Weekly Wrap-Up September 29 - October 3, 1997

Closing Numbers

The North American bond markets faced a week of uncertainty in both economic data and possible central bank activity. The numbers in Canada indicated that the economy is moving ahead at a strong pace. Canadian manufacturing shipments were up by 3.6%, unfilled orders rose 1.5%, new orders rose 7.2%, while inventories fell 0.8%, all pointing to strong economic growth. Canadian economic growth was confirmed with the release of July's GDP figures which showed the economy grew 0.8% in the month. With the FOMC meeting in the US producing an unchanged short-term interest rate stance from the Fed, many expected the Bank of Canada to adopt a wait-and-see attitude for the Canadian economy until at least October 10, when the September employment data will be released. With much of the anticipated Bank of Canada hike priced into the market, when the Bank raise short-term interest rates to 3.75%, from 3.50%, the market was relieved that the forward looking stance to inflation that Bank Governor Gordon Theissen has been preaching was not just words. US NAPM figures showed the US economic engine slowing as the index slipped from 56.8 to 54.6, indicating a robust economy with little signs of inflationary pressure. When the US non-farm payrolls numbers came out Friday, showing the economy produced 215K new jobs, 320K expected, the bond markets rallied to finish the week strong.

Supply continues to come to the street. The Province of Ontario came to market with $CDA 500mil 2027 bonds, at 28 basis points over the Canadian long bond. Credit, and yield, hungry investors grabbed the issue, as the market looked on the issue favourably. Some talk has emerged regarding the influx of Japanese investors into the Canadian market. An improving dollar, a stronger fiscal house, and long yields in Japan of 1.785% have drawn investors into the Canadian market.

The Canadian bond market outperformed the US market significantly this past week. The yield on the Canadian 30 year bond dropped to 6.13% by Friday's close, and interday Friday had dropped slightly below 6% at one point. This is the lowest yield the Canadian long bond has experienced since originally offered in 1990. The bond improved 15 basis points on the week. The US long Treasury performed well, shedding 6 basis points to close the week at a 1997 low yield of 6.29%. The Canada/US 30 year spread has set a record at -16 basis points, reflecting international investors belief that the Canadian fiscal house is improving. (A basis point is 1/100th of a percent.)

The North American equity markets were significantly influenced by the falling bond yields. The TSE, S&P 500, and Nasdaq all set record high closes on the week. Merger activity, as well as slowing earnings disappointments allowed the equity markets to continue to forge ahead in the "goldilocks economy" being experienced in North America. The TSE was helped by the technical break-out of gold, which rose above $US 330/ounce during the week. The gold sector has been the laggard of the TSE sectors, causing, in part, the exchange to underperform relative to the US exchanges. Any signs of a revitalized gold, or metals, sector is good news for Toronto. As yields in the bond markets head lower, investors are looking for better returns on their investments, this means that the mid, and small cap stocks are finding more investors. This is evidenced by the record closes posted by the Nasdaq and the S&P 500 over the week.

The S&P 500 was the performer of the major exchanges for the week, posting at 2.10% increase, with the Nasdaq following a close second with a 2% increase and closing above 1700 for the first time. The TSE posted 4 record closes on the week, adding 1.66%, or 115.99 points to finish the week at 7091.87. The DJIA gained 116.41 points, or 1.47%, to finish the week above 8000, at 8038.59. Technical analysts indicate that for the Dow to break-out of its current trading range, the index will have to close above 8100 and stay there for new record highs to be attempted. If bond yields continue to fall, look for increased cashflow to the equity markets.

Next week brings supply in the US market, wholesale trade figures, chain store sales and jobless claims, all fairly insignificant economic data. The real test to the markets will be the anticipated Fed speak, and Bank of Canada speak, as several officials of both central banks will be speaking. The markets have broken out of recent trading ranges, with the economic fundamentals looking positive. If no major shocks hit the markets look for them to move ahead cautiously. At the current lofty levels, any real inflationary concern will take the wind out of the sails quickly. Good trading.

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