Weekly Wrap-Up August 23-27, 1999

The North American bond markets experienced a roller coaster ride this week. The big event for the week was the announcement by the Federal Reserve Board of a 25 basis point increase in the Fed Funds rate to 5.25%. The Discount Rate also increased 25 basis points. A short covering relief rally ensued. Investors began to speculate that the Fed may be finished increasing interest rates, due to the move to a neutral bias by the Federal Reserve Board. The North American equity markets first benefitted from, then were buffeted by, the actions and comments of the Fed Chairman. Alan Greenspan, Fed Chairman, lifted the equity markets with a minor interest rate increase of 25 basis points, and setting a neutral bias for the Fed. Then the Fed Chairman indicated that the equity markets may be ahead of themselves with comments on the role of technology, bull markets and stock option based pay packages skewing corporate earnings.

The North American bond markets experienced a roller coaster ride this week. The big event for the week was the announcement by the Federal Reserve Board of a 25 basis point increase in the Fed Funds rate to 5.25%. The Discount Rate also increased 25 basis points. A short covering relief rally ensued. Investors began to speculate that the Fed may be finished increasing interest rates, due to the move to a neutral bias by the Federal Reserve Board.

The positive tone developed by the bond market early in the week led to corporate and provincial issuers coming to the market. The Canadian market digested approximately $CDA 1.7 billion in new supply, while the US had a relatively quiet week with $US 7 billion in new supply. Rumours running rampant indicate that the corporate market is going to be full of deals in September as issuers try to get funded before investors turn their focus to Y2K concerns.

Of note is the deterioration in the strength of the $US relative to the Yen and the Euro. As the $US deteriorates in strength relative to the other major currencies, those economies which are net consumers of commodities are put in a more favourable trade position with respect to the raw materials they purchase. In essence, raw material prices decrease. For the US the picture is not as rosy. As the $US deteriorates in value, imports increase in price. The consumer lead economic expansion may be in jeopardy if the US begins to import inflation through higher priced foreign consumer products. The Fed is not likely finished with interest rate increases this year.

The economic data released this week indicated a moderating economy dominated by consumer spending in the US. In Canada there were no major releases. In the US, second quarter GDP was revised to +1.8%, down from 2.3%; price deflator was revised down to 1.5 from 1.6; personal income rose 0.2%; personal consumption rose 0.4%; personal savings rate fell to -1.4% from -1.1%. The personal income growth was the slowest since December of 1998, and the personal savings rate saw its eighth consecutive decline.

The Government of Canada 30 year long bond finished the week 7 basis points stronger at 5.76%. The US Treasury 30 year long bond finished the week at 5.98%, 1 basis point stronger. The Canada/US 30 year spread moved deeper into negative territory, closing at -22 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets first benefitted from, then were buffeted by, the actions and comments of the Fed Chairman. Alan Greenspan, Fed Chairman, lifted the equity markets with a minor interest rate increase of 25 basis points, and setting a neutral bias for the Fed. Then the Fed Chairman indicated that the equity markets may be ahead of themselves with comments on the role of technology, bull markets and stock option based pay packages skewing corporate earnings.

The big concern is the accounting method used to recognize stock options in corporate financial statements. By understating the value of outstanding stock options, or resetting the options to a lower value, the company can raise its earnings and profitability. This may misrepresent the economic liability to the company.

In Canada, there was a lot of corporate activity going on. Onex Corp has bid for both Air Canada and Canadian Airlines. Canadian Airlines is approaching insolvency again, and this plan to merge the two air carriers would attempt to rationalize services and routes. If the deal goes through at least 5,000 will lose their jobs. A sad week in the Canadian equity markets for many Canadians as insolvent retailer Eaton's was delisted from the TSE.

The TSE lost 23.01 points, or 0.32%, to close at 7106.21. The DJIA set two record highs this week, closing Wednesday at 11,326.64. However, comments by the Fed Chairman took the wind out of the market's sails and the Dow close down on the week. The DJIA end the week at 11,090.17, down 10.44 points, and off 2.08% from Wednesday's record high. The S&P500 closed at 1348.27, up 0.87%, and the Nasdaq rose 4.18% to close at 2758.90.

Next week brings NAPM, Chicago PMI and the ever crucial employment reports in both Canada and the US. The markets are going to wind down early Friday as the North American investors head out for the last long-weekend of the summer. No markets on the following week. Good trading.

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