Weekly Wrap-Up July 21-25, 1997

Closing Numbers

The North American bond markets' main focus for the week was Federal Reserve Board Chairman, Alan Greenspan's semi-annual Humphrey-Hawkins testimony on the state of the US economy. The two day session before both the congressional and senate banking committees revealed that the Fed Chairman is optimistic that inflation shows little tendency to rebound at present. This state of economic excellence, a far cry from December's "irrational excuberance", indicates that short-term interest rates should remain stable over the near-term. The mitigated threat of inflation has allowed many forecasters to reduce inflation estimates, and combine the new data with real increased growth data to paint a picture of a "Goldilocks economy" over the near-term. Other significant economic data released this week did little to effect the markets, as Mr. Greenspan's comments far outweighed their importance. In Canada, Stats Canada released May retail sales data, indicating a 0.5% increase over April. This provided some support to an already strong market, as players took this as a sign that the domestic consumer remains active in supporting the economic growth of the Canadian economy. In the US, the durable goods number released Friday did little to effect a market facing a host of significant economic data next week.

Both the Canadian and US markets had to face new supply this week. The positive tone given to the market allowed all auctions to proceed smoothly. The US Treasury issued $US 15.5bil 2 year notes at a 5.93% yield, which was as expected. The Treasury also issued $US 11.5bil 5 year notes, which met strong market demand as reflected in the 2.88:1 bid-to-cover ratio. The Bank of Canada also came to market, on behalf of the Government of Canada, issuing $CDA 1.3Bil 8%/2027. The re-opening of the issue brings the total float to $CDA 8.4Bil.

On the week both markets rallied significantly, pushing yields in the long end well below the 6.50% range, which fell for the first time since December last week. Both markets pushed through the psychological level on the back of Fed Chairman Greenspan's comments and managed to hold the gains into the end of the week, even on profit taking and position squaring going into next week's host of economic data. The 30 year Canada closed the week at 6.48%, 8 basis points stronger. The US 30 year Treasury closed 7 basis points to the good, at 6.45%. The Canada/US 30 year spread is holding a tight range between 2 and 5 basis points, closing the week at 3 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets took the Fed Chairman's comments to heart and rallied to several record closes this week. The exceptional path of high growth and low inflation pushed the Dow into record territory on 3 occasions this week. The TSE managed 2 record closes, while the S&P 500 added another record close to the list. The Nasdaq recovered some of the territory it lost late last week, but is still mired below its previous record high. The push into record territory was broad based and on strong volumes. Although market technicians claim that the market is poised for a correction a la April/May.

The DJIA posted the strongest showing on the week, out pacing the Nasdaq for the first time in many weeks. The Dow added 222.98 points on the week, to close 2.83% stronger at 8113.44. The TSE managed to put together a meagre increase of 42.08 points, adding less than 1% to the index value, closing the week at 6780.27. The volatile gold sector continues to be a drag on the TSE. With inflation low, interest rates at historically low levels, decreased government deficits, increased fiscal responsibility, and healthy economies.....why is there any immediate need to hold gold? Diversification is the only real reason.

Next week brings a host of economic data to both Canadian and US investors. In Canada, May GDP figures will be released mid-week. In the US, the quarterly employment cost index, consumer confidence, new home sales, Q2 GDP figures, and non-farm payroll data are all scheduled for release. Several of the economic figures to be released next week have the potential to knock the markets down, as much of the positive news is already in the market, and the markets are technically overbought. Good trading.

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