February 4, 2000


North American stock markets continue to be volatile and the popular indexes trade at or near new highs.The TSE 300 index at 9209 is at a new high and trades at 37.6 times earnings to yield 1.20% on dividends.The Dow Jones Industrial Index at 10,964 is off 6.7% from its January high of 11,750 and trades at 23.6 times trailing earnings to yield 1.40%.The S&P 500 index at 1424, January high 1478, trades at a 32.3 p/e to yield 1.18% on cash dividends.The NASDAQ is trading at its high of 4244. However, stock markets continue to be selective awarding technology companies high multiples and ignoring many less glamorous issues.

 The bond market took on its own measure of volatility in January. US long-term bonds continued its downward slide in prices through the first half of January reflecting both the attraction to stocks as well as the threat of inflation and at one time traded to yield as high as 6.78%.In the latter part of January, the US Treasury Department announced it will reduce publicly held debt by $17 billion in the current quarter and by $152 billion in the following quarter.Furthermore, the Department will now sell 52-week treasury bills only 4 times a year instead of the usual 13.Ten-year notes will be auctioned only twice a year while 30-year bonds will be sold just once a year and could be soon be eliminated entirely.This had quite an effect at the long end.US 30-year bonds rallied dramatically and on Feb 4 were trading to yield 6.23%.Long Canadas also improved somewhat and now trade at a 6.17% yield compared with 6.27% a month ago.However, 2-year bonds reacted very differently and were influenced by the increase in discount rates imposed by the central banks and by the threat of inflation. US 2-year bonds on Feb 4 trade at 6.58% compared with 6.26% a month ago and Canada 2-year bonds trade at 6.50% compared with 5.93% late December.

Commodity prices, as measured by the CRB futures index, stood at 213 on Feb 4 compared with 205 a month ago, a significant increase of 4 % in a short time.†† Gold for most of the month of January held steady between $280 and $290 but took off suddenly on Friday February 4 to end the day at $310.40 up $23 on the day, after having traded as high as $315.30 intra-day.A number of factors appear to be at play.Some gold producers, such as Placer Dome, announced they would curtail selling gold futures.There were also rumors that certain large hedge funds were caught short on both gold as well as long-term bond futures and were being forced to cover up.In any event, it is becoming apparent to many that the price of gold has been kept artificially down, certainly with respect to supply and demand. Oil continues to trend toward higher prices, $28.82 on Feb 4 compared with US$26 a month ago.

The US economy continues to perform very strongly.US Gross Domestic Product rose at a 5.8% annual rate in the fourth quarter following an annual rate of 5.7% in the 3rd quarter. For the year as a whole, the economy grew 4% after gains of 4.3% in 1998 and 4.5% in 1997.Leading the way was consumer spending which rose 5.3%, the largest gain in 15 years.The US Labor Departmentís employment cost index rose 1.1% in the 4th quarter bringing the cost increase to 3.4% for the full year.So far in the 4th quarter, consumer spending rose 0.5% in November after a 0.7% rise in October.

From an inflation-reporting point of view, the month of January began in a rather benign way, but from then on the results became more dramatic.The US Consumer Price Index in December rose moderately at a less than expected 0.2% compared with Novemberís equally low rate of 0.1%.The US Producer Price Index for December came in at the expected increase of 0.3% compared with Novembers equally moderate 0.2%.However, US retail sales were again much stronger in December, up 1.2% against an expected increase of 0.9% and following the 0.9% increase of November.US non-farm payrolls for December increased by 315,000, much higher than the anticipated 238,000.Then on Feb 3, it was announced that in January the US added 387,000 workers vs. expectations of 265,000.Unemployment rate fell to 4.0%, lowest in 30 years and down from Decemberís 4.1%.Average hourly earnings rose 0.4% after increasing 0.3% in December.

On Feb 2, the policy-setting Federal Open Market Committee raised the overnight bank lending rate a quarter-point to 5.75% and the feeling is it will increase the rate by at least another quarter-point at the next FOMC meetings March 21, 2000. The following day, the Bank of Canada raised its rate also by a quarter of a % to 5.25%.The European Central Bank raised its refinancing rate by a quarter of a percentage point to 3.25% mainly to halt the slide in the euro vs. the US$, a 16% drop over the last year.The euro hit a low of 96.65 on January 31 and had recovered somewhat to 98.32 on Feb 4.Meanwhile, over the last week the US$ rose to 109.06 yen, it highest level since September 13, and has settled down to 107.19 on Feb 4.

The Federal Reserve Board must still be concerned with the very strong US economy and how it will affect prices and the cost of labor.A recent survey of executives produced an outlook that wages will rise 4.8% this year, with some sectors such as high-tech producing an increase of 7.9%.Another worrisome factor is the level of government spending which rose at an 8.4% annual rate in the 4th quarter versus a 4.5% rate in the 3rd.


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