Weekly Wrap-Up June 2-6, 1997

Closing Numbers

The bond markets of North America each had significant, potentially destabilizing, political or economic events this week, and not even the traders can figure out what actually happened. The Canadian bond market faced the potential destabilizing outcome of the Federal election, while the US market had to deal with the non-farm payrolls number. Many individuals on the street left work Friday afternoon, scratching their head, and wondering....just wondering.

The Canadian federal election saw the ruling Liberal party, under Prime Minister Jean Chretien, retain their majority government. However, the majority is not the sweeping victory the Liberal government enjoyed when the election was called. The Liberals now enjoy a small 4 seat majority in the 301 seat Parliament. Some commentators have suggested that this could pose a problem for the government, since the decreased size of the majority could cause the Liberals to lose some of their resolve regarding fiscal responsibility, trying to placate varying constituents. This is unlikely, due to the fact that the Parliament now reflects a much more regional outlook. The official opposition is the Reform Party, which is primarily dedicated to representing the views of the western provinces, while the separatist Bloc Quebecois speaks for the separatist faction in Quebec. Needless to say, the Reform and the Bloc do not see eye to eye on very many issues. The Progressive Conservative Party, all but wiped off the face of the political map in the last Federal election, re-emerged with the middle right wing vote, and the socialist NDP speaks for disillusioned Atlantic regions and socially conscious parts of British Columbia. The Reform and the Bloc are at opposite ends of the scale on special status for Quebec, and any sort of economic cooperation should Quebec separate from the rest of Canada. While the Conservatives and Liberals are well aligned financially, with the NDP joining this group on the emotional issue of solving the Canadian federations unity issue. All this said, the Liberal government should be able to move through the next mandate, with a clear focus on their own agenda, as it is unlikely the opposition parties will be able to work together in an effective manner.

The economic data released this week did little to move the market decisively one way or the other vis-a-vis the Federal Reserve Board's action at the next FOMC meeting, July 1-2. The early reports which carried any weight in the US indicated that the US economy is still humming along with a strong manufacturing sector, and good consumer participation. The National Association of Purchasing Managers reported the 12th consecutive month over month increase in reported activity, citing robust new orders, and significant back-log levels, as indicative of continued signs of production increases in the coming months. Adding to inflation concerns were comments from the inflation hawk, San Francisco Federal Reserve President, Robert Parry. The markets expect such comments by Mr. Parry and had little reaction to them. The number almost all traders had been keying on for the week, the US non-farm payroll numbers, indicated that 138K new jobs were created in the US, with the unemployment rate edging down to 4.8%. The April number was revised significantly higher to 323K new jobs. Canadian unemployment data was released Friday, as well, indicating that the unemployment rate had fallen to 9.5% with 61K new jobs created. Most would expect these types of numbers to send the market south in a hurry. Which happened for about an hour on Friday, after the release. Then the market rallied significantly, which left traders wondering, 'Why ?'.

Explanations came in many forms. Since the jobs created were primarily of the self-employed nature, many analysts feel that the majority of them will fail. As well, with such a high percentage of jobs created in the self-employed sector, there is little to no direct wage inflation generated by these jobs. Continued comments out of Europe relating to concerns about the successful implementation of the EMU, under the current terms of the 1991 Maastricht treaty, raised eyebrows and North American bond prices. Fear that neither Germany, nor France, may be prepared to meet the current terms of the Treaty could point to delayed implementation or a diluting of the terms of entrance. Once again the flight to quality issue was cited, as investors sold European paper and invested in North America. Technically, the bond markets had been in a sideways trading channel for several weeks, and a break out was anticipated. With the non-farm payroll release, the significant news for the week was in the market, and was not considered too negative. If it is not too negative, it must be positive, so the break out is to the up side, with a little short covering to help get things rolling.

All this news lead to choppy trading, in volatility terms, until Friday. The Canadian market indigested the supply of $CDA 500M Real Return Bonds, dated 2026, as the auction was extremely sloppy. By the weeks end, the Canadian 30 year long bond was 15 basis points lower, 13 of those came Friday, at 6.88%. The US 30 year treasury was 9 basis points stronger at 6.83%. The Canada/US 30 year spread narrowed to 5 basis points, matching the tightest the spread has ever been. (A basis point is 1/100th of a percent.)

The North American equity markets all ended the week higher, with several of them closing at record highs. The TSE, DJIA, and S&P 500 all posted record closes, while the NASDAQ is within sight of another record close. The TSE made steady progress on the week, as conglomerates and consumer goods companies posted solid gains. The gains in the Toronto market have been restricted somewhat to the blue chips, passing by the smaller cap stocks. The market rally over the past weeks has not been as broadly based as technicians would like. The fact that the Canadian current account deficit increased last month indicates a still fragile recovery, and little need for the Bank of Canada to act in the near future. In case of a market correction, many players are sticking to the highly liquid blue chips in Canada. The US markets are a different story. After having lagged the blue chips significantly over the course of the year, the small caps are performing well, as market breadth is increasing in the US. Fears that actual earnings will be less than street estimates is driving the markets more so than the interest rate environment at present.

The TSE added 1.72%, or 109.98 points on the week, at 6492.10, out performing the DJIA. The Dow added 1.43%, or 104.74 points, to close the week at 7435.78, about 7 points shy of adding 1000 points since the beginning of the year. The broader markets in the US all ended in positive territory, with the NASDAQ struggling to finish in the black due to continued earnings fears in the high tech sector.

The upcoming week is fairly thin on fundamental economic data, so look for the market to trade a little on the technical side. The US will see the Richmond Fed survey, the retail sales figures, and PPI, which may or may not effect the market. Look for news out of Europe relating to the EMU to continue to have an impact on the North American markets. Good trading.

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