FIRST QUARTILE ECONOMICS |
In Japan, despite the huge economic package, the Nikkei 225 fell 0.5% on the week and one has to wonder what it will take for Japanese equities to move higher. They have been in a topping zone for many weeks and look more set to roll over instead of test fresh highs.
U.S. BONDS: Bond yields have been hesitant to seek their destiny of much lower levels, and in technical terms a several point price move in either direction is close at hand. Yields on the 30-year Treasury have bounced off the uptrend line dating back to mid-January but are back to the trend channel dating back to mid-1997. This week’s closing yield was 5.95% and there is support at 6.0% and resistance at 5.85%.
It all shapes up to a possible resolution by next Friday amidst the March non-farm payroll employment release. There has been a very rare string of four consecutive months of 300,000 plus job gains yet the market has held in exceptionally well. Another strong report could very well test the market’s patience and result in a break to the 6.25% zone. Alternatively, a soft employment report will tend to validate the expectation of slower economic growth, and yields would have the basis to at least test the 5.69% low of January and no doubt 5.50% shortly thereafter.
CANADIAN EQUITIES: The TSE 300 sailed to a 2.8% gain on the week and has achieved a gain of 7.5% during the past four weeks. The big positive was the 13.4% gain in the Golds index accompanied by the 7.0% rise in Utilities. The only downer on the week was the 0.8% decline in Consumer products. The key to the market during the past week was the early week surge in oil prices accompanied by higher gold prices.
From here the technical outlook for the TSE 300 starts to look toppy overall with the proximity to trend channel resistance. Moreover, the TSE 100 is at its upper channel limit but the TSE 200 is far away from any such technical obstacle.
CANADIAN BONDS: Domestic bonds outperformed their U.S. counterparts as yield spreads widened across the curve. I have been watching the 10-year spread in concern over an emerging bear trend but this played out favorable this past week. The relevant chart had the makings of a gradual bearish trend within the bullish spread narrowing trend dating back to early 1997. As a result, long Canada yields are close to their January lows while U.S. long rates are almost 30 basis points higher.
The domestic yield curve has changed little in recent weeks, but for all the media talk of tighter Bank of Canada monetary policy, the level of rates out to 2-years continues to imply otherwise. If anything, 2-year Canada yields imply a lower Bank Rate by the end of 1998 and I would not disagree.
COMMODITIES: Oil prices surged by $2.49 on the week, or 17.4%, as key OPEC members got together and agreed to production cuts. Interestingly, the daily chart suggested the precise timing of an OPEC deal. Nevertheless, oil is still in a bear market and in case the market gets too euphoric near term, there is trendline resistance around the $20 B/L level.
Gold rose by $11.10 or 3.8% on the week as prospects of further world disinflation took a blow on the oil price recovery. Gold has been setting the technical foundation for a healthy uptrend in 1998. If the trend plays out, gold prices would be no lower than about $360 oz. in one year’s time.
U.S. DOLLAR:The dollar remains in a fairly narrow band of late but I continue to expect a burst higher. A pretty hefty Japanese economic support package was announced this week yet the Yen failed to strengthen. With the notion that the end of March will bring on a more natural Yen level, it should weaken imminently.
The DM is really coiling up for a significant move as resistance in the 1.83 zone has held for several weeks. Once the Yen breaks down look for the DM to be close behind. I fully expect a DM level of 1.90 over the next couple of months with an ultimate objective of 2.0 prior to European Monetary Union in 1999.
CANADIAN DOLLAR: The C$ extended its recent consolidation and managed to close a shade higher on the week. The anticipated announcement by Jean Charest about seeking the Quebec Liberal Party leadership materialized on Thursday but had long since been priced into the currency.
Another factor of note was the Bank of Canada Governor’s speech on Wednesday in Winnipeg. According to the newspapers the Bank of Canada is signaling higher interest rates since it expects the economy to be at full capacity in a year or so. My reading of the speech, however, saw a continuation of the theme of keeping inflation low which is not the same as implying inevitably higher interest rates. Anyway, the currency did not react very much.
Finally, the February CPI report showed a boost in the yr/yr core rate to 1.6% versus 1.0% recently and this had some people thinking higher interest rates are imminent. However, the core CPI is just back to levels of a few months ago, before an artificial decline based on free cable channel fees, and we should not get alarmed about domestic inflation. What remains more relevant is the now moderate gap between domestic and U.S. core inflation rates which argues against meaningful negative money market spreads and in turn a sustained uptrend in the currency.
Against this background, the CAD appears to be in a mild bear phase which could test the 1.4300 level soon. Strength may be technically limited to the 1.4100 area.
Monday, March 30, 1998.
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