The Playbook – June 24, 2019

June 21, 2019 • Playbook

The Playbook

The Playbook

Weekly Commentary – June 24, 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 26           Durable Goods Orders May 19 0.4% -2.1%
June 26           Wholesale Inventories Adv May 19 0.5% 0.8%
June 27           GDP Growth Rate Q/Q Final Q1 19 3.1% 2.2%
June 28 Chicago PMI June 19 53.0 54.2
June 28 PPI May 19 1.5% 0.8%

Key Earnings:
June 24: Coffee Holding Co Inc., Elite Pharmaceuticals Inc., WageWorks Inc.
June 25: AeroVironment Inc., Barnes & Noble Education Inc., FedEx Corp.
June 26: General Mills Inc., HB Fuller Co., IHS Markit Ltd., OMNOVA Solutions Inc.
June 27: Apogee Enterprises Inc., Nike Inc., Peak Resorts Inc., ReneSola Ltd.
June 28: Alliance Media Holdings Inc., Carnival Corp., Constellation Brands Inc.
Source: Trading Economics, Yahoo Finance

Market Focus

Canadian inflation picks up
The latest data from Statistics Canada revealed that its consumer price index (CPI) rose 2.4% (year-over-year) in May. While this is not an alarming pace of inflation, it is the fastest annual growth rate for this index since October 2018 (also 2.4%). All eight of the major sub-indexes recorded gains during the month with recreation, education and reading (+1.6%) reporting the largest monthly advance. On an annual basis, food prices (+3.5%) have posted the strongest gain. More important for investors, despite the broad move higher, the Bank of Canada’s main inflation target, CPI common, rose only 1.8% (year-over-year). This remains below the mid-point of their 1% to 3% target range and has been remarkably stable since the end of 2017. During the past 17 months, this has only fluctuated between 1.8% and 1.9%. The bank would have to see much clearer evidence that inflation was moving outside of its target range before deciding to make a move on monetary policy.

Powell sees first dissenting vote
The U.S. Federal Reserve (Fed) met market expectations by leaving interest rates unchanged at its latest policy window. However, for the first time since Jerome Powell became Chairman of the Board of Governors of the Federal Reserve in February 2018, there was a dissenting vote at the policy meeting. James Bullard, the President of the St. Louis Federal Reserve Bank, voted instead to lower interest rates by 0.25%. Dissenting votes are not particularly uncommon, but this shift does suggest that there will be increasing pressure to lower interest rates from inside the Fed. In addition, the updated economic forecasts released at the announcement point to lowered expectations for the Fed’s key inflation measure for both 2019 and 2020. This provides additional support for a move to ease monetary policy. Analysts continue to suggest a total of 0.50% in rate cuts should be anticipated over the balance of 2019.

Japan’s volatile trade balance reflects global tensions
Japan’s finance ministry announced a trade deficit of ¥967.1 billion in May, the first deficit in four months and a dramatic swing that entirely reversed the cumulative ¥911.1 billion surplus seen in the prior three months. Weakening exports to China, amid its trade tensions with the U.S., were held out as the main culprit. Exports to China, Japan’s largest trading partner, slumped 9.7% from a year earlier, a third straight decline. Japan’s overall exports fell 7.8% on the same basis, a sixth consecutive decline. Imports fell 1.5% following a 6.4% increase in the previous month. The volatile trade data suggest a rapidly deteriorating growth outlook for the trade-reliant economy. Without a meaningful improvement in trade over the near term, it appears quite unlikely that Japan will be able to repeat the 2.2% (annualized) GDP growth figure recorded in the first quarter.

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 17
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.

June 18
Statistics Canada reported that manufacturing sales fell 0.6% in April, following an upwardly revised 2.6% surge in March (originally reported as 2.1%). Despite the monthly decline, sales on a year-over-year basis are now up 3.1%. With the market looking for another advance, this report is weaker than expected. These data are closely watched as manufacturing can create high-value employment and the sector continues to run with employment levels below those seen during the previous business cycle.

June 19
Statistics Canada reported that consumer prices rose 0.3% (seasonally adjusted, monthly basis) in May, matching the increase in April. On a year-over-year basis the CPI was up 2.4%, higher than the 2.1% reading in April. While all eight major components increased month over month, the recreation, education and reading index (+1.6%) reported the largest gain. The Bank of Canada’s measures of core inflation were also generally higher, ranging from 1.8% to 2.3%, but “CPI common,” which the central bank says is most closely correlated with the output gap, was steady at 1.8%. The overall figures are somewhat higher than market expectations.

The U.K. Office for National Statistics reported that consumer prices increased 0.3% (M/M) in May, easing from a 0.6% gain in April. Accordingly, this pushed its annual CPI growth rate down to 2.0% in May, following a 2.1% increase in the previous month and brought the measure back in line with the Bank of England’s 2.0% medium-term inflation target. The core inflation rate, which excludes the price of energy, food, alcohol and tobacco, fell to 1.7%, its lowest annual measure since January 2019. The monthly and annual CPI growth figures were in line with market consensus.

