Weekly Wrap-Up June 28 - July 2, 1999

The North American bond markets rallied into the Federal Reserve Board meeting this week on expectations that the Fed would not go into a rate hike cycle. The FOMC meeting produced the 25 basis point increase in short-term rates that the market expected. Current Fed Funds rate now stands at 5.00%, with no change in the discount rate. Fed Chairman Alan Greenspan indicated that the Fed had shifted it's monetary stance back to neutral from a tightening bias. By the week's end the market was second guessing the strength of the rally and started to give back its earlier gains. The North American equity markets rallied on the week, as Fed Chairman Greenspan's comments that the Fed was looking to remove the liquidity provided to the market last fall indicated that a rate hike cycle was unlikely. The 25 basis point hike in rates, along with the move back to a neutral bias all added the markets' advance.

The North American bond markets rallied into the Federal Reserve Board meeting this week on expectations that the Fed would not go into a rate hike cycle. The FOMC meeting produced the 25 basis point increase in short-term rates that the market expected. Current Fed Funds rate now stands at 5.00%, with no change in the discount rate. Fed Chairman Alan Greenspan indicated that the Fed had shifted it's monetary stance back to neutral from a tightening bias. By the week's end the market was second guessing the strength of the rally and started to give back its earlier gains.

Comments made by the Fed Chairman two week ago indicated that the Fed was looking to take back the liquidity that was provided to the global markets in the dark days last fall. This means that the Fed is looking to raise rates a total of 75 basis points. This is good news for the markets as it provides a target and an expectation of things to come. While the market remains ahead of the Fed in some parts of the curve, this weeks early rally got ahead of itself. Look for the bond markets to give back some of their gains, as supply is a big concern on both sides of the border.

The bond markets were rather illiquid as the weekend approached. In Canada, the markets were closed Thursday for Canada Day celebrations. Both markets had an early close on Friday as the US wound down for the Independence Day celebrations and holiday on Monday. Next week will be a short one, with many investors beginning their summer vacations. Thin volumes should prevail.

On the international front, Indonesia reported that the GDP for the second quarter rose 1.82%. While this is not a stellar number, it is a continuing sign of the turn around which is occurring slowly in the region. South Korea announced that it expected to see growth in the 5-6% area this year, after the 5.8% contraction in economic activity witnessed in 1998. The global economic recovery may be another trigger used by the Fed to raise rates. So be aware of the double edged sword of global economic activity, and US labour markets, as keys for the US Fed.

Economic data released this week indicated that the economy is healthy on both sides of the border. In Canada, GDP for the month of April rose 0.3% on a month-over-month basis, or a 2.7% annualized rate; Canadian productivity for 1998 was reported to be +0.7%, down from the +2.9% in 1997. In the US, leading indicators rose 0.3% in May; consumer confidence reached a record cycle high of 138.4; new home sales dropped 5.1% month-over-month; Chicago PMI rose to 60 from 57.9, with prices paid rising to 57.2 from 52.5; NAPM Index rose to 57 from 55.2, while prices paid rose to 53.5 from 52.5; US non-farm payrolls rose 268,000, the unemployment rate rose to 4.3% from 4.2% as the labour force expanded; hourly wages rose 0.4%, up 3.7% year-over-year.

The Canadian 30 year long bond shed 12 basis points on the week to close at 5.63%. The US Treasury 30 year long bond closed at 6.01%, a drop of 13 basis points. The Canada/US long bond spread remains firmly entrenched in negative territory at -38 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets rallied on the week, as Fed Chairman Greenspan's comments that the Fed was looking to remove the liquidity provided to the market last fall indicated that a rate hike cycle was unlikely. The 25 basis point hike in rates, along with the move back to a neutral bias all added the markets' advance.

With the perception that the Fed remains diligent with respect to inflation, and that the earnings reports that will begin to come out next week will be strong, the equity markets set new highs south of the border. The DJIA added 586.68 points to close at a record high 11,139.24. The S&P500 set three highs to close up 5.71% on the week, while the Nasdaq also set several new highs, closing up 7.38% on the week. The Canadian market lagged the US markets, as the closure for the Canada Day celebrations never allowed the market to get going again into the weekend. The TSE rose 2.86%, or 198.58 points, to close at 7137.83.

Next week brings a holiday shortened week in the US and Canadian employment data on Friday. Thin markets will continue as institutional investors wait on the sidelines for the new corporate issues which are coming to market, or simply slow down operations for the summer holiday season. Good trading.

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