was its third consecutive month of contraction and the lowest level since February 2016. Meanwhile, the non-manufacturing PMI also decreased 0.4 points to 54.3 in February, easing in pace, but within the expansion range. The gloomy findings may reinforce views that the world's second-largest economy is losing steam, after growth last year cooled to a near 30-year low.

According to a preliminary estimate, Japan’s Ministry of Economy, Trade and Industry, announced that industrial production fell 3.7% (seasonally adjusted monthly basis) in January, following a 0.1% decline in the previous month. It was the sharpest decrease in industrial output since January 2018 and was significantly weaker than market expectations of a 2.5% decline. On a year-over-year basis, the industrial production index was unchanged, after a 1.9% contraction in the prior month and beating market expectations of 1.5%. Based on the result, the ministry downgraded its basic assessment, saying production is “pausing,” compared with the previous month’s view that industrial output was “picking up slowly.”

March 1
Statistics Canada announced that growth in real GDP slowed dramatically to 0.4% (on an annualized basis) in the final quarter of 2018, after gaining 2.0% in the third quarter. With this release, StatsCan introduced material benchmark revisions to the data going back to 1961. As a result, first and second quarter growth figures for 2018 were revised lower and overall GDP growth for calendar 2018 came in at 1.8%. This is well below the 3.0% posted for 2017. On a monthly basis, real GDP by industry declined 0.1% in December, suggesting that the economy may have carried some negative momentum into the new year. Coupled with the downward revision, these results are weaker than market expectations. GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

The Institute for Supply Management reported that its PMI moved lower to a 54.2 reading in February. This is a 2.4-point loss from January's 56.6 figure, but remains above the key 50.0 (generally expanding) level for a 30th consecutive month. The reading is below expectations and indicates a deceleration in manufacturing activity.

The IHS Markit Eurozone Manufacturing PMI fell 1.2 points to 49.3 (seasonally adjusted) in February, after a preliminary estimate of 49.2 and following a final 50.5 reading in January. The latest reading pointed to the steepest contraction in the manufacturing sector, slipping below the key 50.0 expansion threshold for the first time since June 2013. Manufacturing output was undermined by the sharpest decline in new work received since April 2013, and export orders (including intra-euro area trade) fell for a fifth consecutive month, its greatest degree for over six years. By country, Germany, the largest economy of the 19-nation euro area, posted the weakest manufacturing PMI figure (47.6), resulting in a 74-month low. These results were marginally above market expectations.

The Nikkei Japan Manufacturing PMI advanced 0.4 points to 48.9 (seasonally adjusted) in February, following a provisional estimate of 48.5, and a final 50.3 reading in January. The composite’s reading pointed to a contraction in the Japanese manufacturing economy, sinking below the key 50.0 expansion threshold for the first time since August 2016, and marking its lowest print since June 2016. The fall in output is a direct result of reduced new order intakes, as new work placed with Japanese goods producers fell at its fastest rate in over 2.5 years. Moreover, the global trade frictions and weak domestic manufacturing demand pose considerable risks to Japan’s goods producers. These results were slightly above the consensus estimate.

The Cabinet Office of Japan announced that its consumer confidence index fell 0.4 points to 41.5 (seasonally adjusted) in February from 41.9 in January. This was the lowest reading since November 2016 and the fifth consecutive monthly decline. These results were somewhat below market expectations. The drop in the index was caused by weaker overall livelihood (-1.1 points) and willingness to buy durable goods (-0.8 points). This survey highlighted consumer sentiment surrounding the current Japanese economy, in addition to concerns regarding the sales tax hike that is set to come into effect later this year.


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