Weekly Wrap-Up May 3-7, 1999

The bond market continued the sell-off of last week. Breaking several technical levels over the week, including breaching 5.75% in the US market, sent buyers running for cover. The market has taken on a sell rallies tone, rather than the buy dips view that had prevailed. The North American equity markets were mixed on the week as large cap cyclical stocks drove the market. Comments by Federal Reserve Board Chairman Alan Greenspan put the market into a quandary as the Fed Chairman indicated that some equity prices are beyond justifiable levels. In Canada, the TSE was hurt by golds and concerns that expected earnings do not warrant current market valuations.

The North American bond market continued the sell-off of last week. Breaking several technical levels over the week, including breaching 5.75% in the US market, sent buyers running for cover. The market has taken on a sell rallies tone, rather than the buy dips view that had prevailed. Corporate supply on both sides of the border did little to help, as the market heads into quarterly refunding in the US market, and 10 year supply in Canada.

The Bank of Canada surprised many market participants this week by lowering its target interest rate 25 basis points to 4.75%. The Canadian central bank had been on watch for some time, with an ease in monetary policy expected. The surprise was the timing. Many market participants had expected the Bank to deliver its monetary conditions paper, and then wait until the Federal Reserve Board meets later this month to get a lock on potential Fed policy before acting. The Bank of Canada is clearly concerned with the inflation picture in Canada, and the sluggish nature of GDP growth, as it joins the European Central Bank, the Exchequer in Britain, the Fed in the US, and the Bank of Japan in an effort to re-inflate their respective economies. The Fed is providing liquidity to the world in order to stave off financial crisis at home.

The government of the Province of Ontario introduced its budget for the next fiscal year. The three main features involve tax cuts, increased spending on health care, and increased spending on education. There were no surprises in the budget, and the Ontario government is on track to balance its books by 2000-01, as planned. The day after tabling the budget, Provincial Premier Mike Harris announced he is leading his Progressive Conservative Party to the polls June, 3. Spring is in the air, and with all three political parties campaigning can you smell the fertilizer.

The UK Treasury sent a small panic into the gold markets this week, announcing the sale of over half of its current gold reserves. In 1999-2000 Britain will sell 125 metric tonnes of gold, followed by a further sale of 350 metric tonnes over the medium term. Current reserves are 715 metric tonnes. The funds raised from the sale of gold reserves will be invested in holdings of 40% $US, 40% Euro, and 20% Yen.

On a positive note out of Asia, the Indonesian government announced that GDP rose 1.34% in the first quarter of 1999, on a quarter-over-quarter basis. Signs of a tepid recovery are emerging. Note that on a year-over-year basis the economy contracted by 10.34%.

Economic data released this week provided mixed signals to the market. In the US, personal income rose by 0.4%, while spending also rose 0.4%, the savings rate declined 0.2%; National Association of Purchasing Management survey reported activity at 52.8, versus 54.3 last month with the prices paid component remaining below 50; non-farm payrolls rose 234,000, the unemployment rate rose to 4.3% from 4.2% as the labour force expanded; average hourly earnings rose 0.03 to 13.11. In Canada, the help wanted index rose 1.4% month-over-month, rising 5.6% year-over-year; unemployment rose to 8.3% from 7.8% as 15,000 new jobs were added, but 96,000 new applicants joined the labour market, pushing the participation rate up to 66%.

The bond market in Canada is being tarred with the same technical weakness brush that is dragging down the US bond markets. Economic fundamentals remain strong in Canada, and the spectre of value eroding inflation is some distance off (as in off the radar screens). The Canadian 30 year long bond added 18 basis points in yield to close the week at 5.62%. This puts the Canadian long bond above the technical 5.60% level, and could mean further weakness in the near-term. The US market did not fair much better, as the US Treasury 30 year bond added 15 basis points to close the week yielding 5.81%. Concern exists in the bond markets that the Fed will move to a tightening bias at the next FOMC meeting later this month. This could mean further selling of bonds. (A basis point is 1/100th of a percent.)

The North American equity markets were mixed on the week as large cap cyclical stocks drove the market. Comments by Federal Reserve Board Chairman Alan Greenspan put the market into a quandary as the Fed Chairman indicated that some equity prices are beyond justifiable levels. In Canada, the TSE was hurt by golds and concerns that expected earnings do not warrant current market valuations.

The TSE shed 55.84 points to close the week at 6958.86, down 0.80%. The Toronto Exchange is up 7.29% year to date, and 11.04% below its high water mark of April 1998. The DJIA, on the other hand, set two record high closes, including the week's close of 11,031.59. The Dow was up 2.25% on the week adding 242.55 points, bringing its gains on the year to 20.15%. The S&P500 added 0.74% closing at 1345.00, while the Nasdaq lost 39.32 points to close the week at 2503.62, leaving it up a mere 14.18% on the year.

Next week brings a host of supply in the bond markets as the US Treasury auctions 5 year and 10 year bonds, and the Government of Canada comes to market with 10 year bonds. As well, there are a host of corporate deals lined up to come to market. Supply could weigh heavy on an already weak bond market. Economic data next week includes retail sales figures, PPI, CPI, capacity utilization and industrial production. Market participants will be watching carefully for signs that might trigger the Fed. Good trading.

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