Global Briefing: Focusing on the U.S.-Japan Summit

With Japanese traders at home for the holiday, attention turns to a key meeting next week.
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Activity is subdued as Japan begins celebrating the Golden Week holiday. European equity markets opened lower but steadied after an early 1% decline, awaiting fresh cues from U.S. markets. The dollar is steady to slightly higher.

Even though Japan's markets are closed for the next several days, traders are focused on the possibility that initiatives will be unveiled at the U.S.-Japan summit on May 3. Expectations vacillate depending on which official spoke last. Yesterday Prime Minister

Keizo Obuchi

seemed to play down the need for new spending.

The market appeared to accept this at face value, especially given the string of stronger-than-expected economic data reported yesterday. This included a larger-than-expected rise in industrial production, housing starts (fourth consecutive monthly increase) and construction orders (the first increase in 15 months). Yet today, Taichi Sakaiya, the head of the

Economic Planning Agency

, suggested that new spending may be needed if unemployment continues to rise.

The mixed messages from Japan may be tactical in nature.

Under pressure from the U.S. to take more action and constrained by fear of additional downgrades from the international rating agencies, Japanese officials, recognizing that fiscal consolidation is necessary as soon as possible, must indicate a readiness to take more steps if necessary.

Like other

G7

members, Japanese officials appear to have written off the first quarter. The economy, officials say, stopped contracting after five consecutive quarters but remained strained. The effects of the government's huge fiscal stimulus, especially public-works spending, appeared more evident toward the end of the quarter.

The pump-priming operation will continue into the second quarter, but the market will be looking for signs that the economy's ignition is catching. For their part European officials are betting that their economies will improve as the year progresses, recognizing that the first quarter was largely stagnant. On the other hand, the

Federal Reserve

forecasts that the U.S. economy will slow as the year unfolds.

Asian equity markets were mostly lower.

Of note, the

Hang Seng

fell 1.3%, weighed down by

Hong Kong Telecommunications

. The South Korean market was off almost 5%, its largest decline in nearly three months. In addition to profit-taking on the almost 40% rise this year, news reports suggested the government was considering selling its stake in two of the country's largest lenders. An index of Korean bank shares fell 8.5%. The Malaysian bourse advanced 1%, helped by talk that a U.S. investment bank may raise Malaysia's weighting in its global index.

European equities are lower as well.

In part, the losses reflect the heavy tone of U.S. shares yesterday. In part, the losses also reflect earnings worries in Europe, where disappointing first-quarter earnings are leading to declines in chemical and drug producers. Oil shares are generally faring better on the back of firmer oil prices.

Of interest, press reports suggest that if the

Deutsche Telekom

(DT) - Get Report

/

Telecom Italia

(TI)

merger goes through, part of the new company may be sold to a third party. Reports quoting the CEO of Deutsche Telekom indicated that a possible third-party candidate would be

Olivetti

, which previously tried a hostile takeover of Telecom Italia. The plot thickens.

The

American Petroleum Institute

reported a sharper-than-expected decline in U.S. inventories and the war in Yugoslavia are placing a greater demand on oil products, like jet fuel. The

Pentagon

has reported it will purchase an additional 57 million gallons of jet fuel on top of the already orders 335 million gallons for the Atlantic, European and Mediterranean activities.

NATO's

air raids reportedly are consuming as much as 400,000 gallons of jet fuel a day. The price of jet fuel has risen about 5% since the bombings began. At the same time, the output cuts from oil-producing nations are beginning to be felt. Venezuela indicated that due to maintenance, its oil output will fall short of its quota.

European bonds are narrowly mixed.

Most benchmark bond yields remain near their highest levels in three weeks. One of the emerging issues is the sense that the best news on European inflation is behind us. In recent days, several countries have reported inflation measures above market expectations.

Today saw greater-than-expected rises in German import prices and Swiss consumer prices. German import prices rose 0.8% in March, after February's 0.1% rise, exceeding expectations for a 0.6% increase. The rise in import prices largely reflects the rise in energy prices and the weak euro, which has declined nearly 9% so far this year. Switzerland's consumer prices rose 0.2% in April, marking the fourth consecutive monthly increase. The year-over-year rate stands at 0.6%, low by international standards but above the 0.5% discount rate. This puts real short-term interest rates near zero. Also, the ECB reported that money supply in the eurozone expanded 5.1% in March, unchanged from February and still above the 4.5% reference target.

Late yesterday, Brazil cut its key lending rate to 32% from 34%.

It is the fourth rate cut in a little over a month. The central bank cited the ease at which debt was being rolled over and evidence that price pressures are more muted than expected after the Brazilian real's sharp depreciation at the start of the year. News that

Ford

(F) - Get Report

will not build a $1 billion factory in southern Brazil because the state government wouldn't grant tax breaks and other subsidies as generous as the U.S. automaker wanted may encourage a consolidative tone today.

In the U.S., the employment cost index report be closely watched.

It is a measure of labor costs that Fed Chairman

Alan Greenspan

is believed to scrutinize. The market consensus is for a rise on the magnitude of 0.8%, largely in line with the 0.7% increase in the fourth quarter. While this could help support the fixed-income market, participants may be reluctant to take fresh significant positions ahead of tomorrow's first read of first-quarter GDP.

The euro has given back the lion's share of its gains seen over the past two days.

Support is seen near the $1.0580 area. The lack of full participation in the yen, given the absence of most Japanese players, makes for either very erratic moves or deadly calm. Look for the latter today.

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 stocks, currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.