FIRST QUARTILE ECONOMICS |
CANADIAN DOLLAR: The C$ extended its resurrection from recent record lows as the Quebec political scenario was a plus along with the more relevant continued demand for the domestic currency. During the past week, CAD traded in a range of 1.4037 to 1.4190 with a close of 1.4123 vests 1.4182 the prior week. The currency has now rallied 3.1%, on a weekly closing basis, from the January 29 low, and has retraced some 51% of its decline from the peak starting level in October. On a weekly hi/lo basis, this week's strongest levels were about 3.5% better than the January 29, low and CAD has retraced about 63% of its October to January selloff.
U.S. DOLLAR: The dollar is still struggling with resistance in the 1.83 DM range but has had an easier time against the Yen. The Yen is in trouble amidst concern over the credibility of policy makers and an upcoming economic package. The DM appears set to weaken but the necessary market forces have not built up decisively in either direction. I continue to think the DM will weaken by several percent over the next few months before putting in a final bottom around 1.90 or higher.
U.S. BONDS: It was perhaps a surprising week for bonds as the previous week's breakdown reversed significantly. Treasury futures rose 2 points while 30 year Treasury yields fell 13 basis points to 5.90%. As I have been saying, there is no convincing bear case against bonds other than the idea the Fed will not be easing, as recently thought in some quarters. Obviously, some funds have been diverted from bonds into equity markets, and rightfully so, but this has merely delayed the trend to new multi-year lows in 30- year yields. From a data perspective, the past week was somewhat mixed, for bonds, as February Retail sales rose a stronger than expected 0.5% but the Producer Price Index fell by 0.1%, the fourth consecutive decline. If producer prices are worth anything at all as leading indicators of consumer goods prices in the future, it appears the CPI will decelerate further in the months ahead before the long dreaded uptrend eventually takes hold. Also on the data front, January business inventories were flat thus breaking the string of monthly gains since 1996. With a flat industrial production report for January, this makes sense and given expectations of another lukewarm production gain for February, the first signs of an economic slowdown of some magnitude, are before our very eyes. For those of you who note the string of four months of non-farm payroll gains above 300,000, through February, remember that employment is a lagging indicator and when the numbers finally slow the economy will already be well into its braking mode. For the next week, the February CPI is expected to be restrained by energy prices and the yr/yr trend should fall from last month's 1.6% reading. The core CPI should ease a bit from the 2.2% trend last month. Any upturn in the monthly core CPI pattern that would generate concern on the part of the Fed is still not evident.
CANADIAN BONDS: Domestic bonds out performed their American cousins as yield spreads widened across the curve. Long yields fell moderately more than short term yields. A firm currency was a plus for bonds but basically the U.S. rally set the underlying tone. The February employment report reversed the distortions of the January ice storms as employment rose 82,000 and the unemployment rate declined to 8.6% from 8.9%. No doubt about it, the job market remains firm as most of the demand has been for full time positions. For those worried about wage demands and inflation, the labor market data reinforce fears that the Bank of Canada has several more rate hikes to deliver. For those who note the continued rise in the Monetary Conditions Index, as the currency recovers ( a 3 percent rise in the trade weighted Canadian dollar is the monetary equivalent of a 100 basis point rise in money market rates), the Bank of Canada should be comforted by the monetary drag imparted since last summer. When you consider the past rate hikes have barely begun to dampen economic growth and that the economy has slowed somewhat naturally in recent months, most of 1998 will post growth below the 3% rate. With growth at or below 3%, the output gap remains static and continues to contribute to CPI inflation in the lower half of the 1 to 3 percent target range. I doubt, the CPI will rise by more than 1.5% this year and most of any uptick from current levels will reflect recent currency weakness and some impact from higher mortgage interest costs in the CPI (not sustainable inflationary forces that would trouble the Bank of Canada).
CANADIAN EQUITIES: The TSE 300 put in another solid performance this week with a gain of 2.8% and a climb to new record territory. The Paper and forest products group rose a cool 8.7% on the week followed by a 5.3% rise in the Financial services sector. The Oil and gas sector fell by 3.1% in the wake of continued new multi-year lows in oil prices.
INTERNATIONAL EQUITIES: The S+P 500 hit more new highs during the past week with a net gain of 1.2% (that's nine consecutive weeks of net gains). The Dow rose a mere 0.4% on the week and fell by 0.7% on Friday. As suggested last week, the momentum of the advance is fading and maybe all it will take to trigger a correction is a couple weeks of zero gains.
COMMODITIES: Oil prices stopped just above the $14 B/L level with a close of $14.19 versus $14.87 last week. Oil prices are down some 30 % yr/yr and continue to pull the global inflation structure lower. OPEC is a dysfunctional cartel that will take more time to re-coup its typical co-operative nature and ultimately drive oil prices somewhat higher.
Monday 16 March, 1998
FIRST QUARTILE ECONOMICS |
Capital
Markets Weekly Archives
Back to Markets Page
Back to Investors' Corner
Back to The Investment Strategy Page 
The Financial Pipeline Homepage