November 15, 1996

The trend to lower interest rates and higher stock market prices continued over the last month. On November 1, October nonfarm payrolls were released at up 210,000 and the US unemployment rate remained unchanged at 5.2%. A couple of weeks later, the US producer price index came in at up 0.4%, but the hard core component (ex-food & energy) was down 0.3%. These were all great for the bond and stock markets. The next day,Nov 14, some components came in with a negative bias, and there were some corrections to the bond market. October retail sales were up 0.2% and October Consumer Price Index was up 0.3%.

US long term bonds ended November 15 trading at a 6.46% yield, compared with 6.84% a month ago. This is still quite a way from the low yields of Jan-Feb 1996, when long term rates were at 6.09%. Long Canadas closed Nov 15 at 6.73% yield compared with 7.33% a month ago, cosiderably lower than the prevailing rates in February, when at 7.67%. Two year maturing US treasury notes on Nov 15 yielded 5.67% vs 5.88% a month ago. Canadian 2year bonds traded up to 4.02 % vs 4.39% a month ago. The Bank of Canada cuts its prime twice over the last month, to its current level of 3.25%.

In the stock market, the Dow Jones Industrials average sailed through the 6300 level with the greatest of ease, to stand at 6348 on Nov 15. At this level it trades at 18.4 times somewhat improving earnings and yields 2.06% on cash dividends. The S&P's Composite Index at 738 trades at 20.4 times trailing earnings to cash yield 2.02%. Meanwhile, the TSE 300 index is starting to look pricey at 5871, trading at 23.8 times earnings to yield 1.80% on dividends. The dilemna in Canada is that short term interest rates being lower than in the US is driving money managers that much more into equity instruments.

The fundamentals on both sides of the border appear to still favor stock and bond investing. Inflation seems to be in check as is evidenced by the Commodity Research Bureau index at 242.57 compared with 244 a month ago.