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Weekly Wrap-UpFebruary 14-18, 2000 |
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Weekly Wrap-UpFebruary 14-18, 2000 |
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The North American bond markets continue to outperform market fundamentals in the long-end of the yield curve. Short-dated bonds in both Canada and the US are pricing in several more rate hikes by the respective country's central bank. Inflation remains tame and the large government surpluses in Canada and the US are adding to the fervor for the long bond. Truth being told, there are more rate hikes in the near future from the Federal Reserve Board and the Bank of Canada.
In a speech addressing monetary conditions in Canada, Bank of Canada Governor Gordon Thiessen indicated that inflation would likely fall in the upper half of the Bank's target range this year. This implies that the Bank of Canada will match the Federal Reserve Board move for move in the upcoming months. The Federal Reserve Board Chairman, Alan Greenspan, made his semi-annual hike to the Hill to testify to the House Banking Committee. Chairman Greenspan indicated that the Fed must stay alert t the fact that real interest rates have not yet risen enough to bring growth of demand into line with that of potential supply. This Humphrey-Hawkins testimony was significantly more hawkish on inflation that the minutes of the previous FOMC meeting, or the statement from the Fed after the last increase in interest rates a week ago.
Oil had a good run this week as the black gold traded over $US30 for the first time since the Gulf War in 1991. North American inventories continue to decline as cold weather in Canada and the US northeast push up demand for heating oil. As well, there are concerns that the OPEC nations will maintain the quotas agreed to in March 1999. There are cracks appearing in the alliance, as countries like Mexico, Venezuela and Saudi Arabia begin to mull over how to increase production without causing a collapse in prices.
Economic data in Canada this week indicated that the economy is growing at a very strong rate, with talk of upward momentum in GDP. Demand in the US, Europe, and Asia all add to strong domestic consumer demand in closing the productivity gap in Canada. This week existing home sales rose 2.1% in January; manufacturing shipments rose 1.3% month-over-month, and 9.3% year-over-year for December; the trade surplus was $CDA 2.7 billion in December and $CDA 34 billion for 1999 (the third highest annual trade surplus on record).
The same economic picture was painted south of the border as that in Canada - tame inflation and robust growth. In the US, housing starts rose 1.5%; industrial production rose 1.0%; capacity utilization remained high at 81.6; PPI was unchanged, with the core rate down 0.2% month-over-month; CPI was +0.2%, with the core rate up 0.2% in the month, while it rose 2.7% and 1.9% at the core for the year; the US trade deficit rose to $US 271.3 billion in 1999, a 65% increase over 1998.
The long bonds on both sides of the border were on fire this week. The dealers on the Street were "bid, without" as once they sold long bonds to accounts they could not buy them back. The long end of the market is definitely not trading on economic fundamentals, but rather perception. One analyst has been heard calling the 2029 long bond in Canada the '29.coms'. Government budgetary surpluses along with debt retirement programs and relatively tame inflation have kept investors at the long end of the yield curve. With the Canadian Government stating that the maximum in debt retirement is approximately $CDA 3 billion per year, it will take until approximately 2160 to retire all of the countries Federal Government debt (depending on compounding assumptions). No shortage of bonds there! The US is a different story, as all of the government's surplus may be used for debt retirement, even with that taken into account it would still take approximately 20 years to retire all the US deficit (depending on compounding and economic expansion assumptions.)
The Government of Canada 30 year long bond shed 22 basis points to close at 5.91% this week, 40 basis points lower in yield than the current 2 year bond. In the US, the Treasury 30 year long bond rallied 13 basis points to close at 6.15%. The Canada/US 30 year long bond spread moved deeper into negative territory this week, closing at -24 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets were a mixed bag of volatility on the week. The Nasdaq, and the Nasdaq North - the TSE - posted gains, while the DJIA and S&P500 were down on the week. The increasing reliance of the markets on ever fewer stocks to keep the markets in positive territory is a dangerous sign for the equity markets. With individual investors 'paying-up' for growth potential, they may not be properly compensated for the risks they are assuming. Caveat Emptor.
The usual suspects drove the TSE to three record high closes on the week, before profit taking at the week's end took some of the lustre off the market. Nortel, BCE, Research in Motion, Ballard, JDS Uniphase all contributed to the move. Thomson Corp also added to the excitement with the announcement that the firm intends to sell its newspapers in Canada, with the exception of the Globe and Mail. While stocks like Alcoa, and Gilette were hit as investors continue to drive 'clicks' higher at the expense of 'bricks'. There are a lot of value based equities in the market, but with high tech and telecom momentum trading all the rage, value investors are getting hammered.
The TSE added 138.81 points to close the week at 9295.51, up 1.52%. The DJIA shed 205.69 points, or 1.97%, to close at 10,219.52. The S&P500 joined the Dow, losing 2.96% to close at 1346.09. The Nasdaq added 16.29 points, or 0.37%, to remain in the black on the week closing at 4411.74.
Next week brings a Presidents' Day holiday shortened session in the US, 2 year supply from the US Treasury, and a few economic releases late in the week. There is little in Canada to drive the market one way or the other this week. Look for the yield curve to continue to play silly games. Good trading.
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