Weekly Wrap-Up May 15-19, 2000

The North American bond market witnessed another week of see-saw action. The bond markets rallied into the Federal Reserve Board's expected 50 basis point increase in short-term interest rates, to 6.50%. The initial thought being that the Fed was ahead of the inflation curve. As the week progressed this thinking came into question as traders and investors sold their positions on concerns that the Fed may have some distance to go. Actions by the Fed prompted other central bankers into action as well. The equity markets paralleled the bond markets this week rallying into the Fed FOMC meeting and selling off for the rest of the week. The belief among investors at the beginning of the week was that the Fed would do whatever was necessary to maintain the 'Goldilocks' economy. This was coupled with the feeling that the Fed is finished rate hikes for the time being also helped the markets early in the week. However, equity investors soon woke up to the reality that the Fed is not done yet.

The North American bond market witnessed another week of see-saw action. The bond markets rallied into the Federal Reserve Board's expected 50 basis point increase in short-term interest rates, to 6.50%. The initial thought being that the Fed was ahead of the inflation curve. As the week progressed this thinking came into question as traders and investors sold their positions on concerns that the Fed may have some distance to go. Actions by the Fed prompted other central bankers into action as well.

The morning after the Fed action had been taken the Bank of Canada joined the rush to higher short-term interest rates, matching the Feds 50 basis point move. The Bank of Canada's overnight rate is now set at 6.00%. The rate increase has done little for the Canadian dollar, which continues to weaken against the $US. Traders feel that the Bank of Canada may not match the Fed going forward, which is $CDA negative.

Others raising interest rates this week included the Reserve Bank of New Zealand followed the Fed with a 50 basis point increase to 6.50%. The Hong Kong Bank Association raised rates 25 basis points to 4.75%, and the Philippines raised rates 50 basis points to 10.00%. For the Philippines this is the third rate increase in a month. The country is facing a currency crisis and is attempting to stem the flow of funds. The only notable absence was the Bank of England which is widely expected to wait until early June to raise rates again.

The FOMC committee stated that the risks are weighted mainly towards conditions that may generate heightened inflation pressures in the foreseeable future. Adding, that the increases in demand have increased in excess of even the rapid pace of productivity driven gains in potential supply, exerting continued pressure on resource prices. The disparity between the growth in demand and potential supply will continue to foster inflationary imbalances. With statements like that you know that the Fed is not finished yet.

As a result of the increase in short-term interest rates by the Bank of Canada, the major lenders raised the rates they lend at for mortgages. In Canada, a five year mortgage rose to 8.75%. This is the highest rate since September of 1995.

Inflation may pop up in your morning jolt. This week fourteen representatives of regional coffee growers met in London to discuss the establishment of an OPEC-like cartel to control the global supply of coffee beans. Look for a grab at your wallet in the morning when you grab a java if the meeting is successful.

The economic data released this week was thin, but again pointed to a robust economy. In Canada, retail sales rose 2.1% month-over-month (m/m) in March, with a 6.7% increase year-over-year (y/y); CPI fell 0.3% headline and rose 0.1% core m/m, pushing the headline figure to 2.1% y/y with core up 1.3% y/y in March.

The bond market rallied into the Fed rate hike and sold off afterwards. Many had believed that the Fed was getting ahead of the inflation curve, but the statements out of the Fed clearly indicate that inflation is still a concern. The early week rally also triggered a technical resistance level which brought fast-money accounts in selling. The markets real concern is the implications to Fed policy of a Presidential election November 4. The Fed has a meeting in June, August, October, and December left this year. Fed Watchers believe that the Fed will be handcuffed at the meeting prior to the election and doesn't like to raise rates before the Christmas holidays, leaving the June and August confabs for any further adjustment to monetary policy. If more rate hikes are coming, and they are, they will be sooner rather than later.

The Government of Canada 30 year long bond added 4 basis points over the week to yield 5.84%. IN the US, the Treasury 30 year long bond added 1 basis point to close yielding 6.20%. It is interesting to note that the long bond in the US is not getting all hyped about buyback announcements anymore. The Treasury's repurchase program seems to be fully priced into the markets. (A basis point is 1/100th of a percent.)

The North American equity markets paralleled the bond markets this week rallying into the Fed FOMC meeting and selling off for the rest of the week. The belief among investors at the beginning of the week was that the Fed would do whatever was necessary to maintain the 'Goldilocks' economy. This was coupled with the feeling that the Fed is finished rate hikes for the time being also helped the markets early in the week. However, equity investors soon woke up to the reality that the Fed is not done yet.

This is the first time since the Fed started to reduce liquidity in the markets through an increase in monetary policy that the tech laden Nasdaq did not rally. Maybe the belief that the new economy, or should that be 'cash-flow-negative' economy, is not immune to interest rates and the availability of capital. Or maybe it is just the recognition that some of these new economy companies are not going to survive, a la Boo.com. The high profile e-tailer simply ran out of money and could not raise anymore. Apparently investors want a return on the investment not a blackhole down which money disappears. Watch more e-businesses fail as they burn cash at a rate faster than they can reload.

The TSE and the Dow Jones managed to hang onto small gains this week, while the S&P500 and the Nasdaq closed in the red. The TSE added 81.34 points, or 0.88%, to close at 9293.14. The DJIA added 17.48 points, up 0.16%, to close at 10,626.85. The S&P500 lost 14.01, or 0.99%, to close down at 1406.95. The Nasdaq lost 138.66, down 3.93%, to close at 3390.40. Again the Nasdaq gets the goat horns for the week. Look for more of the same as technical levels (200 day moving average) begin to fall.

Next week brings the US vote on China vis-a-vis trade, which could pave the way for entry in to the WTO. As well, US Q1 GDP revision will be made, but no real impact on the market. Toronto comes back from the Victoria Day long weekend and the US heads into a long weekend, so look for markets to remain thin. New York is expected to wind down early on Friday. Good trading.

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