Destatis, the federal statistics office of Germany, reported that producer prices unexpectedly declined -0.1% (M/M) in May, following a 0.5% reading in April. It was its third fall in the last four months and well below market consensus. On a year-over-year basis, annual producer price index (PPI) inflation advanced 1.9%, easing from 2.5% in the previous month. This pointed to the measure’s first sub-2.0% reading since April 2018. The annual figures were also below market consensus.

Trade Statistics of Japan, a division of the Ministry of Finance, revealed that Japan posted a trade deficit of ¥967 billion in May, after recording a downwardly revised ¥56.8 billion surplus in April. Customs exports fell 7.8% (Y/Y), after dropping 2.4% in the previous month and marked the sixth straight slide and biggest decline since January. Imports fell short of market expectations and weakened to -1.5% (Y/Y) in May, from an upwardly revised increase of 6.5% in April. Overall, these trade numbers were subject to negative effects resulting from Japan’s unprecedented 10-day Golden Week holiday, in addition to a slowdown caused by the U.S.-China trade spat. The country’s total trade deficit was smaller than market expectations.

The U.S. Federal Reserve left interest rates unchanged following its latest two-day policy meeting. The target range for the federal funds was left at 2.25% to 2.50%. The Fed last raised interest rates by 0.25% on December 19, 2018. The press release that accompanied the announcement continued to highlight the unbroken strength in both the labour market and the broader economy. However, the Fed also, once again, mentioned weakening in business fixed investment (i.e., plant and equipment costs). The announcement of no change to interest rates at today’s meeting is in line with expectations. Monetary policy, as decided by the Fed, has significant influence on both the U.S. and global economies. Its lead is often followed by policymakers in other countries.

June 20
The U.S. Department of Labor announced that initial jobless claims totalled 216,000 (seasonally adjusted) in the week ending June 15, a decrease of 6,000 from the previous week's unrevised level of 222,000. The four-week moving average was 218,750, an increase of 1,000 from the previous week's unrevised average of 217,750. These results are marginally stronger than consensus estimates.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region continued to grow in June but at a much less robust pace. The Philly Fed general business conditions index tumbled to 0.3 from 16.6 in May. These results are well below market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

The monetary policy committee (Copom) of the Central Bank of Brazil (BCB) left unchanged its key Selic rate at a record low of 6.50%. Interestingly, the press release that accompanied the announcement stated that the “global outlook has become less challenging, owing to changes in the prospects for monetary policy in major economies” (versus prior “the global outlook remains challenging”). However, Copom lowered its inflation projection for 2019 from 4.0% to 3.8% and held constant its targets of 4.0% in 2020 and 3.75% in 2021, with a range of plus or minus 1.5 percentage points. The BCB indicated that it will continue to take the steps necessary to continue deflating consumer prices. Notably, the bank hinted that adopting tighter monetary policy in the future is likely, and that it will be discussing changes to its 2022 inflation goal during next week’s monetary council’s meeting. The announcement to leave rates unchanged was in line with expectations.

At its latest monetary policy meeting, the policy board of the Bank of Japan (BOJ) met expectations to leave its short-term policy rate for excess reserve unchanged at -0.1%, as it has been since early 2016. The bank also stated that it will purchase Japanese government bonds (JGBs) to keep the 10-year yields around zero percent. The BOJ intends to adjust its pace of purchases of JGBs at an annual rate of ¥80 trillion. The accompanying statement of monetary policy indicated that the economy is “expanding moderately” and this is expected to continue should global risks not heighten. In line with previous statements, the BOJ suggests that rates will need to remain at current “extremely low” levels at least until mid-2020. Following the meeting, BOJ Governor Haruhiko Kuroda stated that the bank will act “without hesitation” given harsher economic conditions.

The Bank of England’s (BOE) monetary policy committee left its key bank rate unchanged at 0.75% and its quantitative easing ceiling at £435 billion gilts, setting its policy to meet its 2.0% inflation target. Nevertheless, the BOE said it expects to markup rates in the next two to three years should a smooth Brexit occur on October 31. Importantly, this makes the BOE stand out among other major central banks such as the U.S. Federal Reserve and European Central Bank, both of which have signalled future rate cuts and stimulus. Notably, the bank stated that the economy is likely to slow in the second quarter and inflation will drop below its 2.0% annual target, which reflects the fading boost from stock building in Q1 2019 and declining energy prices. In the scenario of a no-deal Brexit, the central bank suggested that it is ready to cut rates depending on the economy’s response. The decision to leave rates unchanged was in line with market expectations.

June 21
Statistics Canada reported that retail sales edged up 0.1% (seasonally adjusted) in April, a third consecutive gain. Sales were up in seven of 11 subsectors, representing 74% of retail trade. Higher sales at gasoline stations and food and beverage stores were the main contributors to the gain. On a year-over-year basis, sales growth stood at 3.7%. These results are below consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

According to a flash estimate, the IHS Markit Germany Manufacturing PMI rose to 45.1 in June, following a 44.3 reading in May. The latest reading was still well below the 50.0 expansion threshold and pointed to the smallest contraction in manufacturing activity since February. Output shrank for the fifth straight month. At the same time, new orders fell for the tenth straight month which was linked to weakness in export demand and the auto industry. Additionally, average purchase prices at manufacturers dropped at the fastest pace since April 2016 which pushed overall input cost inflation in both manufacturing and services to a 34-month low. The overall reading was above market expectations.


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