Weekly Wrap-Up April 21-25, 1997

Closing Numbers

The North American bond markets were pestered by both supply and renewed fears that inflation may be lurking around the corner. The US market had to digest $US 17B 2 year notes, and $US 12.5B 5 year notes this week. Traders did a good job cheapening up each sector of the yield curve prior to the auctions and both went off well. The Government of Canada also came to market this week, with a $CDA 1.3B re-opening of the 8% June 2027, 30 year bond. The issue was also well received, as yield hogs tried to pick up some points. The tail was tight, and the bid to cover ratio was strong. The Caisse Central Dejardins du Quebec came to the market with $CDA 300M 5 year, Eurodollar FRN, set at the 3 month Bankers' Acceptance rate plus 6.25%. This issue was targeted at the foreign investor, primarily Japanese and European. This is was said to move well with the target market.

Economic releases were thin in both markets this past week. US existing home sales were down a larger than expected 2.8%, but did little to allay fears that the Fed would raise rates at the next FOMC meeting, May 20. In Canada, the wholesale trade numbers showed a healthy 3% increase, month/month. Canadian CPI remains in the lower half of the Bank of Canada's target range for inflation at a 2% annualized rate, posting a 0.2% increase for the month. Ouch!!! The Canadian economy is on fire, better raise rates soon. Well, maybe not. Although, some commentators interpreted Bank of Canada Governor, Gordon Thiessen's comments this week as indicating just that. Did they miss the part of his comments that indicated the output gap in Canada is still wide and that there is room for continued non-inflationary growth? And Canadian unemployment is how high? 9.3%!!! And the Liberal Government is about to call a national election for June 2nd. No, there will be no rate increase in the near-term.

With the Bank of Canada Governor out doing the speakers circuit, Fed officials did not want to be left out of the major press this week, so out came the Fed speak. Federal Reserve Board Governor, Laurence Meyer, indicated this week that the US economy is speeding along at an "unsustainable" rate. This comment, in and of itself, brought the prospects of the Federal Reserve Board raising rates again May, 20, back to the fore. This looks to be priced into the market, as the front end of the US yield curve indicates a 3 month rate of near 6%, by the end of May.

The equity markets in North America could not sustain the rally they under took a week ago. The momentum waned, and after a thin volume explosive rally on Tuesday, there was nothing left for the markets to hold onto, and they began to track bonds again. With the majority of the major US firms reporting Q1 earnings, there is little in the way of surprises on this front to hold the market in. It has been noted that earnings for the first quarter of 1997 are up 16% over the same period last year. Consensus estimates from street analysts had pegged the increase at 10%. Improved earnings have not held the market in as well as they could have. Yet the case can be made that there are still strong fundamentals in corporate America underpinning the current market correction. Once the Fed rate hike concerns are out of the way, the market could be poised to regain its bullish colours.

The TSE managed to hang onto a small gain over the week of 9.04 points, in lack luster trading. The highlight of the week in Toronto was the closing of the open out call trading floor, as the TSE moves to a completely computerized trading system. A tear was shed for the end of an era by many veteran floor traders as the closing bell sounded for the final time, Wednesday afternoon. As per usual, it would not be a normal week in Toronto, if gold stocks and their lack-lustre performance was not mentioned at least once. So there it is, golds did poorly again. The DJIA held onto a slightly larger gain than did Toronto. The Dow posted a 35.32 point gain, buoyed by the last of the Q1 earnings reports, but the broader markets were mixed. The S&P 500 was up, while the tech stock heavy NASDAQ was down on the week.

Next week brings a host of US economic data, which is why traders were a little nervous about carrying large long positions into the new trading session. Tuesday brings the employment cost index, and durable goods orders. Wednesday has Q1 GDP, and Chicago purchasing managers' index. Thursday shows us the National purchasing managers' index, personal income, and consumer spending. Friday brings the US non-farm payrolls figures for April. These numbers should be enough to cause a great deal of volatility in the markets next week. Good trading.

Weekly Wrap-Up Archives

The Markets Page

The Financial Pipeline Homepage