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Weekly Wrap-UpJuly 17-21, 2000 |
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Weekly Wrap-UpJuly 17-21, 2000 |
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The North American bond markets rallied this week, but not until after the Federal Reserve Board Chairman had finished his testimony. Chairman Greenspan gave the markets reason to believe that the Fed will be on hold for the near-term. Indicating that the US economy may be moderating, and the consumer may be satiated, the Fed Chairman sparked the largest single day bond rally in five months.
Addressing the Senate Banking Committee, in what had traditionally been the first half of the Fed's biannual statement on the health of the US economy and monetary conditions, the Federal Reserve Board Chairman painted a picture of a soft-landing in the US. Mr. Greenspan also indicated that the sustainable growth rate in the US may be above the previously assumed 3.5%, possibly in the 4-4.5% range. The fact that virtually every working US household has two cars and that at least one of those was bought in the last four years by 60% of them had the Fed Chair speculating on whether, or not, the US consumer may be satiated. If so a slow down in consumer spending could be sufficient to reign in the US economy to more moderate levels.
OPEC was at it again this week. The oil cartel continues to jostle for position with respect to the potential need for greater supply. The Saudi's and Venezuelans believe a production increase is necessary in order to continue to prosper from global economic expansion. The belief being that oil prices which are too high will put a damper on global demand. By the end of the week the Saudi Arabian position had solidified to the point that they would pump the extra oil themselves if need be in an effort to move the price of oil lower.
China announced that GDP has risen 8.2% in the first half of 2000. The Chinese also announced that the money supply had expanded by 13.7% over the same time period. Could it be that the Communist Chinese are taking a page out of Fed Chairman Greenspan's book of tricks. With a larger money supply comes a larger economy, for the monetarist school of thought.
Economic data released this week continues to indicate an economy which is healthy, but moderating in tone. Both positive for the bond market. In the US, the trade deficit rose $US 31 billion month-over-month (m/m), standing at a record $US 147.7 billion year-to-date (ytd); exports fell 1.0%, imports fell 0.3%; housing starts fell 2.6% m/m in June, down 17.4% quarter-over-quarter (q/q) and down 0.5% year-over-year (y/y); building permits were unchanged m/m, down 19.9% q/q and down 10.9% y/y. In Canada, housing starts declines 1.1% m/m, while prices rose 4.0% m/m in May; trade surplus rose a smaller than expected $CDA 3.8 billion m/m in May, with exports up 4.6% m/m and imports up 2.4% m/m; retail sales rose 0.4%, up 0.2% ex-autos for May.
The tame nature of the economic data combined with the market friendly comments by the Federal Reserve Board Chairman put a bid in the market late in the week. Prior to Mr. Greenspan's comments, the market was very nervous as traders set new short positions in anticipation of tough bearish comments by the Fed Chairman. When the comments came out bullish, the market rallied and those caught short scrambled to cover. Thursday of this week saw the largest bond rally in 5 months.
In Canada, the Government of Canada 30 year long bond shed 4 basis points on the week, rallying 9 basis points Thursday, to close the week at a yield of 5.53%. The US Treasury 30 year long bond shed 8 basis points after a 10 basis point rally fueled by the Fed Chairman's comments, to close the week at 5.79%. (A basis point is 1/100th of a percent.)
The North American equity markets had a mixed week as Mr. Greenspan's comments were weighed against the earnings releases of the week. In the end, the TSE benefitted from the economic news, and the US markets were dragged lower due to earnings warnings. The Toronto Stock Exchange closed higher than the DJIA for the first time in more than five years.
Software companies in the US warned analysts that profits would not meet expectations. As well, Lucent, Ericsson, and Lexmark warned the analyst community that profits and earnings for the third quarter would not meet current expectations. This did little to support the US markets, even in light of the strong results posted by IBM.
Nortel announced the signing of a multi-billion dollar deal with WorldCom, and JDS Uniphase will be added to the S&P500. The JDS news was excellent for current share holders as adding the stock to the S&P index should generate approximately $US 6.3 billion worth of demand from index funds.
The TSE added 63.28 points to close up 0.59% at 10,842.08. The TSE set a new record high early in the week and closed marginally below that level at week's end. The DJIA lost 79.19 points to close 0.73% lower at 10,733.56. The S&P500 lost 1.97% to close at 1408.19, while the Nasdaq shed 3.57% to close at 4094.45.
Next week brings supply to the Canadian market with a $CDA 2.6 billion 10 year bond auction. In the US, there are rumoured to be 30 IPO's lining up to come to market. The big number for the week will be the employment cost index figure for the second quarter, released in the US market Thursday. Good trading.
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