Weekly Wrap-Up January 27 - 31, 1997

Closing Numbers

This week was driven more by what wasn't said, than by what was. The markets had been waiting for Federal Reserve Board Chairman, Alan Greenspan, to address the Senate Finance Committee. In his statement, made Thursday, Mr. Greenspan did not discuss in any detail the possibility of rate hike. Instead, more attention was given to Mr. Greenspan's comments regarding the manner in which the Consumer Price Index (CPI) is calculated in the US.

The Fed Chairman agreed, along with Stanford economist Micheal Boskin, that the current method of calculating CPI overstates inflation by 0.5-1.5%. The implication being that social security and pension plan calculations indexed to inflation are costing the US Federal government excess money due to the overstated nature of the CPI. A lower CPI rate would mean decreased payments by the government, and an easier job of balancing the budget.

The economic numbers released this past week were a mixed bag of inflationary news, but the headline number for the markets was the Employment Cost Index (ECI). The US ECI was up 0.8%, right on the market expectations. So, no news, right? Not really, the market had priced in a larger than expected increase in ECI. This was done in order to hedge against a possible Fed move to raise interest rates in an effort to curb wage driven inflation. Mr. Greenspan has indicated that the job market is tight and wages may be the primary engine for inflation. Any number with a wage component to it is key in the eyes of the market. Other indicators found a rise in consumer confidence; a decrease of 1.7% in durable goods orders; and Q4 US GDP up 4.7%, for an annualized rate of 2.5%. Price pressure was mitigated in the GDP figure, with prices increasing by 1.4%, down from 1.7% the previous quarter. Again, little in the way of price driven inflation. Canadian GDP for November grew 0.5%, month over month.

The bond market waited for supply to get out of the way before it could digest all the data. The US Treasury issued its first inflation-linked bond, joining Australia, Canada ,and Britain. The US followed the Canadian structure for the inflation-linked bond. An initial issue of $US 7.0B 10yrs came to market and was a huge success, with a 5.3:1 coverage ratio. The coverage ratio indicates the number of bids submitted for every bond available. The average for most other US treasury auctions is approximately 2.3:1. Inflation linked bonds are particularly useful products to any investor who is concerned about protecting a portion of their portfolio from inflation. This is particularly true of large pension funds and insurance companies. The 30yr US bond finished 10 basis points better to yield 6.79%, while the 30yr CDA finished 16 basis points stronger at 7.27. The spread between the two narrowed to 48 basis point. (A basis point is 1/100th of a per cent.)

With the bond market rally moving yields away from the 7% range, and Mr. Greenspan's words posing little threat of a tightening, the stock markets in North America did better this week recovering from their set back last week. The past week saw the blue chips hold the market in on weak days, and lead it ahead on the rally days. Money pouring into the markets for IRA and RRSP contributions, means portfolio managers have to maintain their asset mix. This in turn drives the markets higher. The DJIA was up 116.61 points or 1.74% on the week. The TSE gained 76 points or 1.26%, this despite a 2.32% ($US 8.20) decline in the price of gold on the week. On the TSE, golds comprise 9.9% of the index, given the sell-off in bullion the market has held in very well.

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