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Weekly Wrap-UpJuly 3-7, 2000 |
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Weekly Wrap-UpJuly 3-7, 2000 |
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The North American bond markets chopped around in a holiday shortened week, ahead of unemployment data release. With the Federal Reserve Board leaving rates unchanged, at 6.50%, last week the markets were looking for more good news to help them hold onto recent gains. The employment data did little to dissuade investors of the current view that the Fed is on hold, and may be finished, with respect to interest rate increases. The future markets are pricing in about a 35% chance of another interest rate increase at the August, 22, FOMC meeting.
Both the Canadian and US markets suffered from thin volumes as a result of holiday celebrations. The Canadian market was closed Monday for the Canada Day celebration, and effectively closed Tuesday as well. The US markets suffered holiday illiquidity as few investors or traders bothered to show up, instead opting for a 5 day week-end including the July 4, Independence Day holiday Tuesday. Employment data released at the end of the week gave investors little reason to trade up a storm.
Economic data released this week had investors speculating that the Federal Reserve Board is finished with interest rate increases, and that the Bank of Canada may have little reason to match any future Fed increase - except to defend the dollar. In Canada, retail sales dropped 0.2% month-over-month (m/m) falling 1.1% year-over-year (y/y); building permits fell 0.8% m/m, but remain 0.8% above levels at this time last year; unemployment was unchanged in May at 6.6%, with corresponding declines in full-time employment and the participation rate. In the US, NAPM declined to 51.8, and the prices paid component fell; leading indicators fell 0.1% m/m in May, factory orders rose 4.1% m/m in May more than erasing the 3.8% decline in April; unemployment fell to 4.0% from 4.1%; the pool of available labour declined 3.4% (big Fed number); hourly wages increased 0.4% m/m in May.
The bond markets posted marginal activity in the face of positive economic data and the increased likelihood of the Fed standing firm in the near-term. The amount of good news that is priced into the markets after the 18 basis point rally last week, left investors struggling with adding to positions at the high end of the recent range. With so much good news priced into the market, many investors stayed on the sidelines after the employment data was released. One analyst joked the only volatility to be seen by bond investors this summer will be on the golf course.
The Government of Canada 30 year long bond shed 1 basis point to close the week yielding 5.53%. The Canadian long end shed 15 basis points in the previous week, as the Bank of Canada did not need to follow the Fed. In the US, the Treasury 30 year long bond added a basis point to close with a yield of 5.87%. After the Fed left interest rates unchanged last week, the US long bond rallied 18 basis points. The market is losing momentum and may correct to higher yields, as this weeks spate of inflation friendly data did little to interest rates. (A basis point is 1/100th of a percent.)
The North American equity markets all finished in positive territory on the week. The TSE posted three record high closes, and the US markets all pushed higher as investors believe that the Federal Reserve Board is finished tightening monetary policy. The market may have done better had it not been for some earnings warnings and negative analyst comments.
Entrust Technology was hit hard as the company announced that the upcoming quarterly earnings would miss analyst expectations. IBM fell on the basis of analyst expectations that 'Big Blue' is not as profitable as might be expected. The chip makers also slouched on expectations that supply will exceed demand. Intel and H-P fell in sympathy.
The TSE added 184.63 points, or 1.81%, to close at a record high 10,380.28. The TSE posted three record high closes this week, and most of the move up was based on Nortel. Not until the rally Friday did the broader market look like it was participating. The DJIA added 189.09, or 1.80%, to close at 10,635.98. The S&P500 posted a 1.67% increase to 1478.90. While the tech heavy Nasdaq closed above 4000 at 4023.20, up 1.44%.
Next week brings PPI and industrial production in the US, which will be keenly watched in order to determine whether the US economy is slowing or not. As well, second quarter earnings begin to be released next week. Good trading.
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