Weekly Wrap-Up September 1-5, 1997

Closing Numbers

The North American bond markets came back from the Labour Day long weekend to a couple of significant economic indicators. In the US, the National Association of Purchasing Managers released the NAPM diffusion index at 56.8 down from 58.6, indicating a moderation in manufacturing growth. The index remains bullish, with a reading above 50 for the 76th consecutive month. In Canada, Stats Canada reported the Canadian unemployment rate remained unchanged, despite the addition of 55K new jobs. An increase in the labour force caused by an increase in the number of Canadians seeking work, prevented the unemployment rate from slipping below 9%. The Canadian unemployment figures are unlikely to drop much below 9%, as the labour force is likely to continue to grow as the health of the Canadian domestic economy builds. The end of the week saw the US non-farm payroll number released. The rate of unemployment in the US rose to 4.9% from 4.8%. The headline number of +49K jobs (+80K expected) was over shadowed by the revision of August to +365K from 316K, and an increase in the length of the average work week.

The Canadian market also digested supply as the Government of Canada continued with the inflation linked Real Return Bond program issuing $CDA 400mil 2026. Hydro Quebec came with $CDA 350mil 2003, at 25.5 basis points over the Canadian yield curve. The issue was aggressively priced and competed against the Government of Canada for market interest, and as a result moved slowly.

The bond markets finished the week mixed. The Canadian bond market, responding to a strong Canadian employment report positively added only 2 basis points to 30 year bond, closing the week at 6.59%. The US 30 year Treasury traded in a choppy manner all week, closing at 6.64%, adding 4 basis points. The Canada/US 30 year bond spread continues to trade in negative territory, at -5 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets had a much choppier ride than the fixed income market. The August doldrums were thrown off to start the new month. All the major markets surged ahead. One analyst asked if the 7% market correction was really over. Another technical analyst indicated that the market has had a 33% retracement of the April to July rally. The 1/3 level is a significant level for technical traders. The Canadian market was fuelled by merger activity in the oil and transportation sector. The TSE managed a 1.99%, or 131.43 point increase to close the week at 6743.22. The DJIA closed the week on a negative note, as the Friday volatility continues. The Dow added 200 points, or 2.62%, to close the week at 7822.42. The S&P 500 posted a 3.29% increase on the week, while the Nasdaq closed the week at a record high of 1635.77 adding 3.09%. The shine of the blue chips is fading as investors and analysts question the valuation levels of the large caps. The small and mid-cap stocks are starting to regain some of the lustre they had lost as investors turned to large caps for liquidity.

Next week brings the first full trading session of September. The volatility in the markets is likely to continue as the market players continue to trade the range looking for a reason to break out one way or the other. Look the the retail sales figure and PPI number released next Friday to be the market movers. The Government of Canada will come to market with $CDA 3.5bil 2 year bonds next Wednesday. Good trading.

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