Weekly Wrap-Up April 5-9, 1999

The bond markets were bid all week, as the combination of last Friday's US non-farm payrolls number, and rate cuts across Europe kept investors interested. The low number of new jobs created, combined with a decrease in the size of the labour force, put investors at ease with respect to the prospects of wage driven inflation in a tight labour market. The belief that the Fed is on hold for the near-term and that demand for goods and services will accelerate in Europe has the equity markets well bid. The DJIA, S&P 500 and Nasdaq all posted record highs over the week. Companies in the financial sector, technologies - particularly internet related shares, and multi-nationals with European exposure all benefitted on the week. The '.com' stocks were on fire again.

The North American bond markets were bid all week, as the combination of last Friday's US non-farm payrolls number, and rate cuts across Europe kept investors interested. As a result of the markets being closed last Friday for the Good Friday Holiday, bonds had some catch-up work to do in reacting to the subdued US labour market. The low number of new jobs created, combined with a decrease in the size of the labour force, put investors at ease with respect to the prospects of wage driven inflation in a tight labour market.

The Bank of England cut interest rates in the UK by 25 basis points to 5.00% this week. As well, the European Central Bank cut interest rates a larger than expected 50 basis points, to 2.50%. The central bank in Norway matched the ECB rate cut with a 50 basis point cut in the domestic rate. The newly created European Central Bank wanted to appear to be responding independently to the economic needs of the 11 member Eurocurrency union. The rate cut will placate politicians and economic critics alike, setting the stage for stable rates through-out the rest of the year. Of note is the fact that the domestic demand component of the European econmy is not that weak, the economies of Europe are being hampered by poor export demand in Eastern Europe and Asia. Rate cuts at home will not stimulate export markets. Look for the Euro to weaken against the major currencies.

The rate decreases in Europe had Bank of Canada watchers speculating on whether another rate cut is in the offing in Canada. The front-end of the market has priced in a further 25 basis point cut, and all eyes are focused daily on the Bank of Canada's 9:00am window for action. With the bond markets doing better, and belief that there is another rate cut coming, the major financial institutions in Canada lowered their mortgage lending rates by 20 basis points this week. A five year fixed rate mortgage now has a headline number of 6.80% (but if you negotiate, you will do better).

Economic data released this week reinforced the time tested and true formula of healthy economic growth with low inflation. In the US, PPI was released for March showing an increase of 0.2%, with the core rate unchanged; on a year-over-year basis PPI rose 0.8%, with the core rate up 1.8% - down form last months reading of 2.3%. In Canada, new vehicle sales rose 9.7% on a month-over-month basis, building permits dropped 3.4% month-over-month, down 6.8% year-over-year; the unemployment rate remained unchanged at 7.8%. The employment figures showed a decrease in part-time jobs, and an increase in full-time jobs, while the labour force contracted over the month.

In Canada, the 30 year bond rallied 9 basis points to close the week at 5.29%. The US 30 year Treasury bond closed the week 23 basis points lower at 5.47%. The impressive rally by the US market was fueled initially by the friendly employment report of last Friday, but was sustained by investors belief that the Federal Reserve Board will be on hold for the near-term as a result of central bank activity in Europe. Canada underperformed the US market as domestic corporate issuers took the opportunity to use the firm market tone to bring $CDA 1.4 billion in new issues. This supply had to be digested before the market could do better. The Canada/US 30 year spread widened from -30 basis points to -16 basis points as the US market outperformed over the week. (A basis point is 1/100th of a percent.)

The North American equity markets benefitted from the inflation friendly non-farm payrolls data last week and the interest rate cuts in Europe. The belief that the Fed is on hold for the near-term and that demand for goods and services will accelerate in Europe has the equity markets well bid. Companies in the financial sector, technologies - particularly internet related shares, and multi-nationals with European exposure all benefitted on the week.

Merger and acquisitions pointed to continued consolidation in the telecom and entertainment sectors. New Corp., owned by Rupert Murdoch, plans to buy 50% of Fox/Liberty for $US 1.43 billion; GTE will buy a 50% stake in Ameritech Corp's wireless operations for $US 3.27 billion. Partnership agreements also helped move the equity markets forward as Seagrams announced a joint venture with BMG to sell CD's on-line, and Chapters Books announced an agreement to provide services via the AltaVista Canadian search engine. The '.com' stocks were on fire again.

The TSE added 264.96 points, or 4%, to close at 6889.77. This puts Toronto up 6.23% on the year, but still 11.92% below it record high close in April 1998. The DJIA added 341.33 points, or 3.47%, to close at 10,173.84. The Dow posted three record high closes over the course of the week. The S&P500 added 3.98%, closing at 1,348.35, and setting four record high closes. The Nasdaq also added 4%, closing at 2593.05, with four record closes on the week as well.

Next week brings the release of more inflation related data in the US. After the close on Friday, Compaq announced that their 1st quarter earnings would not meet Street expectations due to weak personal computer sales. Look for the markets to open weaker on Monday on that news. Good trading.

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