FIRST QUARTILE ECONOMICS |
Heading into this week, the currency may very well re-test the 1.4265 level that held as the low since 1995. It seems a bit premature to expect a meaningful CAD rally from here even if 1.4265 is broken. Rather it seems more probable that some re-test of the late January low of 1.4685 lies somewhere ahead.
U.S. DOLLAR: The big dollar faded across the board this past week after showing signs of a rebound several days earlier. Apart from concerns that the Bank of Japan has set a limit to Yen weakness, hence limiting any rallies near term, there remains talk that hedge funds continue to unwind recent Yen borrowings. In the big scheme of things the Yen is still overvalued. Technically, Dollar/Yen is in a three year uptrend with major support in the 123 area, or right where it is now.
U.S. BONDS: It was a bad week for bonds as the prior week’s two point rally in the long end was largely reversed. Rallying equity markets were the key to the flight from bonds. The FOMC meeting adjourned with no policy change, as expected, and the minutes of the December meeting indicated a removal of the bias toward tightening.
The quarterly refunding is on tap for the upcoming week and promises to keep a lid on any price gains. Still, the inflation outlook remains favourable and there is no compelling reason for long bond yields to back up much further. Having said that, long Treasury futures could fall a couple of points before trendline support comes into play which is certainly not out of the question if equities continue to advance. To the market’s credit, a nominally bearish non-farm payroll report was digested on Friday with a slight gain in bond prices and money market futures continuing to build in a benign Fed through 1998.
CANADIAN BONDS: The Canadian market saw a moderate steepening of the yield curve as the 5 year area was virtually unchanged in yield while long rates rose about 4 basis points and 2 year rates eased 6 basis points.
From here, there is not a lot of room for short and mid-term yields to decline, unless the currency suddenly firms significantly. As for long rates, there was some spread narrowing versus the U.S. this past week but we are in no shape to resist any near term weakness in the U.S. We also have a $2.3 billion, 10 year Canada issue in the middle of the U.S. refunding, so any firmer tone awaits Thursday or Friday.
CANADIAN EQUITIES: The TSE 300 rose a welcome 2.2% on the week and is now up 9.2% over the past four weeks, the same as the S+P 500. Financial Services rose 4.2% while Utilities rose 3.9%. Amidst the consolidation in gold and metals prices, the Gold index eased 1.5% while Metals and Minerals fell by 1.1%.
INTERNATIONAL EQUITIES: The S+P 500 hit a new high this week as did the German Dax index. The S+P 500 notably broke above the 1000 level while other U.S. indices are now close to record highs. I’ve not been keen on equities of late, so the equity market strength has caught me off-guard. Nevertheless, this is broadly an environment to trim equity holdings at near record prices in a lot of areas. With all due respect to the 14% rise in the Hong Kong market on Monday that triggered the global equity euphoria, there is still a U.S. economic slowdown coming as a result of Asia and what appears to have been an excess inventory buildup in Q4. While there is nothing akin to a recession or soft landing on the horizon, the expected minimal profit growth in 1998 does not justify a renewed and sustainable run by equities for some time yet.
CANADIAN ECONOMIC DATA: The January unemployment rate retraced to the 8.9% level from 8.6% in December and 9.0% in November. Employment fell marginally after a large gain in December, but apart from the ice storm in Eastern Canada employment actually rose about 45,000.
The U.S. received a mixed data slate from a fixed income market perspective this past week: The Purchasing Managers’ Index fell in January with a big drop in the prices paid component while non-farm payroll employment in January surged by 358,000 versus 355,000 in December and another large gain of 429,000 in November. Unemployment was unchanged at 4.7% in January while average hourly earnings rose by 0.3%. Nominally, this kind of payroll gain would destroy bond prices but evidently traders took solace in the 3.8% yr/yr trend in hourly earnings - a sign that wage gains were acceptable.
Also in the realm of labor market data, outplacement firm Challenger Gray & Christmas Inc. said the number of job cuts announced in January stood at 72,193, up 66% from a year earlier. The five biggest job cuts announced were by: AT&T Corp.(18,000), Seagate Technology Inc.(10,000), Raytheon Co.(9,700), J.C. Penney Co.(4,900) and Whirlpool Corp.(3,200). Obviously, despite the overall tight labor market in the U.S., job security remains elusive.
FUTURE DATA: Apart from January Housing Starts on Monday, no relevant Canadian data are on tap this week. The U.S. market is looking ahead to Thursday for the Retail Sales report for January which is expected to be friendly for bonds.
Monday, February 9, 1998.
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