The Playbook – September 23, 2019

September 20, 2019 • Playbook

The Playbook

The Playbook

Weekly Commentary – September 23, 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
  Toshi K. Okada, B.MOS
Analyst, Investment Strategy
Assante Wealth Management

Richard Wylie’s podcast will return the week of September 30, 2019.

A PDF version of The Playbook is also available for download.

Economic Calendar*

Date Release Period Consensus Previous
September 25 New Residential Sales August 19 5.1% -12.8%
September 26 Gross Domestic Product Q/Q Q2 19 2.0% 3.1%
September 27 Personal Income August 19 -0.3% 0.1%
September 27 Personal Consumption August 19 0.4% 0.6%
September 27 Durable Goods Orders August 19 -1.2% 2.1%
September 23 Wholesale Sales July 19 0.50% 0.6%
September 23 Markit Manufacturing PMI Flash September 19 45.9 43.5
September 24 Ifo Business Climate September 19 94.4 94.3
September 26 Gfk Consumer Sentiment October 19 9.8 9.7
Euro Area        
September 23 Markit Manufacturing PMI Flash September 19 48.7 47.0
September 27 Economic Sentiment September 19 102.5 103.1
*Source: Trading Economics

Key Earnings Calendar**

September 23: Akerna Corp., Cantel Medical Corp., NetSol Technologies
September 24: AutoZone Inc., BlackBerry Ltd., CarMax Inc., Cintas Corp., IHS Markit Ltd., IsoRay Inc., Jabil Inc., NIKE Inc., SYNNEX Corp.
September 25: AAR Corp., H.B. Fuller Company, KB Home, Pier 1 Imports Inc., Worthington Industries Inc.
September 26: September 26: Accenture PLC, Actuant Corp., CalAmp Corp., Conagra Brands Inc., FactSet Research Systems Inc., Micron Technology Inc., Vail Resorts Inc.
**Source: Seeking Alpha

Market Focus

Canadian retail sales signal growing debt burden

The latest data from Statistics Canada revealed a 0.4% advance in retail sales during July. The increase was due largely to a 1.5% jump in sales at motor vehicle and parts dealers, the largest monthly increase for the subsector since February. The broader gain, which was the first increase since April, came on the back of a downwardly revised 0.1% decline in June and was enough to lift annual sales growth to 1.2%, the fastest pace since April. Excluding motor vehicles and gasoline, retail sales declined 0.1% on the month. In volume terms, which exclude the effects of price changes, sales advanced 0.8% year-to-date, the slowest rate of growth since 2009. The advance falls short of consensus estimates for a greater recovery and may indicate higher debt servicing costs, which reached a record high in the second quarter, are hampering consumer consumption. The weaker-than-expected figures may suggest that consumer spending remained soft in the prior quarter, which could put further pressure on the Bank of Canada to lower interest rates.

Fed cuts rates but leaves mixed signals

As anticipated by the markets, the U.S. Federal Reserve (Fed) cut its benchmark federal funds rate to a range of 1.75% to 2.25%, a decrease of 0.25%. The press release that accompanied the announcement contrasted the continued strength of the U.S. job market and household spending with weak business investment and exports. In addition, the release continued to highlight muted domestic inflationary pressures. The Fed also released an update to its economic forecast. Not surprisingly, only very minor changes to expectations for gross domestic product (GDP) and the unemployment rate were made. Still, analyst focus quickly turned to the voting by the members of the committee. The rate cut was passed by a vote of 7-3. However, the dissenting votes were mixed with one vote for a 0.50% rate cut and two for no change. Further, looking into the “dot plots,” signs of ongoing divisions within the Fed appear. Seven of 17 policymakers projected one more quarter-point rate cut in 2019. Five others, in contrast, see rates as needing to rise by the end of the year. This heightened uncertainty on the monetary policy front can be expected to fuel additional market volatility ahead of the next policy meeting on October 29 and 30.

