Weekly Wrap-Up June 16-20, 1997

Closing Numbers

The debt markets in North America had a heavy slate of economic data to digest early in the week. This caused little concern among traders, as the bulls are firmly in control of the market at this point. The US released several economic numbers which indicate that the economy is positioned to continue to grow, with little sign of inflationary pressure. US CPI came out as expected, at 1.4% annualized, up 0.1%, with the core up 0.2%. Industrial production was a stronger than expected 83.7%, up 0.4%. This caused some inflationary concerns due to signs that productive capacity is near constraint levels. However, it should be noted that the Chrysler strike ended, inflating the figures. Real earnings showed strength, rising 0.3% in the US. The inflationary concerns caused by this number were mitigated by the fact that US productivity increased 2.6% in Q1, allowing businesses to continue to boost production without increasing costs. Of significance to Canadian investors was the release of Canadian CPI data, which indicated that inflation at the consumer level is 1.5% annualized for May, down from 1.7% in April. Bank of Canada Governor, Gordon Theissen, spoke to a group in Quebec City, Tuesday, indicating that Canadian interest rates could remain stable, even in the face of increasing US rates. With inflation figures like the ones being posted by Canada at this point in time, there is little need to attempt to slow the economy down.

The nature of the numbers released this week allowed traders to further discount the possibility of an increase in US short-term interest rates at the next Federal Reserve Board FOMC meeting, July 1-2. Given the comments made by Mr. Theissen, the likelihood of an increase in Canadian rates is also slim. Although, the mitigated chance of an increase in Canadian rates will have a temporary negative effect on the Canadian dollar, as witnessed by the trading in the currency late in the week.

The US market did little this week, starting the week with some positive momentum, and then drifting lower with little real volume driving the trading. When in doubt, the trend is your friend. The US market did receive some support mid-week with a Fed coupon pass, and buying out of the Bank of China. Probably in an attempt to spend all that US currency that Chinese exporters are earning - the US trade deficit with China increased by 33% last month. In Canada, the market would have done just fine all week, were it not for some supply which had to be moved off of the dealers' books. The Province of Ontario re-opened the 7.60% 2027 issue, again, this week at 20 basis points over the Government of Canada 8%/2023. As well, the long talked about, and oversubscribed, Canada Trust MBS deal came with 5 tranches. Due to the demand, the deal was increased from $CDA 900M to $CDA 1.27B. Canadian issuers are trying to take advantage of the low interest rate environment to do a little pre-funding. The CT MBS deal is significant in that there has been a concerted effort made by the major dealers in Canada to re-establish the MBS, and securitized issue market. This is due to the desire of companies to free up balance sheet assets through the use of securitized deals. The 30 year US Treasury closed the week 6 basis points stronger, at 6.67%. The Government of Canada 30 year long bond closed the week at 6.68%, 5 basis points stronger. The Canada/US 30 year spread is at +1 basis point. Although, in the midst of the supply concerns, it moved out to +8 basis points mid-week.

The equity markets in North America diverged from one another, based on geography. The major exchanges south of the border continued to charge ahead into record territory, while the major Canadian exchange languished over the course of this weeks trading. Since June, 6, there has been a new record close established on at least one major American exchange every day except Wednesday of this week. The S&P 500 posted four record closes, the Nasdaq showed three record closes, and the DJIA closed the week on a record high. With the debt markets discounting a stable Fed policy stance through July, the equity markets are beginning to focus on Q2 earnings reports, due out the second week of July.

The DJIA added 14.47 points, or a marginal 0.20%, in choppy trading to close at a record high of 7796.51. In the US, the Nasdaq was the big winner, adding 24.07 points, or 1.69%. High techs lead the way as the broader market continues to enjoy the fruits of this portion of the market rally. Triple witching on Friday added to the strength of the US markets as huge long future positions had to be converted into the underlying securities. The TSE had the same problems its been experiencing since last August, when gold started to drift lower. With approximately 10% of the Toronto exchange related to the price of bullion, there is no doubt that the TSE will have to work even harder if it is to keep up with the exchanges south of the border. Rumours on the street had the Belgian government selling gold reserves into the market in an effort to get ready for the European Monetary Union in 1999. With the establishment of a single European central bank, the individual member central banks will have little need to hold large reserves. A quick look at the torrid pace of inflation in North America indicates that there is little need at present to hedge portfolios against the corrosive effects of inflation. So gold continues to under perform, as does the TSE. The Toronto market managed to end the week in the red by 39.18 points, closing at 6511.43.

Next week brings, US durable goods, existing home sales and final Q1 GDP. As well, the US Treasury will come to market with 2 years and 5 years, which should see these two areas of the curve cheapen up a little prior to the auctions, so that dealers may set up a book. Canada will just be along for the ride, with little on the calender. Watch the $CDA, and gold for indications of Canadian overall market performance. Once again the fixed income markets look to be at the high end of their recent range technically, and could be vulnerable to a correction. With little in the way of data, and supply coming, there is little reason for traders to establish large new long positions. Good trading.

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