Weekly Wrap-Up July 28 - August 1, 1997

Closing Numbers

A week of economic data influenced the bond markets in North America. The US economy was put under the microscope this week in an effort to discern whether or not inflation is coming out of hibernation to spoil the "Goldilocks" economy. Early in the week was the influential employment cost index which tracks the cost of wages and benefits employers are supplying to labour. This number, released quarterly, has been hailed as one of Fed Chairman Alan Greenspan's favourite indicators of underlying inflation. The employment cost index, +0.8% for the quarter, was slightly below expectations, spurring the bond market rally which persisted until the end of the week. Mid-week the bond rally was fueled by GDP releases in both Canada and the US indicating continued economic growth, but at a more moderate pace from the first quarter. Canadian GDP was reported at +0.3% for May, down from +0.8% for April. US Q2 GDP showed economic activity slowed from its torrid 4.9% first quarter pace to a moderate 2.2%, with the GDP deflator slowing to a 23 year low of 1.4%. Also contributing to the excitement was the announcement of a balanced budget amendment in the US. A host of economic data, and the beginning of a new month took the wind out of the bond markets' sails on Friday. US non-farm payrolls showed the labour market in the US tightened over the last month, with the unemployment rate dropping to 4.8%, from 5.0%, adding an estimated 316,000 new jobs to the work force. The US economy also showed signs of heating up with the release of factory orders at +1.2%. The National Association of Purchasing Managers diffusion index indicated increased activity, and most importantly to the markets, an increase in prices paid and received over the last survey period. Canadian manufacturing orders were stronger than expected, and many manufacturers surveyed indicated that they felt that inventory levels were too low. Sell it now!!!

Given all the good news that had been in the market, the strength of the recent bond rally, and fund money lightening up for the beginning of the new month, the stage was set for the market to back up. And it did. After posting an extremely strong start to the week, both markets posted low yields of 6.31% in the 30 year sector of the yield curve, only to give up a significant amount of the gains on Friday. The markets on both sides of the border reacted adversely to the economic data released Friday, with Canada adding 10 basis points, and the US market adding 15 basis points to the long end of the curve.

On the week the 30 year Government of Canada bond shed 7 basis points to end the week yielding 6.41%. The US 30 year treasury added 1 basis point by the time the dust settled Friday, closing the week at 6.46%. The Canada/US 30 year spread narrowed 8 basis points on the week to -5 basis points.

The North American equity markets followed the bond markets all week. Doing little with out the fundamental influence of interest rates, equities set records through-out the week as the bond markets rallied. The TSE, DJIA, S&P 500, and Nasdaq exchanges combined to set 13 record high closes on the week. Only the tech heavy Nasdaq was able to post a gain in the face of Friday's heavy economic data, to close the week on a record high. All other major North American exchanges shed some value to close the week. Given the pace of the recent rally, the markets are due for a period of consolidation, and possible retracement.

Market participation was broad based, on strong volumes. Real estate, financials, pipelines and the transportation sectors all did well as the bond market rally fueled interest in interest sensitive issues. The high tech heavy Nasdaq still posted the strongest gains on the week, despite the lack of exposure to these sectors. The Nasdaq posted a 1.58%, or 24.75 point, gain to close he week at 1594.33. Can a close of 1600 or greater be far away? The TSE posted a 70.87 point gain, or 1.05%, to close the week at 6851.14. The DJIA posted a fair 1% gain to close the week's trading session at 8194.04, after closing above 8200 earlier in the week.

Next week brings a fairly limited amount of significant economic data to the markets on either side of the border. In the US look for construction spending, and initial claims data to hold traders attention. While in Canada, building permits and unemployment data should carry some weight fore the market next week. The markets are in need of some consolidation and possible retracement from a technical basis. Good trading.

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