Weekly Wrap-Up February 3-7, 1997

Closing Numbers

This week the markets were dominated by several events. The release of US NAPM figures at 52 versus 53.8, construction spending down 0.7% for December versus November, and supplier deliveries at 48.5 compared to 51.6 on Monday indicated little to fear from the Federal Reserve Board's Federal Open Market Committee Meeting, Tuesday and Wednesday. As expected, the Fed left short-term US interest rates unchanged. The market had anticipated such a result and no relief rally occurred. Many players stayed sidelined ahead of the release of the US Non Farm Payroll report released on Friday. This report showed an increase in non farm payrolls of 271,000 new jobs. Last month a number like that would have knocked the stuffing out of the markets. However, analysts and traders, alike, looked beyond the headline number and focused on the minor increase in hourly earnings (+0.1%) and the decrease in the length of the average work week (-0.1 hours).

Most would suspect that a set of numbers like the ones seen this week, combined with a hold the line view from the Fed would have allowed the US bond markets to rally into the next millennium. This was not the case, as on the week the US long bond could manage only an 8 basis point improvement. (A basis point is 1/100 of a per cent.) This uninspired move may be attributed to the large amount of supply coming to the US market next week. The US Treasury is about to begin its quarterly refunding. Look for a larger than anticipated auction size to keep markets from getting to excited. There will be $US 17.75B 3yrs, $US 12.0B 10yrs, and $US 12.0B 30yrs issued in the refunding.

Another factor subduing the bond market rally in the US were comments made by US Treasury Secretary, Robert Rubin. Secretary Rubin indicated that the Administration may no longer be as vigilant in its support of the $US. The G7 meeting of finance ministers and central bankers set for the end of this week is to concentrate on the currency issue. The $US has moved to a 4yr high vs the Yen and a 2yr high vs the Deutsch Mark. Any perception that the $US may weaken will give foreign investors good reason to sell their US bond positions. As the currency weakens, the bond must rally a larger amount in order for the foreign investor to earn money.

The Canadian bond market was on fire from the get go on Monday. A press release by the Minister of Finance, Paul Martin, indicated that the Federal Budget would be released on February, 18. The announcement came earlier than usual, signaling that Finance Minister Martin and Prime Minister Chretien have already come to an agreement on the major budgetary issues. Mr. Martin also indicated that the Canadian people should not expect an election budget, but rather more of the same fiscal responsibility the Federal Government has demonstrated over the past several budgets. This was good news to investors, both domestic and international, who bought Canadas all week. The 30yr bond was 20 basis points stronger by the close on Friday. (A basis point is 1/100 of a per cent.) The strong performance of the Canadian bond market means that spreads versus the US have tightened to the narrowest they have been this year, 36 basis points in the 30yr sector of the yield curve. Supply next week in Canada will see the Government issue $Cda 2.3B 10yrs. This will be a re-opening of the 7.25% June 2007 issue. The Government has also committed to at least 15% of the issue.

The stock markets had a mixed week in North America. The DJIA managed to post a positive close of 42.71 pts, after a very volatile week of trading. Blue chips and high tech stocks had some of their luster fade as expectations of future earnings were revised lower. There appears to be too much optimism in an overvalued market, causing a wild ride when disappointing results are reported. The TSE posted a 7.84 point loss on the week. This was mainly the result of golds, and the oil and gas sectors. With the price of bullion still suffering from European central bank selling ahead of the deadline for the Monetary Union agreements to take affect, little relief for the gold sector may be expected in the short term. Technically, there is support for the price of gold between $US325-335 per ounce. As milder temperatures ease heating oil requirements across North America, the price of oil has been declining. This in turn has hurt the oil and gas sector of the TSE. The stars for the week in Toronto were the banking stocks, which were reported to be undervalued versus their US counterparts. This report, along with the rally in the Canadian bond market helped the interest rate sensitive bank sector.

Next week should be dominated by the results of the G7 meeting (i.e. currency discussions) and the quarterly bond refunding by the US Treasury. Good trading.

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