Weekly Wrap-Up August 11-15, 1997

Closing Numbers

The North American bond markets had a choppy ride this week as a host of US economic data kept the market from running ahead of itself, prior to the August, 19, FOMC meeting. The sell-off, which began as a result of last Friday's US non-farm payroll report, continued to influence the markets. To start the week, a little Fed speak was deemed necessary in order to assuage any fears the markets may have had about the state of US monetary conditions. Fed Governor, Susan Phillips, released a statement Monday indicating that there is no reason at present to raise US interest rates. This should have allowed those who have been buying on dips through out the rally to re-emerge and support the market. That just did not happen. There were simply too many economic releases in the US to warrant the establishing of new long positions in the face of an uncertain market.

The US market saw many influential economic releases this week. The least of which was the Redbook retail sales survey. This report is based on a survey of retailers across the US, the number of respondents varies every week, and as a result is not necessarily an accurate reflection of actual activity. Every trader knows this. When the Redbook release takes on significance, the markets are looking for a reason to do something. Take profit, and sell. As the week progressed, more respected and significant economic data was released. US PPI dropped for a record seventh month in a row, down 0.1% with the core rate, ex volatile food and energy components, down the same 0.1%. The official retail sales release indicated that consumer activity had been as expected at +0.6% month over month. With the CPI release inflation fears were soothed to some extent, as inflation at the consumer level was up a mere 0.2% month over month, leading to a yearly reported figure of 2.2%, with the core figure up 2.4% on a yearly basis. This provided room for a bit of short covering, and a relief rally. The week ended mixed as currency concerns in both Canada and the US did little to help the performance of the bond markets. The markets are positioned expecting no action by the Fed at Tuesday's FOMC meeting.

After a week of volatility and nervousness by traders over the markets direction, the bond markets finished in positive territory. The Canadian 30 year long bond shed 5 basis points to close the week at 6.54%. The US 30 year Treasury bond managed to hang onto 6 basis points of short covering, from Wednesday and Thursday, to close the week at 6.58%. The Canada/US 30 year spread continues to trade in negative territory, at -4 basis points. (A basis point is 1/100th of a basis point.)

The North American equity markets took their initial que from the bond markets, then diverged, like two paths in a yellow wood, and that made all the difference. The negative momentum established late last week remains entrenched in the equity markets. Major investors remain on the sidelines, meaning that those accounts responsible for using any pull back by the market as a buying opportunity are waiting to see if the correction is for real and we have another situation in the markets comparable to the April/May correction of earlier this year. Without that support, the markets continue to head south. The current strike by the Teamsters versus UPS is also weighing on the markets. The rally which has been present in the market for so long, has been dependent upon strong fundamentals, particularly the lack of wage inflation in an extremely tight US labour market. If the Teamsters are successful in securing large wage concessions from UPS, the markets will remain nervous, looking for increased signs of inflation in future labour settlements. Increased wages are not necessarily a concern, if they are in line with increased labour productivity. However, if increased wages come with out a corresponding increase in productivity, then the inflationary fears that many market players are concerned about begin to show themselves in the broader economy. This in turn, raises the possibility of an increase in short-term interest rates by the Fed, cooling the economic environment, reducing corporate earnings, and putting current equity valuations into question. The result would be a continuation of the market correction to reflect a more conservative view of corporate valuations.

The equity markets took it on the chin this week, as traders and accounts had little joy in establishing new positions, instead further profit taking was exhibited through out the week. The Nasdaq emerged as the outperformer in an underperforming market, shedding only 2.28% on the week. The TSE held in well, thanks to strong Canadian fundamentals, a weak, but neutral currency, and a good jump in the price of gold to start the week. All this translated into the TSE loosing 177.21 points, down 2.58%, to close the week at 6695.09. The DJIA shed 336.56 points on the week, to close down 4.19% at 7694.66. In the past two weeks the Dow has dropped nearly 500 points. The majority of the decline came on Friday's double witching, weak $US, 247 point sell-off. While the interest rate sensitive issues did decline somewhat over the week, the major hit was taken by the large consumer products firms as concerns about valuations and future earnings saw profit takers emerge in a sector which has performed well.

Next week will be dominated early by the Fed FOMC meeting on Tuesday. The street consensus is that Fed Chairman, Alan Greenspan, will leave US short-term interest rates unchanged at this time. The market has been focused on the September meeting for some time as the next likely meeting for a Fed move. After the meeting, the week is thin on economic data. Look for the various regional Fed surveys, which will be released later in the week, to provide any hints that the markets can glean from them as to further market direction. The markets remain technically weak, and are prone to volatile activity over the short term. Good trading.

Weekly Wrap-Up Archives

The Markets Page

The Financial Pipeline Homepage