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Weekly Wrap-UpJune 5-9, 2000 |
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Weekly Wrap-UpJune 5-9, 2000 |
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The North American bond market had a mixed week. Economic data is beginning to indicate that the Federal Reserve Board's tightenings to date may be taking some of the steam out of the US economy. Fed officials continue to speak about the need for vigilance with respect to inflation, and that there has not been a long enough time horizon for any monetary tightening effects to be felt.
Catching up to the Fed and the Bank of Canada this week was the European Central Bank (ECB). The ECB raised rates 50 basis points to 4.25%. This is the fifth rate increase in seven months. While comments out of the ECB indicated that the increase was made in an effort to slow growth, and keep inflation in check, the real reason is to maintain a minimum interest rate difference with the US in defence of the Euro.
The OPEC nations are beginning to make noises about increasing production quotas again. The next meeting of the cartel will be June, 21 and posses an opportunity for a rise in output. The OPEC nations put a $US 28/barrel average price over a twenty day period as the trigger price for an increase in production. This target has been breached, but don't look for an automatic trigger effect to kick in. Many oil exporters believe that the increase in production is not necessary at this time and should wait until the next meeting in September.
Good news out of Australia this past week, as the unemployment rate fell to a 10 year low. The reported unemployment rate declined to 6.6% from 6.7%. Can only mean that the Reserve Bank of Australia will be keeping a close watch on inflationary pressures. Look for higher interest rates in Australia, especially with the tourist stimulus the Olympics will bring in.
Economic data released this week have investors thinking that the Federal Reserve Board, and the Bank of Canada may be finished with their respective interest rate increases. In the US productivity for the first quarter rose 3.7% year-over-year (y/y), and grew 2.4% quarter-over-quarter (q/q); consumer credit rose 7.8% y/y in April, down from the 9% increase recorded in March; headline Producer Prices Index was unchanged, while the core was up 0.2% month-over-month (m/m). In Canada, the capacity utilization rate rose to 87.6% in the first quarter, making this the sixth consecutive quarterly increase; housing starts dropped 10.4% m/m, due primarily to a concrete truck driver strike in Ontario; the unemployment rate fell to 6.6% from 6.8% in April, the lowest level in 24 years.
The bond market in both Canada and the US is looking for nothing but good news over the near term. The short end of the yield curve is pricing in only a 40% chance of a Fed increase at the next FOMC meeting June, 28. The talk out of members of the Federal Reserve Board continues with a hawkish tone, trying to prevent the markets from getting too far ahead of themselves. The strong employment data hurt the Canadian market, which underperformed the US market. The US market did well as a result of the inflation friendly PPI release. Although the lack of follow through buying indicates that the investor is beginning to get wary of establishing long positions at the current yield levels.
The Government of Canada 30 year long bond added 3 basis points on the week to close at a yield of 5.56%. This may also have been a little profit taking after last weeks 15 basis point rally. The US Treasury 30 year long bond shed 3 basis points this week, to close yielding 5.89%. This adds to the 14 basis point rally last week. US investors are beginning to see light at the end of the Fed tightening tunnel.
The North American equity markets were generally weaker, with the exception of the Nasdaq. Profit warnings out of the consumer products giant, Proctor and Gamble, did little to extend last weeks impressive rally. The ruling on splitting Microsoft into two companies did little to support the markets. A little profit taking can be added to the mix, just for good measure. Investors are concerned about the next Federal Reserve Board move, and are waiting to hear the Fed Chairman speak.
After the impressive rally in the equity markets last week, primarily driven by the weak US employment report, investors decided to take some profits. The Nasdaq experienced its largest weekly move in history last week, so there was some speculative money being taken off the table. News out of P&G, warning of a second quarter of weaker than expected earnings did little to help matters. Nor did the news that Microsoft would be split into two separate companies. Some traders continued to talk of the low volumes and the potential for the early establishment of a summer trading range. It's not long until those vacations start pulling investors out of the office.
The TSE lost 18.83 points over the week to close down 0.19%, at 9728.84. The DJIA shed 180.70 points, or 1.67%, to close at 10,614.06. The S&P lost 1.37%, closing at 1456.95. The Nasdaq posted a 1.16% gain, after a near 19% gain last week, to close at 3874.84. The talk among equity portfolio managers is that the inflation fever of early spring was over done and the Fed is is done. We'll see.
Next week brings more inflation related data. In Canada, CPI, manufacturing output, wage settlements, and existing home sales will be released. In the US CPI, retail sales and factory production are all on tap. Also of note, both Federal Reserve Board Chairman Alan Greenspan, and Bank of Canada Governor Gordon Thiessen are speaking this week. Investors will keep a close ear out for their comments. Good trading.
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