Weekly Wrap-Up August 9-13, 1999

The North American bond markets closed in the black this week as a weaker than expected PPI number in the US fueled a short covering rally. The markets are focused on economic data, any sign of inflation, and supply. The Federal Reserve Board meeting 24 August, 1999, has the market concerned about the magnitude and the number of possible rate hikes going forward. Given that the Federal Reserve Board Chairman Alan Greenspan has indicated that the Fed is looking to remove the excess liquidity added to the markets last fall, a minimum 25 basis point hike should come as no surprise to the market.

The North American bond markets closed in the black this week as a weaker than expected PPI number in the US fueled a short covering rally. The markets are focused on economic data, any sign of inflation, and supply. The Federal Reserve Board meeting 24 August, 1999, has the market concerned about the magnitude and the number of possible rate hikes going forward. Given that the Federal Reserve Board Chairman Alan Greenspan has indicated that the Fed is looking to remove the excess liquidity added to the markets last fall, a minimum 25 basis point hike should come as no surprise to the market.

The US fixed income swap market certainly believes that the interest rate level in the US is set to rise. Swap spreads in the US market continue to trade on the wide side. The 10 year swap spread is at levels wider than during the Russian debt melt-down last August. Swap spreads tend to widen out as investors believe that interest rates are going to move higher, as they try to 'fix' their long-term interest rate payable limiting costs.

In Japan, bank lending fell in July, the sharpest decline ever recorded. This is the fourth consecutive month of record lending declines. Many observers believe that the decrease in an example of banks showing greater discipline towards lending, thereby increasing the credit worthiness of the banks. This would be welcome news in a country where the health of the entire banking community remains in question. Elsewhere in Asia, Thailand announced a business recovery plan aimed at aiding the country's faltering industries. Also good news for the Asian region.

For the first time this month, Boris Yeltsin has fired the Russian Prime Minister, Stepashin, and replaced him with a former high ranking secret police bureau member, Putin. The newly announced Prime Minister has made it a priority to crush the Muslim rebellion in the former Soviet Union.

Economic data released this week showed a continuing robust economy with little signs of significant price pressures. In the Canada, housing starts declined 4.5% month-over-month in July. In the US, retail sales rose 0.7% in July, while June's figure was reduced to -0.2% from +0.1%; PPI rose 0.2%, while the core rate remained unchanged; the Atlanta Federal Reserve Bank report of area economic activity showed an increase in the prices paid portion of the index.

The Canadian bond market had to digest some supply this week as the Government of Canada issued $CDA 2.8 billion 5 year bonds. Investors showed good demand for the issue, and the deal went well. The Government of Canada 30 year long bond finished at 5.92%, lower by 1 basis point on the week. In the US, investors had to chew through a significant amount of supply, again. This week the US Treasury issued $US 15 billion 5 years, $US 12 billion 10 years, and $US 10 billion 30 year bonds. The amount of supply made the mid-week trading rather sloppy. However, the smaller than expected PPI number put a bid back in the market and the bond finished stronger. The US 30 year long bond finished the week yielding 6.10%, 6 basis points lower than last week. (A basis point is 1/100th of a percent.)

The North American equity markets were all stronger on the week as economic data and strong earnings and commodity prices fueled a corrective rally. Investors felt that the correction of the past several weeks had been overdone, and some bottom fishing took place. Canadian aluminium producer Alcan announced a deal that would have made it the world's largest aluminium producer, only to be topped a day later by Alcoa when it announced a deal to acquire Reynolds.

The TSE benefitted from the rising commodity markets, closing the week at 7006.16, up 127.36 points, or 1.85%. The markets south of the border had a much stronger week, responding to the continued subdued tone of the PPI. The DJIA finished the week at 10,973.65, up 2.42% or 259.62. The S&P500 closed at 1,327.68, an increase of 2.11%. While the tech heavy Nasdaq rose to 2,637.81, up 3.53%.

Next week brings a reduced calender of supply to the fixed income markets, and a couple of significant economic numbers including US CPI. The week will be choppy as few are going to take large positions ahead of the Federal Reserve Board meeting on August 24. Good trading.

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