Weekly Wrap-Up December 1-5, 1997

Closing Numbers

The North American bond markets traded off of fundamental economic information for the first time since the Asian Flu hit the markets. Economic data coming out of Canada and the US contributed to the activity witnessed in bonds this week. In Canada, the current account deficit nearly doubled to a seasonally adjusted $CDA 6.38bil, for the period and $ CDA 25.5bil annualized. There was a slight decline in exports, while imports surged in the last quarter, undermining the current account deficit. Canadian GDP grew 0.2%, to an annualized rate of 4.2%; international reserves decreased $CDA 762mil in November, as the Bank of Canada defended the sagging 'Beaver Buck'; building permits declined 3% in October; and the help wanted index rose 1.6% in November. Friday's release of Canadian employment statistics indicated that the unemployment rate declined 0.1% to 9.0%, on the back of 33,500 new jobs. This pales in comparison to US job growth last month.

US non-farm payrolls, the tell-tale sign of the strength of the US economy, rose by 404,000 jobs to post an unemployment rate of 4.6%. This was well ahead of street expectations, and the lowest unemployment level in the US since October of 1973. Of concern was the 4.1% annualized wage growth. This should be tempered by the 4.1% growth in non-farm productivity reported earlier in the week. Some bond traders are beginning to wonder if Federal Reserve Board Chairman, Alan Greenspan might raise short-term interest rates at the next Fed FOMC meeting Tuesday, December 16. The other economic data in the US seems lackluster by comparison, but for the sake of fairness, and full disclosure, here it is. In the US, NAPM reported a 1.6 decline in the index to 54.4, with the prices paid component declining to 51.9 from 55.9; construction spending eased 0.1%; new home sales declined 1.7% in October, but remain well above the 700,000 mark, at 797,000; factory orders grew 0.3%, and consumer credit rose again to a total of $US 1.233 trillion. That should help offset any weakness from the Asian economies on North America.

The Canadian 30 year long bond underperformed this week, amidst continued concern over Canada's deteriorating current account deficit, profit taking by foreign investors, and weakness in the Canadian dollar. The Canadian long bond added 7 basis points in yield on the week , to close over six percent at 6.04%. The US 30 year Treasury bond managed to hold in, closing Friday at 6.07%, unchanged this week. The weakness demonstrated by some of Canada's trade and currency numbers is contributing to the decrease in spread differential between the Canadian and US yield curves. All along the curve, spreads are moving in, as exemplified by the Canada/US 30 year spread which closed the week at -3 basis points. Not long ago, this spread had moved into the low 20 range. (A basis point is 1/100th of a percent.)

The North American equity markets had a good session this week, as all major exchanges showed signs of health. Some of the weak sectors such as metals and biotechnology continue to get worse as tax-loss selling ahead year end starts to emerge. Other sectors, such as financials and, the recently maligned, oils are pulling the major exchanges ahead. In Canada, the last of the big banks reported their earnings this week, with the Royal Bank of Canada coming in as expected and the Canadian Imperial Bank of Commerce showing better earnings, both moving ahead on the week, and bringing the broader Canadian market with them. While the activity in the financial and oil sectors were strong enough to pull the TSE ahead on the week, it was not enough to offset the affects of golds continued fall from grace.

Bullion this week traded down to a 12 1/2 year low, losing 2.90% of its value, or $US 8.60, to close the week at $US 288.40. With so much of the TSE made up of gold stocks, a gain this week was surprising. Reports this week indicated that the Swiss central bank will coordinate its sale of gold reserves with other major central banks so as to avoid further disruption of the gold markets. Added to the news that the Swiss would be actively seeking stable periods to initiate selling of their gold reserves was news out of Argentina that the central bank there would move off of a gold standard. The precious yellow metal is getting cheaper every day.

A strong Monday in Asian markets, particularly the Nikkei, sparked the move by equities this past week. North American traders came in Monday morning to find the Asian markets all doing well, and with the Thanksgiving turkey hangover no longer lingering traders moved to take prices higher through-out the week. While concerns over the stability of the Asian financial system is still a very real concern, as is the potential for a full-fledged recession in Japan, investors are beginning find value in stocks which have had the impact of the Asian slow down over discounted in their share prices. A bit of a slow down in the US economy would help Mr. Greenspan continue to keep the economy rolling along at a healthy pace, with out the need for extensive monetary intervention. The US non-farm payrolls number helped to add to the bargain hunting, as traders saw the increase in employment as a healthy offset to the Asian turmoil vis-a-vis corporate earnings.

The TSE did well considering the move by gold over the week, closing 211.59 points higher, or 3.25%, at 6724.37. The DJIA moved north of 8000 again this week pushing 4.17% higher, or 326 points, to close at 8149.13. The S&P 500, and Nasdaq also moved higher, posting gains of 2.97% and 1.92% respectively.

Next week brings Richmond and Atlanta Fed Surveys, wholesale trade, US current account balance for Q3, retail sales and PPI data. The silly season is upon us with tax-loss selling taking place ahead of year end, while fund managers try to employ all of their capital in an effort to be fully invested over year-end. The see-saw battle begins. Good trading.

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