Weekly Wrap-Up February 2-6, 1998

Closing Numbers

The North American bond markets chopped around during a week dominated by the FOMC meting, Bank of Canada Governor Gordon Thiessen's speech and employment data. The Federal Reserve Board met this past week to discuss the state of the US economy and determine the course of US short-term interest rates for the next 6 weeks. After two days of deliberation, the Fed left rates unchanged. The 'no change' position adopted by the Fed was widely expected by the market, so there was little in the way of a relief rally. The $CDA was a rising star this week aided by the Bank of Canada 50 basis point short-term interest rate increase last Friday. The dollar was talked up further this week as Governor Thiessen indicated that the Canadian economy is on track, and the easing of domestic monetary conditions by a weaker dollar was unwarranted, justifying the rate increase. The markets liked the tone of the speech, allowing the $CDA and Canadian bonds to outperform their US counterparts.

On the economic front several releases were issued this week, with the employment reports at the week's end being the most anticipated. In Canada, building permits declined 2.3% in December; international reserves increased $CDA 3.2 million in January despite the Bank of Canada's intervention on behalf of the dollar; the help wanted index for January was unchanged. Canadian unemployment data indicated that, primarily as a result of the ice storm which hit eastern Ontario and southern Quebec, employment declined by 300 jobs in January. The headline unemployment rate rose to 8.9% from 8.6%, as the ice storm and an increasing labour force caused the decline. In the US, personal income rose 0.4% in December; personal spending was up 0.3%; NAPM was down 0.7; construction spending rose 0.1%; new home sales decline 9.3% year-over-year; US factory orders declined 2.5% in December. The much anticipated non-farm payrolls number showed that the US economy generated 358,000 new jobs in January, with the unemployment rate remaining steady at 4.7% as the labour force continues to expand.

All this taken together saw the bond markets in both Canada and the US move lower over the week. Canada managed to outperform in a declining market as the US market was hurt by the Monica Lewinski immunity issue. The Canadian 30 year bond closed the week at 5.77%, an increase of 5 basis points. The US 30 year Treasury note moved 11 basis points higher to close the week at a yield of 5.92%. The Canada/US long bond spread moved to -15 basis points, as the Canadian market was aided by the strengthening currency.

The North American equity markets moved higher on the week, fueled by an increasing feeling that the worst of the Asian flu is behind us, and optimism that earnings fears may be over done. The TSE managed to shake off the effects of the Newbridge Network meltdown as the stock was battered on exceptionally poor earnings. However, the financial and interest rate sensitive sectors managed to help pull the exchange into positive territory on the week, as concerns of another interest rate hike by the Bank of Canada eased with a strengthening $CDA. New York did better as concerns about the Asian turmoil wanes, and earnings expectations are moving in a more positive direction. All this is momentum and market sentiment, as few of the big players have reported earnings. Street whispers of earnings surprises to the upside are helping to push the market higher.

The TSE closed the week at 6847.13, up 146.93 points, or 2.19%. The DJIA outpaced the TSE closing at 8189.49, 3.58% better. The Nasdaq was the true winner on the week, posting a 4.63% gain, while the S&P500 posted closes above the psychologically important 1000 mark every day this week.

The equity markets are picking up some of their momentum lost at the beginning of the Asian crisis, as players move out of bonds and back into the equity markets. This may be a sound strategy over the near-term as the bond market is likely to be under pressure as a host of Federal, Provincial and Corporate debt is preparing to come to the market. Good trading.

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