May 15, 1996

Funny things are happening on the Road To Inflation. Over the last two weeks, various statistics came out that at first gave fears of inflation and then just as quickly took them away. First quarter US gross domestic product increased at an annual rate of 2.8%. Average US hourly earnings increased 0.6% in April. The Commodity Research Bureau index at 260.22 is not far off its recent high and compares, for example, with 246.40 in our editorial page of Feb.15. On the positive side, the US Producer Price Index rise of 0.4% announced last week was lower than anticipated. The US non-farm payroll increase of just 2,000 in April contrasts with the revised figures of the 624,000 increase in February and 178,000 in March. This week, the announcement that consumer prices rose by 0.4% in April, similar to the 0.4% increase in March was qualified by the higher energy prices that took place at the time. The core CPI (ex food & energy) rose just 0.1% versus 0.3% in March and 0.2% in February. On a year to year basis the core CPI is up 2.7% and similar to Nov/Dec of 1994 is as low as it has been in thirty years. Added to the bullish sentiment is that retail sales in the US fell by 0.3% in April vs. a 0.5% rise in March. Furthermore, oil prices are already well below recent highs of $25/barrel and this will soon translate into lower CPI gains.

The move from bearish to bullish sentiment made for some wild market swings in both the bond and stock markets. Long term US treasury bonds currently yield 6.83%, virtually unchanged from a month ago after having gone through the 7% level to as high as 7.12%. Long term Canadas yield 8.21%, exactly the same as a month ago, after having traded down to yield 8.40%. Two year maturing US treasury notes yield 5.96%, unchanged over the last month, after trading as low as to yield 6.20%. Two year Canadas trade at 6.04% after having yielded as high as 6.27%, but, nevertheless, a big improvement over the yield of 6.23% a month ago and, quite interestingly, at just about the same rate as US, quite a reversal and narrowing of spread.

The Dow Jones Industrials average at 5625 is nudging its yearly high of 5690, a significant increase over the 5533 level a month ago. This equates to an 18.4 price/earnings ratio and a yield of 2.1%. This compares with 17.6 times and 2.2% a month ago. The Standard & Poor's Composite Index of 666 is just about at its high and is 4.5% higher than a month ago. The Toronto Stock Exchange 300 index at at a new high of 5206 trades at a 17.2 price/earnings ratio to yield 2.1% in dividends. This is 3.7% higher than the 5022 level of a month ago.

With downsizing continuing at both the government and corporate levels, the wage component (judged to account for 60% of inflation) appears to be in check. With US elections in the Fall and the summer Olympics to be held in Atlanta, the sentiment towards investing in North America continues to be positive.

A word about gold: Gold demand continues to outstrip supply. In 1995, the 682 tonne shortfall, according to London-based Gold Fields Mineral Services Ltd., was filled mainly by foreward sales of 461 tonnes and sales from central bank reserves of 201 tonnes. Foreward selling will continue in 1996 but this real supply/demand imbalance will most likely cause price increases, possibly to the 410-415 US$/Oz area.