Global Briefing: Calm Belies Movement on Several Fronts

ECB rate cuts are beginning to appear more likely.
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Global capital markets are subdued, but the calm may be obscuring three noteworthy factors. First, Japanese economic data continue to fall short of market expectations, casting doubt on the optimism that has crept into the market, especially among foreign buyers of Japanese equities. Second, the prospects for a rate cut next week in the eurozone are improving. Third, the Dow Jones industrials' closing above the 10,000 mark for the first time has not managed to boost global equity markets, warning perhaps of a breakdown of recent trading patterns.

Earlier today Japan reported an unexpected rise in the February unemployment rate to 4.6% from 4.4%, where it had stood since November 1998 and where the market expected it to stay. The jobs-to-applicant ratio was unchanged at 0.48, while the consensus had forecast some improvement. It is unreasonable to expect an improvement in the Japanese labor market any time soon. Ongoing restructuring efforts will involve more layoffs, and poor employment prospects will offset some of the government's efforts to stimulate the economy.

Look what's happening to consumption, despite the tax cut and public-spending schemes.

Salaried households' spending fell 4.1% on a year-over-year basis in February. This marks the sixth decline in eight months and the largest decline in 11 months. Compared with January, spending in February fell a whopping 5.7%, which is the largest decline since Japan hiked its retail sales tax. Another way of looking at this data is to consider Japanese households' willingness to spend their disposable income. According to government statistics, the propensity to spend has slipped to 67.8% in February, the lowest for the nearly three decades that the data has been tracked.

The Nikkei slipped about a percentage point as retailers and property-related issues led the way.

The poor economic data and a healthy reception of the two-year bond sale helped underpin Japanese debt instruments. The yield on the benchmark 10-year bond eased 8.5 basis points to 1.735%. For the record, the bid-cover ratio was 6.04 compared to 5.49 at last month's two-year bond sale. On Thursday the government will auction 1 trillion yen of four-year bonds.

European bonds are flat and the major bourses are narrowly mixed. Merger activity real, planned or imagined appears to be lending support to the overall market. Rate-sensitive issues are being underpinned by perceptions of an increased likelihood that the

European Central Bank

will deliver a rate cut as early as next week.

Rate-cut ideas are based on three developments.

First, a number of ECB board members have recently expressed concern about either slowing growth or deflationary risks. Just today, the ECB's Solans joined the fray by warning that further damping of eurozone activity could make lower rates necessary. Solans' remarks follow ECB's Issing and Noyer's comments reported in this

space.

Second, the growth prospects of the eurozone economies continue to get downgraded. Italy and France officially revised lower their own forecasts. Today Germany's economic minister, doing double duty until the new finance minister assumes office, warned that Germany is unlikely to achieve the official 2% growth forecast. The

OECD

lowered its forecasts for the region earlier this month and today the

EU

reduced its forecast to 2.2% from 2.6%.

In addition, consider that the war in Yugoslavia may also dampen economic growth in the region, especially if the conflagration lasts longer than initially anticipated. Third, Lafontaine may be gone, but political pressure on the ECB to cut rates continues to mount. The U.S. and IMF are weighing in and taken up Lafontaine's call for a rate cut.

The economic calendar in Europe is light.

The only data release of note was German producer prices for February. Producer prices fell 0.1% in February to record the ninth consecutive monthly decline. On a year-over-year basis, producer prices are off 2.4% compared to 2.3% in January. Elsewhere, note that Germany's two banking unions rejected employers' latest offer for a 3.1% pay rise and a 350-mark bonus. The unions represent some 470,000 workers and have already been engaged in some symbolic strikes to demonstrate their resolve. One of the key sticking points is how work on Saturday's should be compensated. The wage settlement in the insurance industry last week was not far from the bank employers latest offer.

The Federal Open Market Committee meets today.

Excluding the intrameeting cut last fall, over the past year the FOMC consistently has announced the outcome of its meeting between 2:12 p.m. and 2:19 p.m. EST. The market does not expect a rate hike today. If the Fed was going to move today, officials, including Chairman

Greenspan

, would have done much more to prepare the market. Many assume the Fed has a neutral bias and some expect it to adopt a tightening bias, primarily to send a signal to the market about the above trend growth and tight labor market conditions.

While the Fed has indicated it will take steps to become more transparent, it seems unlikely that it will do so in a significant way today by revealing its policy bias. The June FOMC meeting takes place too late in the month for the June fed funds contract to offer a clean read, so instead use the July contract to get a handle on market expectations for Fed policy in the second quarter. At the close yesterday, the July Fed funds futures settled at 95.17, implying an expectation for an average effective (weighted by volume) Fed funds rate of 4.83% (100 minus 95.17). This means that 8 of a possible 25 basis points has been discounted, or about a third of the move. This also means that the market assesses about a 1 in 3 chance of a hike in the second quarter.

The dollar is little changed, hovering around the 120-yen level, with the euro bouncing along its trough near $1.07.

Japanese officials are perceived to desire the yen to be near current levels for the end of the fiscal year, which ends tomorrow. The fiscal year-end consideration may discourage North American players from punting the yen today.

The euro remains weak, but the downside momentum has eased. This has often been the case during the first quarter. When the euro recorded new lows, its downside momentum eased and a brief consolidative phase unfolded before the euro fell to new lows. My best guess is that the euro will record its best bounce, which so far has been limited to a little more than 2 cents, following any rate easing by the ECB.

Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.