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Weekly Wrap-UpFebruary 28 - March 3, 2000 |
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Weekly Wrap-UpFebruary 28 - March 3, 2000 |
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The North American bond markets were better bid through out the week. However, the lack of follow through buying after the tame US non-farm payroll number indicates that the market may be poised to give back some of its recent gains. There is no doubt that the Federal Reserve Board in the US will increase interest rates again this year. Some analysts are beginning to think that the next three to six months do not look as positive for interest rates as they did a week ago. The term extension rally induced by the coupon payments and bond maturities early in the week is likely to stall ahead of next weeks three speaking appearances by the Federal Reserve Board Chairman Alan Greenspan.
The Government of Canada released its long-awaited, and well publicized budget. The next five years will see a cumulative tax burden reduction to Canadian households of $CDA 58 billion, while spending will increase to education, health care, and the military. Debt reduction is anticipated to continue at the Governments stated pace of $CDA 3 billion annually. The increase in Canadian GDP is doing the work of reducing the Debt:GDP ratio, rather than the Government seizing the opportunity to retire larger amounts of Federal debt. The US are projecting being debt free in the next 20 years, while at the current pace the Canadian Government will be debt free around 2200.
The OPEC cartel began discussions about the possibility of increasing crude oil output, in an effort to redress the supply/demand imbalance. The concern is that sustained high oil prices will be a fiscal drag on the economies of the globe at a time when demand is increasing. Low oil prices in 1998 and early 1999 acted as a tax cut to many economies, now with oil near $US 32/barrel economic activity may be constrained by this commodity tax. The OPEC nations recognize this and are grappling with the need to increase production with the desire to maintain stable prices. Saudi Arabia, Venezuela, and Mexico all desire an increase in global production, while Kuwait, Iran and Iraq are sceptical. Commodity analysts warn that any increase in production may come as too little, too late, for the North American driving season. Look to pay up at the pumps for a while.
Economic data released this week was both bond and equity market friendly. Data on both sides of the border indicate strong economic growth with moderating inflationary pressures. In the US, personal income grew 0.7%, personal savings rose 0.5%, the savings rate rose to 1.5% from 1.0% in January; non-farm payrolls rose 43,000 in February; the unemployment rate rose to 4.1% from 4.0%. In Canada, the fourth quarter real GDP rose 4.6%, third quarter real GDP was revised up to 5.5% from 4.7%; annualized GDP rose 4.2%; the GDP price deflator rose 2.6% in the fourth quarter, rising 1.7% on an annualized basis.
The bond market faced supply and cash inflows this week as maturities and coupon payments on the first of the month put money into investors hands. The long end of the yield curve benefitted from the increased cash available and the yield curve returned to its inverted ways. The Government of Canada issued $CDA 350 million Real Return (inflation linked) 2031 bonds. The auction was relatively well received once the sector had been cheapened up by the market.
Negative for the bond market this week was the inability to sustain any rally momentum beyond the US non-farm payrolls report. This was a bond friendly number and should have seen more buying as a result. The market had no appetite for bonds after the payrolls report, indicating that a correction may be setting up.
The Government of Canada 30 year long bond shed 6 basis points on the week, closing at a yield of 5.82%. In the US, the Treasury 30 year long bond closed at 6.12%, after rallying 4 basis points on the week. The Canada/US long bond spread is at -30 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets posted strong gains this week, as bottom fishing on the DJIA and momentum trading on the Nasdaq and TSE pushed the indices higher. The techs and telecoms continue to be the market darlings, with the usual suspects doing the majority of the work. The IPO of 3Comm's Palm division had the market all worked up. After rising 150% the first day, Palm investors saw some profit taking due to valuation concerns. The inflation friendly non-farm payrolls report in the US allowed the markets to post strong closings on the week.
Research in Motion added to its recent gains as it announced deals with both AOL and Compaq. Duetsche Telecom indicated that it may be in the market for a US based phone/telecom company which put a bid into that sector. Nortel, BCE, Lucent, JDS Uniphase, and Global Crossing were all beneficiaries of the rumour.
The TSE had a strong week, adding to its gains so far this year. The Toronto Exchange added 321.70 points, to close up 3.52% at 9462.90. The TSE has posted a 12.47% return year-to-date. The DJIA had its first strong week in many. The Dow posted a 505.08 point increase, or 5.12%, to close at 10,367.20. Even with this strong performance the Dow is still down 9.83% year-to-date. The S&P500 added 5.69% to its total, closing at 1409.17. The S&P is still down 4.09% this year. Once again this week the Nasdaq posted the strongest returns. The tech laden market rose 324.29 points, or 7.06%, to close at a record high 4914.79. Talk on the Street is not if, but when, the Nasdaq breaks 5000.
The upcoming week has little in the way of data releases. In Canada, the employment report and housing starts will be released, as well as a 2 year bond auction to add supply to the market. In the US, the Federal Reserve Board Chairman Alan Greenspan will speak three times over the course of the week. As well, productivity data will be released south of the border. Good trading.
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