Weekly Wrap-Up June 1-5, 1998

Closing Numbers

The North American bond markets faced a host of significant economic data, along with a souring of the Asian markets, and a rate hike by the Bank of England. In Britain, the Bank of England surprised the markets this week raising short-term interest rates 25 basis points. Comments out of the Bank indicated that although the economy is showing some signs of slowing, concerns over increasing wage inflation pressures forced the move. The Asian situation continues to deteriorate as Japan, Malaysia, Thailand and Korea all face recessions. The big surprise came from Hong Kong which is facing a recession, large employment cuts, and the possible devaluation of the Hong Kong dollar. All this combined to provide a mixed week for the bond markets.

On the economic front several numbers of importance were released in the North American market this week. In Canada, GDP for the first quarter was up a larger than expected 0.9%, with the implicit price index dropping 0.2%; the current account deficit was a smaller than expected $CDA -3.85billion for the first quarter; international reserves dropped 1.22billion to 20.56billion defending the currency; building permits declined 3.6% in April; the help wanted index was 143, up 0.7% in May; the May unemployment report indicated that 33 thousand part-time jobs were lost, while 26 thousand full-time jobs were created, leaving the unemployment rate unchanged at 8.4%. In the US NAPM index for May was down 1.5 to 51.4; construction spending in April was up 0.8%; new home sales were up 5.2%; leading indicators were up 0.1% factory orders were up 1.2%, or 0.3% with the transportation sector removed; non-farm productivity rose 1.1% in the first quarter; May non-farm payrolls rose 296 thousand, leaving the unemployment rate unchanged at 8.4%, with hourly earnings up 0.3%. All this taken together appears to be mixed with a strong economy with little sign of inflation.

This is bad news for the Bank of Canada. The Canadian dollar is sagging on the international markets, in desperate need of a rate hike in order to shore it up. Unfortunately for Bank of Canada Governor Thiessen, there is little reason to pull the trigger on higher short-term rates with the economy feeling the slowing effects of Asian demand for commodities. The Canadian dollar will test it's old lows versus the $US in the near-term.

The Canadian bond market underperformed the US market this week as the weakness in the $CDA and the adverse sentiment filtering into the Canadian market due to negative spreads to the US caused little in the way of investor excitement. The Bank of Canada is handcuffed at this point, and the bond markets performance reflects that. The Government of Canada 30 year bond added 3 basis points on the week closing at 5.56%. The US long Treasury bond shed 1 basis point to close the week at 5.79%. The Canada/US long spread has moved out 4 basis points to -23, after being as tight as -35 basis points two weeks ago.

The North American equity markets diverged this week as the commodity bias of the Toronto Stock Exchange continues to drag down Canada's major exchange. The US markets benefitted from some selective buying and a refocusing on the earning fundamentals of corporations. The interest rate focus of late April and the month of May has eroded, and market players are looking at earnings, particularly those earnings not influenced by Asian demand.

In Canada commodity prices are low, and getting lower as the $CDA losses ground to $US, and commodity inventories are high, while Asian demand continues to drop. Several timber producers on the west coast have announced plant shut-downs due to over-supply and slack commodity prices. The announcement by yet another central bank that its gold reserves are too high is not helping gold prices, and as a result the Canadian equity markets. All that had been driving the Canadian markets higher were bank and financial stocks, and utilities. With the uncertainty in the market about short-term interest rates and the declining probability of more merger announcements to fuel the market, look for the equity markets to underperform the bond markets over the summer months.

The TSE closed down 81.55 points or 1.07% at 7508.23. Weakness in banks and bullion exacerbated market losses. The DJIA closed up 137.76 points, or 1.15%, at 9037.741. The S&P500 added 23.04 points at 2.11% to close at 1113.86, and provide investors with something to smile at. The Nasdaq also posted a small gain on the week.

Next week brings the G7 plus Russia meeting to discuss a Russian bail-out, as well as more aid to Asia. If the focus is placed on the Russian situation look for the $US versus the Yen to move to new highs. Also, Fed Chairman Greenspan speaks next week, allowing the markets to try to glimpse the Feds next move on interest rates and the expected affects of Asia on the US economy. Not slot of economic data out, but there is a lot of corporate bond supply and a 2 year Government of Canada auction next week. Good trading.

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