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Weekly Wrap-UpJune 12-16, 2000 |
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Weekly Wrap-UpJune 12-16, 2000 |
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The North American bond markets had a lack lustre week of consolidating recent gains. The release of inflation friendly economic data on both sides of the border has investors believing that the Federal Reserve Board and the Bank of Canada will not be raising interest rates in the near future. The next FOMC confab is June, 28. Given the recent talk out of Fed Governors and Presidents, the fear of inflation still courses through their veins. This is an attempt to talk the markets lower, without the need to raise interest rates. Moral suasion is not a good tool for financial market policy implementation.
The Bank of Japan voted this week to leave interest rates unchanged, choosing to leave administered rates near zero. This comes as little surprise to investors as the Japanese economy still remains on a shaky footing. By way of example, the Japanese department store figures released this week indicated that sales declined 2.5% year-over-year (y/y) in May. This is the third consecutive decrease in department store figures. The consumer is not confident enough to spend, when concerned about the next pay-cheque.
Central bankers were also talking in Canada and the US. Federal Reserve Board Chairman Alan Greenspan indicated that it is too early to feel the effects of the Fed tightenings. Recent weak economic data does not make a trend, and the Fed must remain vigilant against the onset of inflation. The Bank of Canada Governor Gordon Thiessen indicated that the productivity gap had been closed and with unemployment running at at decade low 6.6%, he would have no difficulty matching any move by the Federal Reserve Board. Do not expect the Bank of Canada to raise interest rates independent of the Fed.
Economic data released this week had investors salivating at the possibility of the end to the Federal Reserve Board's tightening of monetary policy. Weaker than anticipated numbers are starting to be taken as a developing trend, rather than an aberration. In the US, retail sales fell 0.3% month-over-month (m/m) in May, unchanged with the automotive sector removed; CPI rose 0.1% m/m, with the core rate up 0.2% m/m, overall CPI rose 3.1% y/y, with the core rate up 2.4% y/y; industrial production rose 0.4% m/m, up 5.8% y/y; capacity utilization was unchanged at 82.1% m/m, up from 80.5% in May 1999; building permits fell 4.3% m/m in May, down 9.0% y/y; housing starts fell 3.9% m/m, down 3.5% y/y. In Canada, manufacturing shipments fell 2.8% m/m in April, but rose 9.0% y/y; CPI rose 0.5% m/m, with the core rate up 0.2% m/m, bring headline inflation to 2.4% y/y and the core rate of inflation to 1.4% y/y in May; wage settlements rose 2.1% y/y in May.
The fixed income markets are beginning to believe that the Federal Reserve Board and the Bank of Canada may be on hold for the near-term. However, all the 'Fed speak' for the past two weeks remains bearish. The loss of momentum in the debt markets this week is not positive, as all the good news is already priced into the markets. The front end has rallied to the point that any potential Fed tightening has been priced out of the market, resulting in a steeper yield curve.
The Government of Canada 30 year long bond was unchanged at 5.56% after a quiet, thin week of trading. The US Treasury 30 year long bond shed 2 basis points to close the week yielding 5.87%. The thin volumes and decreasing volatility indicate that the fixed income markets are consolidating their gains and moving into a trading range. Investors are more likely to active at the extremes of the range than in the middle of the range, due to the risk/reward payoff. Look for further consolidation before the next Federal Reserve Board meeting June, 28. (A basis point is 1/100th of a percent.)
The North American equity markets had a mixed week with Toronto setting a record high, while the major US exchanges wallowed. Toronto continues to benefit from the rally in commodity prices, along with the high tech linked Nortel, and JDS Uniphase. Profit and earnings warnings from techs, consumer products and banks in the US did little to help investors capitalize on their view that the Fed will be on hold for the near-term.
Cisco issued a profit warning this week, as did HomeDepot. Both cited increasing interest rates and falling earnings. Two major US banks also cautioned analysts about future earnings due to concern about increasing loan/loss provisions and shrinking margins. Corel posted a warning regarding deep losses as a result of plunging revenues.
Toronto looked past the concerns at Corel, and focused on the Seagrams potential merger with Vivendi of France, Ranger Oils rescue by white knight Canadian Natural Resources, and strong growth possibilities from market darling Nortel. Lucent, Corning and Nortel all benefitted from the investment communities optimism over fibre optics growth.
The TSE added 306.82, or 3.15% to close at 10,035.66 Friday, after a record high close of 10,110.56 Thursday. This puts the stealthy TSE up 19.28% year-to-date (ytd). The DJIA lost 164.76 points, or 1.55%, to close down at 10,449.30. The Dow is down 9.11% ytd. The S&P500 eeked out a positive week adding 0.52% to close at 1464.46, while the Nasdaq lost a marginal amount to close down 0.37%, at 3860.56.
Next week adds thin data to an already thin market. International trade data will be released in both Canada and the US. Canadian retail trade and US current account data will also be released. The big market item of the week will be the OPEC meeting June, 21. After that the market will be waiting on the Fed - June, 28. Good trading.
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