Weekly Wrap-Up November 3-7, 1997

Closing Numbers

The North American bond markets were dominated by a host of economic data and a flood of supply this week . The US Treasury performed it's quarterly refunding this week bringing 3 year, 10 year and 30 year bond issues to the market. The Government of Canada also came to market with a re-opening of the 10 year Canada issue. Tuesday saw $US 14bil 3 years come in the US at an average yield of 5.76%, which was as many traders expected. This paved the way for $US 11bil 10 year notes and a $CDA 2.3bil re-opening of the 6%/08 bond. Both issues were well received with the Government of Canada issue coming at an average yield of 5.636%. The final installment of the US quarterly refunding came Thursday, with $US 10bil 30 years at an average yield of 6.201%, the lowest yielding long bond auction in almost two years. All of this supply, combined with the economic data ahead of next Wednesday's FOMC meeting kept the bond markets fairly close to home. Many institutional accounts were said to be inactive due to the upcoming Fed meeting.

Economic data this week indicated a robust economy in the US, with little inflationary pressure, and an economy in Canada which may not need the monetary snugging which the Bank of Canada has been hinting at for the past several months. In the US, NAPM came out at 56 versus 54.2, with the prices paid index indicating a rise from 54.7 to 55.9. US leading economic indicators rose 0.2%, and US manufacturing orders rose 0.4%, the fourth consecutive increase. The US non-farm payrolls report released Friday indicated the US job market is getting tighter, as 284,000 new jobs were created last month, dropping the unemployment rate in the US to 4.7%, from 4.9%. The Canadian employment data did not mirror that of the US, as the unemployment rate in Canada rose to 9.1% from 9.0%, with 11,000 full-time jobs being lost. Many analysts believe that the recent employment reports out of StatsCan are anomalies (the Help Wanted Index rose 1.6% in October), and that the Canadian economy is still growing at a healthy pace. However, this recent report does little to encourage the Bank of Canada to raise short-term interest rates.

Given the recent economic data out of Canada, there is little domestic need to raise short-term interest rates. Unemployment will not decline, commodities are falling in price, price pressures at the wholesale and retail levels are non-existent and the $CDA is under extreme pressure in the wake of the Asian and South American currency worries. With the need to raise interest rates perceived by the global currency market in order to stem downward spiral of the beaver buck, there is little reason domestically to do so. It would be very difficult for Bank of Canada Governor, Gordon Theissen to raise interest rates at a time were there are so few signs of inflation on the horizon after indicating two months ago that the Bank is looking at a neutral monetary stance from its previously proclaimed accommodative stance. Since just after the Bank of Canada raised interest rates in October, the Canadian dollar has lost 3% of its value versus the US dollar. This trend, analysts say, could be reversed if the Bank of Canada raises rates again, to regain its credibility as an inflation fighter. Politically, this will not be a popular act for the Bank to undertake, and until stability returns to the currency market, would be fool hearty as it would just allow the global currency market to reload and run at the Canadian dollar again. Show me more signs of inflation, and a more stable international currency market before you show me higher Canadian short-term interest rates.

On the week the Canadian bond market saw the yield curve flatten, as the short-end weakened off following the currency, and the long-end held in with the inflation benign news, and continued volatility in the global equity markets. The Canadian 30 year bon rose 2 basis to yield 6.03%. The US 30 year Treasury also rose 2 basis points to close the week at 6.17%. The Canada/US 30 year spread moved to -20 basis points this week before moving back to close the week unchanged at -14 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continued their volatile activity, although in a somewhat muted form, this week. Early week rallies overseas lead to a confident mood in North America, which was easily interrupted by any signs of market weakness abroad. The fluctuations and mood swings the equity markets have been demonstrating were manifest in the sell-off Friday, which was fueled by a strong non-farm payrolls number and strong selling on the Asian, European, and Latin American equity markets. High techs, financial services, base metals, and golds were the major contributors to the sell-off. Although the activity saw the TSE, DJIA and other major North American markets lose significant ground into the week's end, the markets managed to hang onto marginal gains on the week.

Earnings concerns are being cited with respect to the potential effect on sales, and profits, for firms which export to Southeast Asia of that regions potential economic slowdown. That sentiment took hold on Friday to erase the majority of the ground won back from the market melt down of last week. The TSE held onto a meager 0.14% gain on the week, closing at 6851.74, up 9.36 points. The Dow posted the strongest showing of major North American markets, rising 1.87%, or 139.24 points to close the week at 7581.32. Other major markets were up at the margin on the week.

Next week brings a shortened trading session for the bond markets, as Tuesday, Canada recognizes those who gave their lives in war with Memorial Day, and the US does the same with Veterans Day. Economic data next week will see the US release productivity data, PPI, and retail sales figures. However, the big event of the week is the FOMC meeting, Wednesday. It is widely believed that the Fed has many other factors in the equation determining the direction of short-term interest rates at present than just the domestic economy. The currency turmoil in Southeast Asia and South America could be exacerbated by a raise in US short-term rates. With no hard signs of inflation on the horizon look for the Fed to hold the course Wednesday. Volatility is still present in the markets, so be aware. Good trading.

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