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Weekly Wrap-UpMay 1-5, 2000 |
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Weekly Wrap-UpMay 1-5, 2000 |
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The North American bond markets sold off this week as concern over the magnitude of the Federal Reserve Board's interest rate increase, coming May 16, was top of mind for investors. Technical levels in the bond markets also indicated a move to higher yields which was played out almost perfectly. The bond markets are now pricing in a full 50 basis point move by the Fed at the next confab.
The Bank of Canada is in for a change. The current Governor, Gordon Theissen, announced that he will not be seeking a second term as head of the central bank. Mr. Theissen's term comes to an end in January 2001. The Bank of Canada Governor is appointed to 7 year terms. Speculation points to the second in command at the Bank of Canada to replace Mr. Theissen.
Staying ahead of the Federal Reserve Board was certainly one reason that the Reserve Bank of Australia hiked interest rates 25 basis points this week to 6.00%. The Reserve Bank cited concern about importing inflation, the $AUS weakness, strong private credit demand, solid job creation, and faster wage growth. This is the second 25 basis point move by the Reserve Bank in a month and is an indication that many dollar block currencies are being hurt by the large capital flows into the US. There is a concern that the global expansion may end sooner than expected if countries must increase interest rates as fast, or faster, than the Fed in order to maintain some form of currency stability.
Gold continued to struggle this week as the Swiss Central bank announced its auction schedule. The Swiss intend to sell 120 tonnes of gold between now and September. This is only the short-term plan. Over the next five years, the intention by the central bank is to sell a total of 1300 tonnes of the yellow metal. It truly appears to be the final nail in the old gold standard's coffin. While the gold standard officially came to an end decades ago, the wholesale disposal of central bank reserves is putting any trace of the old foreign exchange mechanism to an end.
Asia was fairly quiet on the week as Japan was closed Wednesday through Friday for the Golden Week celebrations.
Economic data in the US and Canada continue to point to strong economies with labour resources growing tighter. In the US, construction spending rose 4.5% month-over-month (m/m) in March; NAPM moderated to 54.9 from 55.8, while prices paid remained strong at 76; new home sales rose 4.5% m/m; factory orders rose 2.2% m/m; durable goods orders rose 3.5% m/m; non-farm payrolls rose 340,000 pushing the unemployment rate to 3.9%, March non-farm payroll data was revised higher to 458,000 from 416,000; average hourly earnings rose 0.4%; the labour pool decreased 4.1%. These numbers combined with the slowing in productivity growth have forced the market to re-examine the Fed's gradualist approach, and the bond market is now looking for a 50 basis point increase on May 16, from the previously expected 25 basis points.
In Canada, new car sales grew 3.7% year-over-year (y/y); the unemployment rate remain 6.8%, 4,800 new jobs were added over the month of April. The story in the Canadian employment data is not the headline figures, but rather some of the data below the surface. In the report, StatsCan indicated that 97,000 self-employed jobs were lost and 100,000 full-time jobs were created. This is good news for the economy as many self-employed jobs are really disguised unemployment, or at very least under-employment. The Bank of Canada will be hard pressed not to match interest rate moves with the Fed.
The fixed income market fell victim to the inflation bug this week. Investors were reluctant to hold interest bearing assets in the face of increased interest rates by the Fed and the Bank of Canada. As yields in the US long bond rose higher, any break above 6.00% targeted 6.20-6.25% on a technical basis. Without the US Treasury in the market providing a support bid to the long end through its buy-back program, yields rose all week. By the close Friday, the Government of Canada 30 year long bond had added 9 basis points to yield 5.86%, significantly out performing its US counterpart. In the US, the US Treasury 30 year long bond added 22 basis points over the course of the week to close at 6.18%. The Canada/US long bond spread has now at -32 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets had a choppy week, with the US markets finishing in negative territory and the Toronto exchange finishing in the black. This week saw the splitting of Nortel from BCE, Nortel splitting 2 for 1, and GE splitting 3 for 1.
Investors in BCE received their shares of Nortel this week as the company paid out its holding in the high tech firm to shareholders. This was then followed by a 2 for 1 split by Nortel. The flood of extra shares into the market caused some concentration concerns for some investors, as indicated by the record setting volume the day of the split on the TSE. In the US, investors in General Electric participated in a 3 for 1 stock split. All the excitement about all those new shares helped the equity market in the US post a modest gain on Friday, while still finishing down on the week.
The TSE posted a 249.71 point gain, up 2.67%, to close at 9597.32. This puts the TSE up 14.07% year-to-date (ytd). The DJIA lost 156.05 points, or 1.45%, to close down at 10,577.86. The S&P500 lost 1.36% closing at 1432.63, and the Nasdaq lost 1.14% closing at 3816.62. The DJIA, S&P500 and Nasdaq are now down 8.00%, 2.49% and 6.20% year-to-date, respectively.
Next week brings supply to the fixed income markets as the Government of Canada issues $CDA 2.8 billion 5 year bonds, and the US Treasury issues $US 12 billion 5 year notes and $US 8 billion 10 year notes. Economic data is thin this week, with the two most influential releases being retail sales and PPI. The market will be thin ahead of the Federal Reserve Board meeting May, 16. Good trading.
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