Australia’s unemployment rate hits one-year high

Australian unemployment climbed in August as the labour force swelled to a fresh record, signalling spare capacity in the labour market and setting the backdrop for additional interest rate cuts by the Reserve Bank of Australia (RBA). In its latest report, the Australian Bureau of Statistics revealed that 34,700 jobs were created in August, slowing from a revised increase of 36,400 in July. However, the headline gain was heavily tilted towards part-time work as full-time jobs dropped 15,500 while part-time surged by 50,200. The unemployment rate edged up to 5.3%, the highest measure in 12 months. Meantime, the participation rate rose to 66.2%, highlighting the increasing level of labour market slack, while underemployment and underutilization advanced to 8.6% and 13.8%, respectively. This comes after RBA President Philip Lowe cut rates twice in 2019, pulling down the policy rate to a record low of 1.0%, and reduced the estimated level of full employment in the economy to 4.5%. Futures markets currently suggest that the bank will cut rates by another quarter point at its October 1 meeting.

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

September 16
Statistics Canada reported that foreign investors sold $1.2 billion of Canadian securities from their holdings in July, the fourth reduction in five months. Canadian investment in foreign securities increased to $12.5 billion, the largest investment since October 2018. Foreign investment was broadly in line with expectations. Weak foreign investment reflects the relative attractiveness of Canada as an investment destination and can influence the value of the currency.

September 17
Germany’s ZEW Indicator of Economic Sentiment jumped 21.6 points to -22.5 points in September, following a -44.1-point reading in August. Despite this being the first increase in five months and the largest since December 2014, September’s outcome was still among the weakest in seven years. However, the improvement was still stronger than market consensus of -37.0. Over the same period, a separate gauge measuring investors’ assessment of the economy’s current conditions dropped 6.4 points and stood at a final reading of -19.9. This was the gauge’s weakest reading since May 2010 and well below market consensus of -15.0. Though the ZEW findings are on the sturdier side of market expectations, the readings will not be enough to calm rising concerns that the German economy could be in recession by the close of this quarter.

Statistics Canada reported that manufacturing sales fell 1.3% in July, following a downwardly revised 1.4% decline in June. In line with the material declines, sales on a year-over-year basis are now down 1.9%. This report is much weaker than the market consensus. These numbers are closely watched as manufacturing can create high-value employment and job levels remain well below the pre-recession peak.

The Fed announced that industrial production expanded 0.6% in August after declining 0.1% in July. On a year-over-year basis, industrial production was reported to have gained 0.4%. Capacity utilization for total industry rose to 77.9% from 77.5% in July but was down from 79.3% a year earlier. 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.

September 18
Statistics Canada reported that consumer prices were flat (seasonally adjusted, monthly basis) in August, after rising 0.4% in July. On a year-over-year basis, the Consumer Price Index (CPI) was up 1.9%, the smallest annual gain since March (also 1.9%). Not surprisingly, soft energy prices, particularly for gasoline, were largely responsible for the overall moderation in the annual inflation rate. The Bank of Canada’s three measures of core inflation showed continued stability in underlying inflation, ranging from 1.8% to 2.0%. CPI common, which the central bank says is most closely correlated with the output gap, edged lower from 1.9% to 1.8% in this report. The overall figures are nominally weaker than market expectations.

The U.S. Census Bureau announced that housing starts in August were at a seasonally adjusted annual rate of 1,364,000. This is 12.3% above the revised July estimate of 1,215,000 and is 6.6% above the August 2018 rate of 1,279,000. At the same time, the number of building permits issued in August was at a seasonally adjusted annual rate of 1,419,000. This is 7.7% above the revised July rate of 1,317,000 and is 12.0% above the August 2018 figure of 1,267,000. These figures are far stronger than market expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The U.K. Office for National Statistics revealed that consumer prices advanced 0.4% (M/M) in August, following a flat reading in July. This was lower than expected, reducing annual inflation from July’s 2.1% to 1.7% and comfortably below the Bank of England’s (BoE) 2.0% medium-term target. It was the weakest annual inflation reading since December 2016 and below market consensus. The monthly core CPI, which excludes the volatile prices of energy, food and tobacco, edged up 0.4% (M/M) in August, while the underlying annual core rate slipped 0.4 percentage points to 1.5% in August. This was its lowest mark since November 2016 and twelfth straight sub-2.0% outturn. The overall results will likely be taken into consideration by BoE officials ahead of the bank’s next monetary policy meeting on September 19.

Eurostat, the European Union’s statistical office, reported that consumer prices advanced 0.1% (M/M) in August, rebounding from a 0.5% decline in July. As a result, annual inflation remained flat (Y/Y) in August, following a 1.0% advance in the previous month. This matched both its flash reading and the final July result. The monthly core CPI, which excludes the volatile prices of energy, food and tobacco, and at which the European Central Bank looks to for policy decisions, jumped up from -0.6% in July to 0.2% (M/M) in August. As a result, the underlying annual core rate remained flat at 0.9% in August. The overall figures were roughly in line with market consensus.

