Weekly Wrap-Up May 10-14, 1999

The bond markets suffered the weight of supply, inflationary economic data and poor technical conditions. Strong US CPI data indicated that consumer price increases are broad based in nature. Many market participants had anticipated a sharp rise in the oil and gas component of the index, but prices were higher on a large number of goods, and services. The monthly increase in the headline CPI number was the largest month-over-month increase since October 1990. This prompted the bond markets to sell off in dramatic fashion, as headline inflation fundamentals deteriorate and fears of Federal Reserve Board interest rate increases ran through the market. The equity markets had a choppy week, as new highs were met with selling on inflation concerns, and fear of the next Fed policy move. Through-out the week the markets were buoyed by 'Big Blue' which posted a record high on the week. Analysts at Merrill Lynch and CS First Boston both raised their 6-12 month targets to $US 270. To the moon. However, the strength of IBM was not enough to counter the selling in the financial sector on interest rate fears. Markets ended lower on both sides of the border - except the Nasdaq.

The North American bond markets suffered the weight of supply, inflationary economic data and poor technical conditions. Strong US CPI data indicated that consumer price increases are broad based in nature. Many market participants had anticipated a sharp rise in the oil and gas component of the index, but prices were higher on a large number of goods, and services. The monthly increase in the headline CPI number was the largest month-over-month increase since October 1990. This prompted the bond markets to sell off in dramatic fashion, as headline inflation fundamentals deteriorate and fears of Federal Reserve Board interest rate increases ran through the market.

Adding to some of the market excitement was the announcement out of the US this week that Treasury Secretary Robert Rubin would resign on 4 July, and his announced replacement is Deputy Treasurer Lawrence Summers. Since Summers is a known commodity, and agrees with Rubin's strong $US policy, little reaction was generated by the markets. There was more for investors to focus on.

It is noteworthy to report that the OPEC quotas announced to take effect 1 April, have met with an 82% compliance rate to date. Saudi Arabia also indicated that it would push for further cut-backs in production in order to maintain and improve crude oil prices.

On the economic front, many significant numbers were released this week. In Canada, housing starts decreased 3.3% on a month-over-month basis. The data indicated that single family dwelling starts increased by 9.1%, while multi-family starts decreased 17.8%. In the US, import prices rose 0.8% month-over-month, but declined 0.3% ex-oil, import prices declined 1.9% year-over-year; retail sales rose 0.1%, up 0.4% ex-autos; industrial production rose 0.6%; capacity utilization increased to 80.4 from 80.1; PPI rose 0.5%, up 0.1% ex-food and energy; CPI rose 0.7%, up 0.4% ex-food and energy. The increase in CPI was broad based encompassing more than just energy products, and the largest monthly increase since October 1990.

The Canadian bond market had to take down $CDA 2.5 billion Government of Canada 10 year bonds, as well as about $CDA 1.5 billion Province of British Columbia bonds, and several corporate issues. The fact that it held in as well as it did in the face of the deterioration in the US bond market is impressive. Due to the massive sell-off in the US, investors may not have focused on Canada to the same extent as the US market. The Government of Canada 30 year long bond added 6 basis points to close the week at 5.68%. In the US, the market had to digest $US 15 billion 5 year and $US 12 billion 10 year bonds auctioned by the US Treasury. The supply, added to the weak technical picture and inflation concerns pushed the US long bond 10 basis points higher, to close the week at 5.91%. The Canada/US long bond spread moved deeper into negative territory at -23 basis points, as Canada outperformed the US market by 4 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets had a choppy week, as new highs were met with selling on inflation concerns, and fear of the next Fed policy move. Through-out the week the markets were buoyed by 'Big Blue' which posted a record high on the week. Analysts at Merrill Lynch and CS First Boston both raised their 6-12 month targets to $US 270. To the moon. However, the strength of IBM was not enough to counter the selling in the financial sector on interest rate fears. Markets ended lower on both sides of the border - except the Nasdaq.

Merger activity saw a couple of announcements this week worth noting. Microsoft announced a $US 600 million deal with Nextel; HSBC announced that it would pay $US 10.3 billion for Republic Bank of New York; rumours abound that Chevron will offer $US 42 billion for Texaco.

The TSE saw gold shares and financial shares move lower, dragging the index down on the week. Gold lost 2.62% on the week, in the wake of the British Tresury announcement on its intended gold sales. Toronto finished the week down 72.36 points, at 1.04% at 6886.50. This leaves the major Canadian market up 6.18% on the year, but 11.96% below its high water mark. The DJIA shed 118.27 points, or 1.07%, to finish the week at 10913.32. This was 1.75% lower than its record high close on Thursday. The S&P500 lost 0.54%, closing at 1337.80, while the Nasdaq added 0.97%, climbing to 2527.86.

Next week brings the Federal Reserve Board's Open Market Committee meeting. Many market participants believe that the Fed will shift it's monetary policy position to a tightening bias. This would indicate that the Fed's next interest rate move would likely be to raise rates. The Bank of Japan is also meeting, and the Bank of Canada will release it's monetary conditions report this week. As well, there are a host of economic data being released which could influence the markets. Good trading.

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