Weekly Wrap-Up April 7-11, 1997

Closing Numbers

The week started well for the North American bond markets, as international and domestic buyers came into the market early on the $US strength. Currency strength fueled a short covering rally, which squeezed out those with a weak stomach. The initial action set up for a bit of a sleeper until the inflation data released on Friday. Early inflation news did not provide any information it had not already factored into the market. The big numbers Friday left the market with a thin appetite for new supply, leaving the US inflation-linked 10 year issue to receive a luke-warm reception by the market. The weak tone, and overall negative sentiment, in the market meant traders were looking for a reason to sell and the PPI, and retail sales figures out of the US provided that impetous on Friday. US PPI came out -0.1%, but the core figure, ex-food and energy prices, was +0.4%. Retail sales figures in the US were revised higher for February, to +1.5% from +0.8%, and March figures came in at a stronger than expected +0.2%. While these numbers are not bad, in and of themselves, to the market, and three months ago would have been shrugged off, they provide a glimpse at the current psyche of the market. All eyes are turned to the next Fed move on short-term interest rates, widely anticipated to be raised again on May, 20, the next Fed FOMC meeting. This means that traders, analysts, and investors are all looking for reasons to confirm the next Fed action (ie: inflation is rampant in the economy, sell everything now before it is not worth anything, as inflation erodes its present value).

The US bond market fared worse than the Canadian market even though the currency picture for the two countries is reversed. The US currency is moving into territory not seen in the past several years versus both the Yen and the Deutschemark. The strength of the $US has helped to mitigate some of the negative activity in the bond market. While $US strength is lending some support to the bond market, that same strength is not enough to provide a positive tone to the market. As a result, the US 30 year sector added 5 basis points over the week, to close at 7.17%. Now that traders have pushed through the 7.125% level, the next technical level, from a psychological point of view, is 7.25%. As market participants look to price in the next Fed move on short-term interest rates, look for them to push the 30 year US treasury yield to that next level.

The Canadian currency has been under continuous pressure since late January, and is at 2 year lows versus $US. Bank of Canada officials stated this week that the Bank would not be raising Canadian short-term interest rates to defend the movements in the currency. This provided the market with information, that had been lacking since before the Fed raised US interest rates in March, on Bank of Canada intentions. This, however, did not ease the pressure on the $CDA, and the Bank was seen in the markets this week defending the currency. Oddly, the 30 year bond in Canada outperformed it's southern neighbour, even in the face of such currency concerns. The Canadian 30 year closed the week 3 basis points lower at 7.42%. The Canada/US 30 year spread narrowed last week to close 8 basis points tighter at 25. (A basis point is 1/100th of a percent.)

The equity markets are still moving through their corrective phase, attempting to price in the next Fed move on short-term interest rates, as well as, discount the potential for lack-luster earnings as Q1 reporting begins. Initial Q1 earnings reports surprised a few, allowing the North American equity markets to follow bonds early in the week. With the brief rally, traders were able to set up new shorts at better levels, and the markets resumed their downward momentum. Most of the major markets behaved themselves in a fairly orderly manner, until the release of Friday's inflation data in the US. The markets have a bearish tone and are looking for reasons to continue selling off. And this they did, with a vengeance, to close the week, weak.

The interest rate sensitive sectors, such as banking, financial services, and utilities helped pave the way for the continued decline. High tech stocks helped out as computer chip giant Intel indicated it would have to cut pentium chip prices by 20-25% in order to compete in the chip market. Competition may force earnings down. The DJIA lost 2.06% on the week. Since the high in March the Dow has given back 693.47 points, or 9.79% of its value. The Dow Jones is now down on the year, closing Friday 56.58 points below the open on January, 2. The TSE is not faring any better, as Toronto lost 2.30% on the week. From the high in March, the TSE has shed 649.23 points, or 10.25% of its value. Toronto has lost 4.11% on the year, or 243.39 points from the open January, 2.

Concerns about the next Fed move are being blamed for the continuing correction in the markets. This is just an excuse at this point, as market indicators and technical factors are all negative. The market sentiment is bearish, and is looking for reasons to take it lower. Early next week inflation numbers are coming out in the US. CPI, real earnings, and industrial production figures should all provide a focus for traders looking to glean the next Fed move. (We all suspect that May, 20, will bring another 25 basis point hike.) The trend is your friend, so until the Fed is happy, look for weak markets to dominate. Good trading.

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