Weekly Wrap-Up January 26-30, 1998

Closing Numbers

North American bond markets traded primarily on fundamental data this week, and not the Asian contagion. Fixed income securities were influenced by supply and economic data, and little of the Asian flu surfaced to move prices around. The US bond market saw a 2 year and 5 year auction, while the Canadian market had to contend with a 30 year auction, as well as a host of new corporate bonds.

Supply cheapened up the bond market mid-week, but comments out of the Fed Chairman, Alan Greenspan, indicating that the difficulties in Asia would have a natural slowing effect on the US economy were good for bonds into the week's end. A robust GDP figure, with little sign of inflation in the price deflator helped to solidify bond market gains into the close, Friday. Action by the Bank of Canada, raising short-term interest rates 50 basis points to 5.00%, to defend the Canadian dollar hurt the short-end of the Canadian yield curve, but did little to hurt the inflation outlook resulting in continued strength at the long-end of the curve.

On the data front, Canada released industrial prices for December at -0.2%, with raw materials down 4.1%; weekly earnings were up 0.9% in November; Canadian GDP was up 3.3% year-over-year in November, with the postal strike causing a 0.3% decline in the month -over-month data. In the US, existing home sales declined 2.1% in December; consumer confidence declined 8.9 points in January; the help wanted index declined 5 points in December; the closely watched employment cost index rose 1% in Q4, and 3.3% year-over-year, this was the highest quarterly rise in 5 years; and US GDP for Q4 was +4.3%, with the price delator rising a temperate 2.0% which is the smallest increase since 1965.

The Canadian 30 year bond's performance was hurt by supply coming in that sector of the curve this week. The Government of Canada 30 year bond closed 4 basis points stronger, at 5.72%. The US long bond outperformed the Canadian long bond by 11 basis points this week, closing at 5.81%, 14 basis points stronger than last Friday's close. The Canada/US long bond spread is now -9 basis points, after closing at -20 last week. (A basis point is 1/100th of a percent.)

The North American equity markets had a strong week, as little concern emerged from the Asian markets, and Mr. Greenspan mitigated the markets fears over inflation coming to America. Several large multi-nationals, with operations in Asia, reported earnings this week and beat street expectations. This type of news is well received by a market expecting the worst. Any sign of strong earnings growth, especially by corporations exposed to Asia will be well rewarded by the market.

The TSE saw profit taking in the financial sector after some of the shine wore off the thought of more bank mergers. Comments out of Finance Minister Paul Martin's office indicate that the announced merger of Royal Bank and Bank of Montreal is not a done deal. Even with the profit taking as a backdrop the TSE managed to post a solid 3.22% gain, or 209.21 points, to close at 6700.20. The DJIA posted a 205.76 point increase, or 2.67%, closing at 7906.50. Oil and gas stocks did well as the result of President Clinton's sabre rattling at Iraq. While gold did better due to President Clinton's alleged infidelities with a White House intern. Aren't the markets great!

Next week brings more numbers, and undoubtedly more corporate supply. The ForniGate scandal will influence things somewhat, but the American and British stance against Iraq will be more interesting to the markets. Now that the Bank of Canada has shown its hand again, look for the markets to take another run at the $CDA. Good trading.

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