The Fed cut interest rates following its latest two-day policy meeting. This is the first rate cut since July 31 and the second rate cut under current Federal Reserve Chair Jerome Powell. The target range for the federal funds is now set at 1.75% to 2.00%, a decrease of 0.25%. The press release that accompanied the announcement contrasted the continued strength of the U.S. job market and household spending with weak business investment and exports. In addition, the release continued to highlight muted domestic inflationary pressures. The announcement of a 0.25% interest rate cut 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.

September 19
The BoE's monetary policy committee met expectations by leaving its key bank rate unchanged at 0.75% and its quantitative easing ceiling at £435 billion gilts, setting its monetary policy to meet its 2.0% inflation target. The statement accompanying the announcement noted that the trade war between the U.S. and China has “intensified” and the “outlook for global growth has weakened.” The minutes of the meeting highlighted that “political events could lead to a further period of entrenched uncertainty” and that for as long as this persisted, “domestically generated inflationary pressures would be reduced.” Importantly, however, the minutes suggest that the BoE is preparing for a postponement to the Brexit deadline and will act when a departure plan is solidified. Prime Minister Boris Johnson has stated that the U.K. will leave the European Union with, or without, a transition deal on October 31. The central bank’s next policy meeting is scheduled for November 7.

The Australian Bureau of Statistics (ABS) reported that employment increased 34,700 (seasonally adjusted) to 12,926,900 in August. Full-time employment decreased by 15,500 to 8,818,000 during the month, however, part-time employment spiked by 50,200 to 4,108,900. At the same time, the unemployment rate edged up 0.1 percentage points to 5.3%, the highest level in 12 months, while the participation rate ticked up 0.1 percentage points to 66.2%. In line with recent gains, overall employment was up 2.5% from 12 months earlier. These results are marginally weaker than market expectations. The rise in unemployment suggests that the level of slack in the labour market exceeds the rate of employment growth, which may likely drive the RBA to cut its key cash rate by a quarter point for the third time this year.

The U.S. Department of Labor announced that initial jobless claims totaled 208,000 (seasonally adjusted) in the week ending September 14, an increase of 2,000 from the previous week's revised level. The previous week's level was revised up by 2,000 to 206,000. The four-week moving average was 212,500, a decrease of 750 from the previous week's revised average. The previous week's average was revised up by 500 to 213,000. These results are stronger than consensus estimates.

According to the U.S. National Association of Realtors, existing-home sales increased 1.3% to a seasonally adjusted annual rate of 5.49 million units in August from 5.42 million in July. This is the highest level since March 2018. Sales are now 2.6% above the 5.35 million-unit pace in August 2018. These results are stronger than consensus expectations. Activity in the housing market has a significant "ripple" effect on the broader economy.

The Federal Reserve Bank of Philadelphia reported that manufacturing activity in the region was mixed in September. The Philly Fed General Business Conditions Index fell to 12.0 from 16.8 in August. These results are marginally stronger than market expectations. This data release is followed as an indicator of broader manufacturing sector trends.

September 20
Statistics Canada reported that retail sales advanced 0.4% (seasonally adjusted) in July, the first increase in three months, following June’s 0.1% decline. Sales were down in six of 11 subsectors, representing 71% of total retail trade. The headline gain was bolstered by stronger sales at motor vehicle and parts dealers (1.5%) and cannabis stores (14.3%), which exceeded over $100 million in sales for the first time. Year-over-year sales growth accelerated modestly to 1.2% from 1.0%. These results are slightly weaker than consensus estimates. Since consumer spending accounts for over 60% of Canadian economic activity, it is critical for overall GDP results.

The Ministry of Foreign Affairs of Japan reported that consumer prices were flat (M/M, seasonally adjusted) in August, after rising 0.1% in July. On a year-over-year basis, the CPI was up 0.3%, the smallest annual gain since February (0.2%). Annual core CPI, excluding fresh food prices, rose 0.5% on the year in August, down from 0.6% in July and matching consensus estimates. This latest measure was the lowest reading since July 2017 (also 0.5%) and well below the Bank of Japan’s 2.0% inflation target.


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