Weekly Wrap-Up November 29 - December 3, 1999

The North American bond markets moved in tandem with this week's economic releases, first higher in yield then lower. There was very little in the way of market sentiment outside of that dictated by each day's economic data. The market is thin, with low levels of liquidity. It does not take much to push the bond market in either direction. The equity markets continue to surge forward as both the S&P500 and Nasdaq set record highs over the course of the week. However, the markets remain vulnerable to a correction as was proven by the Toronto exchange which lost 4 weeks of gains during the first two trading sessions of the week. Trading flows already have it feeling a lot like Christmas.

The North American bond markets moved in tandem with this week's economic releases, first higher in yield then lower. There was very little in the way of market sentiment outside of that dictated by each day's economic data. The market is thin, with low levels of liquidity. It does not take much to push the bond market in either direction.

Of note outside of North America this week was the announcement by the Bank of Japan that there was plenty of artillery to keep the Yen from appreciating too significantly against the $US. The Bank of Japan was seen intervening in the foreign exchange markets on two occasions during the week. Once in the Euro market and once in the $US market. With the Yen having appreciated 18% versus the $US so far this year, it is thought that the minimalist approach to the defence of the Japanese currency is just window dressing.

This week's intervention by the Bank of Japan is believed to be on behalf of Japanese corporations who have unhedged positions in Europe and the US who need to hedge before year end. This is because it is widely believed that the Yen will continue to strengthen versus the major world currencies. Adding to the confidence of Japan fans is the fact that new car sales rose for the first time in 32 months, rising 0.2%. This is a modest gain, but a significant indication that there is growing strength in parts of the Japanese economy.

The Bank of England conducted its third auction of gold reserves this week. Twenty five tonnes of gold was sold, in an ongoing series of sales aimed at reducing the Bank's gold reserves by 50%. This sale did little for the health of the gold markets as bullion fell $US 14.55 this week to close at $US 282.30, a decline of 4.90%.

Adding to the markets nervousness and lack of liquidity were comments out of Federal Reserve Governor Meyers. Mr. Meyers is a noted Fed hawk with respect to interest rates and reinforced that image again this week. In a speech given mid-week, Governor Meyers indicated that he would be in favour of increasing interest rates if the labour markets remained tight. This put added significance on the end of week non-farm payrolls number in the US.

Economic data released this week dictated the direction of the market on any given day. With concerns running high over the timing of the next interest rate increase by the Federal Reserve Board and the possibility of the Bank of Canada matching any move, the markets' concerns lay with data inflationary in nature. In Canada, third quarter GDP rose 4.7%; the trade surplus came in at $CDA 625 million; unemployment fell to 6.9% from 7.2%. In the US, existing housing sales rose 16%; NAPM data came in tamer than anticipated; non-farm payrolls remained unchanged at 4.1%; average hourly earnings rose 0.1% for an annualized increase of 3.6%; average hours worked edged up to 34.6.

The Canadian employment figures are at their lowest levels since 1981, giving many commentators the clearance to speculate that the Bank of Canada will now have to move quickly to stem the potential inflationary pressures of a tight labour market. Yeah, whatever. The US employment figures are still at record low levels and there is anecdotal evidence that the supply of labour is now being constrained.

Sears has taken to mailing out staffing requirements to their credit card holders. Retail stores are having a difficult time finding seasonal help, and skilled construction workers are in short supply. The question is - do companies have the pricing power to increase the cost of goods in order to maintain their profit margins in the face of increasing labour costs? According to the US airline industry they don't. A 3% fare hike implemented late last week was rolled back this week.

Thin volumes allow large trades to push the market up and down on little activity. It's beginning to feel a lot like Christmas. The Canadian 30 year long bond added 3 basis points to yield 6.15%. The US 30 year Treasury bond added 3 basis points over a volatile week to close at 6.26%.

The North American equity markets continue to surge forward as both the S&P500 and Nasdaq set record highs over the course of the week. However, the markets remain vulnerable to a correction as was proven by the Toronto exchange which lost 4 weeks of gains during the first two trading sessions of the week.

Toronto saw its largest point drop since August 27, 1998 and its largest percentage drop since October 5, 1998 this week. As interest rate sensitive stocks, golds, and the oil and gas sector all lost ground. With the market pricing in earnings growth of 15-20% annually, corporations are going to have to continue to have earnings surprises to the upside in order to support current valuations. Consider the fact that the Nasdaq has risen by 60.56% so far this year. Is that sustainable?

The TSE lost 102.74 points, or 1.30%, this week to close at 7787.20. The Toronto exchange remains up 20.06% year-to-date. In New York, the DJIA added 297.26 points, or 2.71%, to close at 11,286.18. The Dow is up 22.92% so far this year. The S&P500 added 16.68 points to close the week at a record high of 1433.30 points. The Nasdaq also posted a record high close this week at 3520.63, up 72.82 points, or 2.11%. The S&P500 is up 16.60% and the Nasdaq is up 60.56% year-to-date.

The US markets received a boost from noted market bull and Goldman Sachs' equity guru Abbey Joseph Cohen, who indicated that the major markets would all post record highs in the coming months.

Next week brings inflation data in the US. The CPI and PPI numbers are going to take on even greater importance now that the Fed has taken the liquidity out of the market it injected during the melt-down during the fall of 1998. Now any Fed action will be aimed specifically at the domestic economy. The interest rate increases are not over yet. Good trading.

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