Weekly Wrap-Up February 15-19, 1999

The bond and equity markets suffered from a severe case of lack of conviction this week. With Federal Reserve Board Chairman Alan Greenspan speaking at the two day Humphrey-Hawkins testimony next week, investors saw little reason to get involved.

The North American fixed income markets had little conviction over the Presidents' Day holiday shortened week. There was little in the economic data or international events which could compel investors to get involved. Canadian markets were poised for a federal budget which was leaked so well that the capital market had no response to the final document. (Which is exactly what the Government of Canada was looking for.) The market is focused on the two day Humphrey-Hawkins testimony which Federal Reserve Board Chairman Alan Greenspan will give next Tuesday and Wednesday.

The Federal Government of Canada brought down its budget for fiscal 1999. Contents of Finance Minister Paul Martin's document were pre-announced allowing for orderly capital markets in it wake. The Canadian government has turned its attention to the waning health care system in Canada. As well, the government has targeted productivity as a cause du jour. As has become common place in recent budgets, any surplus will be used to retire debt. The main focus of the Finance Minister seems to be making the federal budget a non-event in the financial markets. Mr. Martin....it's working.

On the international scene, Japanese officials announced that they would be participating in the bond markets, buying 10 year JGBs and issuing 3 year and 6 year bonds. They also talked down the value of the Yen. This continues to be the strategy of Japanese officials. Talk down the value of the Yen, and export your way out of recession. Given that the Japanese trade surplus continues to grow ($US 139 billion), there is continuing evidence that the export sector is doing better. However, domestic demand remains stagnant as imports continue to decline.

There continues to be little in the way of good news in Southeast Asia. Indonesia remains plagued by political and ethnic unrest. Muslims and Christians continue to clash. The political crowd that replaced Suharto are tarred with the same brush, leaving them with little credibility in the eyes of the populace. The Philippines shows continuing evidence of a floundering economy. The country recently reported the lowest trade deficit in a quarter of a century, reflecting the same economic activity as Japan, increasing exports, with declining domestic demand for imports. Consumer spending is non-existent.

One bright spot in an otherwise troubled region is South Korea. The country announced Friday that it would repay a further $US 1 billion of IMF loans which it had been granted during the volatile period between August and October of last year. Since December 1998, the South Korean Government has repaid $US 3.8 billion in emergency loans to the IMF.

As the new Euro continues to lose ground to the other major world currencies, further evidence of a looming economic slow down in Europe presented itself this week. The Riksbank, central bank of Sweden, dropped its short-term interest rate 25 basis points to 3.15%. Central banks outside of the EU have been reducing interest rates over the past several months as it is becoming apparent that Europe is headed for an economic slowdown.

On the economic front this week, the data continues to point to a strong economy with little sign of inflation or other supply bottlenecks which may lead to inflation. With the economy is moving along so well, there is little reason for either the Federal Reserve Board in the US, or the Bank of Canada, to lower interest rates over the near term. In the US, housing starts rose 3.8% in January; PPI rose 0.5%, with the core rate (less food and energy) rising 0.1%; US CPI was released Friday to little market fanfare. In Canada, bankruptcies rose 1.6% month-over-month, for an annualized increase of 2.1%; existing home sales rose 6%; manufacturing shipments rose 1.4% (with 0.9% of the increase attributed to rail rolling stock); unfilled orders declined 0.8%; inventories dropped 1.3%; CPI rose 0.2% month-over-month, for a headline increase of 0.6% for the year; core CPI (ex-food and energy) rose 1.0% on a year-over-year basis.

Bonds on both sides of the border did little on the week. Supply overhang from the US Treasury's quarterly refunding continued to hold back the US market, while supply from corporates, and government agencies prevented the Canadian market from having any conviction. The Government of Canada 30 year long bond finished 1 basis point better on the week at 5.38%. In the US the Treasury's new 30 year long bond finished at 5.39%, 11 basis points higher than were it was issued. The Canada/US long spread remains in negative territory at -1 basis point. (A basis point is 1/100th of a percent.)

The North American equity markets had just as little conviction as the bond markets. Corporations continue to be rewarded and/or punished by the markets for their earnings. Merely meeting analyst expectations is not enough anymore, as witnessed by Dell. Other earnings disappointments, along with weak commodity prices did little for investor enthusiasm. The equity markets are waiting on Fed Chairman Greenspan's testimony next week just as eagerly as the bond markets.

Merger and acquisitions activity was not as hectic as in the previous several weeks. Are corporations beginning to think that valuations are just a little high? Apparently Dutch insurance giant Aegon doesn't think so as it offered $US 10.8 billion for TransAmerica Corp. This continues the consolidation being seen in the US financial and insurance industries.

The TSE suffered as a result of weak commodity prices, and the poor results out of GEAC did not help. The Toronto Stock Exchange lost 24.15 points, or 0.38%, to close at 6409.54. Year-to-date the TSE is down 1.18%, and down 18.06% from its high in April of 1998. The DJIA posted a modest 65.06 point gain on the week, or 0.70%, to close at 9339.95. The Dow is up 1.73% on the year, but down 3.15% from its recent high. The S&P500 added 0.74% on the week, leaving it up 0.81% on the year, and 3.16% off its high. The tech heavy Nasdaq was down 1.65% on the week, which makes it 9.02% off its high, however it is still up 4.15% on the year.

The big event for both the bond and equity markets next week is Fed Chairman Alan Greenspan's two day Humphrey-Hawkins testimony. Given the robust state of the US economy, and benign inflation, Mr. Greenspan is likely to indicate that the Federal Reserve Board will continue to hold a neutral monetary policy stance. This will confine the bond market to range trade, and force the equity markets to re-assess current valuations and expected earnings growth. Good trading.

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