Weekly Wrap-Up June 9-13, 1997

Closing Numbers

The North American bond markets were looking for excuses to chop around early, while they waited for the US retail sales and PPI figures at the end of the week. Currency concerns greeted the markets, as fears emerged from Europe about the future of the European Monetary Union, and whether the terms of the Maastricht Treaty would be upheld. Germany and France, the two nations required to set the standard by which the other participants in the single monetary unit would be judged, may not be able to meet the terms of the Treaty by the required date. This would leave German Chancellor, Helmut Kohl, eating crow, and the socialist lead French government attempting to get the Treaty altered to include employment provisions and weakened inflation clauses. The US retail sales figure released at -0.1%, month over month, to show that consumers had cut back their purchases again last month, the third consecutive monthly decline. This combined with the fifth monthly decline in PPI (-0.3%), in as many months, pushed the bond markets north. Not since 1952 have producer prices declined in the same fashion as they have for US firms over the last five months.

The Canadian market not only had to deal with the strength of its southern neighbour, but also supply and political issues. The supply came in the form of two long issues. The first, issued Monday, was a $CDA 500M re-opening of the Province of Ontario 7.60%/2027. The issue moved well, even in a slightly weak market, as the credit was welcome on the street. Wednesday saw the Province of Quebec come to market with $CDA 350M 8.50%/2026 at 40 basis points back of the CDA 8/2023. This was a little aggressive for the market and the issue sat for a while on the dealers' books. The $CDA 3.5B 2 years the Government of Canada came with also kept the Canadian market subdued midweek. Once Prime Minister Chretien announced his Cabinet, re-affirming Paul Martin as Finance Minister, and stating that the finances of the country come before increased social spending, the Canadian market caught a bid. A huge bid.

The Canadian 30 year bond shed 15 basis points on the week, to close Friday at 6.73%. The US 30 year Treasury was hard pressed to keep pace, as the good inflation news could only pull 10 basis points off the yield, also closing at 6.73%. The Canada/US 30 year spread was flat (0) at the end of the week, after Canada traded through the US earlier in the week. This is the first time that the spread between the Canadian and US long bonds has disappeared since the two countries started issuing long bonds. The yield spread between Canada and the US reflects the premium international investors require to hold one credit over the other. Canada, historically, trades at a premium to the US.

The equity markets had ideas of their own. In the US the DJIA and the S&P 500 rallied ahead setting record closes every day last week. The good news for bonds was perceived to be good news for equities. The benign nature of the US non-farms payroll report last Friday, coupled with the resurgence of M&A activity, fueled the early activity this week. While the retail sales figure, and PPI number, added fuel to the fire, such that all the major North American markets closed the week in record territory.

The DJIA was clearly the horse to have bet on. The Dow added 346.26 points, or 4.66%, moving through the 7500, 7600, and the 7700 point level to close at 7782.04. The S&P added 4.11%, while the Nasdaq lagged posting a 1.29% gain on the week. The Nasdaq was dragged down by high techs such as Intel and Compaq. The TSE, while posting two record closes this week, including Friday's mark of 6550.61, seriously underperformed the US markets. Adding only 0.90% on the week, the Toronto market was hurt by all that shines, golds. The story of the TSE's underperformance continues to be the gold stocks, which drag on Canada's major market. Without any real signs of inflation, and little reason to hedge for inflation, gold has not been a strong performer over the course of this business cycle. With 9.9% of the TSE composed of gold stocks, the index has a hard time keeping up to the other major markets. On a bright note for the Canadian market, interest sensitive stocks, such as utilities and banks, posted a strong week as concerns about any action by the central bank faded with the benign inflation numbers.

The next week holds little in store for the markets other than US CPI, which given the recent trend of PPI should not pose any surprises to the market. The Beige Book, and the Philly fed report may shed more light on the inflation picture, but odds are moving in favour of the Fed doing nothing with US short-term interest rates at the next FOMC meeting, July1-2. Be careful of the technicals, the market is clearly overbought. However, with the cash that keeps on rolling into mutual funds, the stable interest rate environment, and reasonable corporate earnings, it may be a while before the market realizes it has discounted expectations through 1997 and into 1998, and a correction is in order. Good trading.

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