Weekly Wrap-Up April 6-9, 1998

Closing Numbers

The North American bond markets suffered from a distinct lack of interest this week. The Easter Holiday shortened trading session found most traders and investors catching up on credit research and office paper work. The economic data released this week reinforced the markets' view of a healthy economy with little sign of inflation. On the supply front, there were a few noteworthy issues in the market this week, particularly South Korea.

New issue supply was seen in both the Canadian and US markets. In the US, along with the 'regular' new corporate supply, there were two particularly noteworthy issues. The Treasury issued $US 8billion in 30 year TIPS, inflation linked notes similar to those in existence in Canada, Britain and Australia. This type of product tends to be popular with pension funds, and life insurance companies, as there is an inflation hedge to the long-term liabilities that are faced by each industry. The South Korean government came to market with $US 4billion in bonds. The two large issues both came to market Thursday, causing the government markets in both Canada and the US to sell off, as bonds were sold out of portfolios to make room for the new supply. Canada saw Canadian Tire come to market with a long bond at 70 basis points back of the 30 year Government of Canada bond. As well, Westcoast Energy came to market with a 10 year issue priced at 48 basis points back of Canadian 10 years. Both issues were over-subscribed by investors.

Economic data released this week seemed to pale in comparison to last weeks US non-farm payrolls number, but there was a continuation of the 'low-inflation-healthy-economy' theme. In the US, wholesale inventories rose 1.1% in February; consumer credit was up $US 0.7billion to $US 1.244trillion; PPI was down 0.3% for March with the core rate unchanged from the previous month. In Canada, February building permits rose 14.3%, rebounding form the ice storm blues; housing starts rose 3.1% in March; the help wanted index rose 1.5%; new housing prices were unchanged in February; the March Unemployment figures showed a 0.1% drop in the unemployment rate to 8.5%, the majority of the 15,000 jobs created were part-time in nature. The main reason for the drop in unemployment in Canada was due to a decrease in the labour force, as fewer people were actively looking for work.

For the week, the Government of Canada 30 year bond was weaker, adding 3 basis points to yield 5.60%. The back-up in yield came only after the Canadian long bond had posted a record low closing yield of 5.56%. The US 30 year Treasury bond closed the week 8 basis points higher, as the market digested the inflation linked notes and the Korean paper, to yield 5.87%. The Canada/US 30 year bond spread moved farther through the US, even in the face of a weakening Canadian dollar, to close the week at -27. The spread went to a record low close of -30 earlier in the week, before widening back out.

The North American equity markets had a boost early in the week from news that Citibank and the Travelers Group would be merging, in the largest deal ever ($US 70billion) to form CitiGroup. This news propelled the DJIA to a close above 9000 for the first time. As the week progressed concerns about valuations, in the face of quarterly earnings reports being released next week, caused some investors to book profits. The tech stocks were hurt by a report by Motorola which indicated that it was cutting industry growth estimates in half for its semi-conductor business.

On the week, the TSE and the Dow managed to hang onto small gains, rallying into the close Thursday to obtain the black ink. The TSE added 0.10%, or a whopping 7.91 points, to close the week at 7620.64. In the TSE's defence, it did set a new record high Monday. The DJIA also set a record close of 9033.23, Monday, but could not sustain the momentum for the week closing below 9000. The Dow finished the Easter holiday shortened session adding 0.13%, or 11.45 points, at 8994.86. The Nasdaq and S&P500 had marginal losses on the week.

Of note this week, was that after the big OPEC love-fest to cut supply in an effort to pull oil prices out of the bottom of the barrel, it was learned that Saudi Arabia may be selling oil at a discount to the US. Quick survey - Anyone who believes that the latest round of OPEC quotas will stick raise your hands.....Not many arms up.

Next week brings a street full of Passover and Easter meal hangovers, as everyone loosens the belt loop one notch to accommodate all the extra food. The fundamentals are still strong in North America, but watch for a resurgence of the popularity of the Blue Chip stocks, as wary investors look for stable earnings, from liquid securities as the first quarter earnings reporting season begins. Good trading.

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