Weekly Wrap-Up April 26-30, 1999

The North American fixed income market started the week well, only to succumb to inflationary fears and technical trading. All is well, until the GDP numbers, combined with the Chicago Purchasing Managers Index showing stronger than anticipated prices paid and inflationary concerns emerged pushing Canada and the US market yields higher. The Dow, S&P 500 and Nasdaq all posted record closes on the week, but the Dow was the only exchange to close the week in positive territory. The TSE was down marginally as the cyclical resource sector and the tech stocks battled for supremacy on the week.

The North American fixed income market started the week well, only to succumb to inflationary fears and technical trading. The Canadian bond market benefited mid week from supply in the long end. Insurance companies were seen rolling out of the 8%/2023 and into the 5.75%/2029. This caused the dealers to get short in a rising market. A well bid auction catches the traders short and the bid takes over. Traders hate to be caught short a small issue held in strong hands. All is well, until the GDP numbers, combined with the Chicago Purchasing Managers Index showing stronger than anticipated prices paid and inflationary concerns emerged pushing Canada and the US market yields higher.

With the potential uptick in inflation many market watchers are talking of the next Federal Reserve move on monetary policy to be a tightening. The Fed meeting later this month takes on greater significance now as all eyes focus on whether or not the Fed will shift to a tightening bias from its current neutral stance. This means that the Bank of Canada is likely to continue to hold monetary policy steady until the Fed meeting. With the $CDA strengthening, and GDP numbers continuing to show only marginal signs of growth, the Bank of Canada would probably like to lower rates again.

There are concerns growing among international analysts that the stock market recovery, and subsequent increase in corporate asset values, may cause the economic reforms that began in the region to stall. As the water level rises, many hazards are hidden just below the surface.

Economic data was plentiful, and had market ramifications. In the US, consumer confidence rose 0.9 to 134.9 in March, existing home sales rose 0.9% month-over-month, 3.7% year-over-year; durable goods rose 2.0% in March and February was revised from -4.9% to -3.9%; employment cost index rose 0.4% in the first quarter; GDP rose 4.5% in the first quarter, with final domestic demand rising 6.7%; price deflator was +1.4%. In Canada, the raw materials price index rose 5.5% in March (the result of crude oil), but down 2.9% year-over-year; GDP for March was up 0.1% month-over-month, an increase of 2.4% year-over-year. The Chicago Purchasing Managers Index was also released in the US last week, displaying a larger than anticipated increase in the prices paid component.

The Canadian bond market managed to hang on to its auction driven gains on the week, outperforming the US market significantly. The improving $CAD, as well as stronger commodity prices have international investors interested in the Canadian market again. The Government of Canada long bond shed 4 basis points to close the week yielding 5.44%. The US market was hit hard at the end of the week as inflation fears spooked the market. The US Treasury 30 year long bond added 6 basis points to close the week yielding 5.66%. The Canada/US 30 year spread moved 10 basis points further into negative territory at -22 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets were mixed on the week. The Dow, S&P 500 and Nasdaq all posted record closes on the week, but the Dow was the only exchange to close the week in positive territory. The TSE was down marginally as the cyclical resource sector and the tech stocks battled for supremacy on the week.

Merger and acquisition announcements were not as pronounced this week, as the market is still trying to digest the large number of combinations announced since the beginning of the year. However, there were a couple of deals worth noting: GEC announced a $US 4.5 billion bid for ForeSystems in order to better position itself in internet switching equipment; Amazon.com announced that it would spend $US 645 million on rare books, web navigation and e-commerce companies. Q:How do you value an internet company? A: Price to last news release.

The TSE fell 13.79 points, or 0.20%, to close the week at 7,014.70. The DJIA was the performer of the week, posting three record high closes mid-week, and finishing up 99.37 points, or 0.93%, to close at 10,789.04. The S&P 500 posted two record high closes, but finished the week down 1.60%, while the Nasdaq, also posting a record close on the week, finished down 1.85%.

Next week brings the all important unemployment data in both Canada and the US. The National Association of Purchasing Management Index early in the week could also be of importance to the market, given the reaction to the Chicago number. A large increase in the prices paid component will trigger another round of selling in the fixed-income markets. Good trading.

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