It may be the beginning of a new quarter, but one couldn't tell by looking at the global capital markets
, where the price action looks a lot like what we have seen in recent weeks. Fueled by foreign buying, Japanese stocks rose sharply. European bourses are mixed and mostly uninspiring. Japanese bond yields continue to fall. European bond yields are a touch softer today, but remain at the upper end of their recent trading range. The dollar is steady to firmer across the board.
rose 3% to start the new fiscal year on a strong note. Reports suggest that foreign purchases remain a key force propelling the Nikkei higher. The most recent data, from the week of March 12, illustrate what is happening. In that week, foreigners bought a record 776 billion yen of Japanese equities. That same week, Japanese corporations sold 550 billion yen, the most since August 1995, and insurers sold almost 100 billion yen of Japanese stocks.
This is one of the patterns I anticipate to continue into the new fiscal year: Foreigners buying stocks from Japanese investors. Reports also suggest that while foreigners have to buy yen to buy Japanese equities, they are also hedging some of the currency risk by selling yen into strength.
Japanese banks, flush with the 7.5 trillion-yen public capital injection, are buyers of Japanese government bonds.
One trillion yen of four-year bonds was successfully sold today at an average yield of 0.66%. The auction was oversubscribed by 2.6 times, about the same as the last auction. While the total return of the four- and the 10-year Japanese bond is practically the same in recent months, the fact that the former is less volatile than the latter means that on a risk-adjusted basis it has been the better investment. The
Bank of Japan's
rinban operation (coupon pass) also helped support the bond market. The benchmark 10-year bond yield fell 3.5 basis points today to 1.71%.
Japanese economic data has continued to be reported below expectations. The
Fischer and U.S. Treasury Secretary
have warned this week that the Japanese economy is likely to contract further before recovering. This is a more sober assessment than the talking heads that recommend buying Japanese equities and then have the eggs to argue that the rise in the Nikkei is proof the economy is recovering. The
report, the much-followed survey of business sentiment, will be released Monday. Most forecasts call for a small improvement, especially among large manufacturers.
Many European markets are already closed for the long holiday weekend and those that aren't will be winding down operations shortly.
Purchasing managers' surveys for the U.K. and Germany were released earlier today. Both showed that while the manufacturing sectors continued to contract, the pace has slackened. The U.K.'s CIPS survey was stronger than expected at 47.2 in March compared to 45.9 in February. The 50 level is the boom-bust line on these diffusion indices. March was the 12th consecutive month that the CIPS manufacturing survey was below 50.
The German PMI rose to 48.37 in March from 47.80 the month before, marking the sixth consecutive month that the index was below 50. Exports are still falling, but at a slower pace, though further deterioration in new orders was evident. Lastly, on the data front, Italy reported weaker-than-expected January retail sales. The market had been looking for a 2.5%-3% rise, so the 2% rise was disappointing. It is the smallest rise in four months and warns that after contracting in the fourth quarter of 1998, the Italian economy is largely treading water.
Next week could see both the European Central Bank and the Bank of England cut interest rates.
The case for the former has strengthened over the past week. Official growth forecasts for individual countries and for the eurozone as a whole have been reduced. Comments from several ECB board members reflect a sensitivity to this development and have sounded noticeably less hawkish recently. One ECB member indicated yesterday that a rate cut at next week's meeting could not be ruled out. International pressure for a rate cut has mounted, replacing former German Finance Minister
calls. The IMF, the U.S. and the U.K. have advocated a rate cut.
The risk of waiting for the April 22 ECB meeting is that data could be released that would make a move more awkward. For example, with the decline in the euro and the higher oil prices, eurozone inflation is likely to tick higher. Also, money-supply growth, which is reported around the third week of a month, is likely to remain above the ECB's reference range.
Lastly, from an operational point of view, once there is a consensus to cut rates, waiting to implement it makes little sense.
Better to get it over with and then wait patiently. In contrast to the
, which expects U.S. growth to slow as the year progresses, the ECB expects the eurozone economy to improve.
Without fail, the euro finished each week of the first quarter lower than the previous week. I suggest that a rate cut by the ECB next week could end this run, as at least the market has a sense of the economic performance in the second quarter. Ahead of the ECB meeting on April 8, the euro could retest its low near $1.0680 and possibly record a fresh low, but then the risk/reward would seem to favor a bounce back toward the $1.10 area.
That a currency can rally in the face of lower rates is distressing only for those who rely on memories of Econ 101.
There are plenty of examples of lower rates coinciding with currency gains. It is true not only for countries like Mexico and Brazil, whose currencies have strengthened as interest rates have fallen: look at the Canadian dollar, which appreciated following
yesterday's unexpected 25-basis-point rate cut. Indeed, it looks as if the Canadian dollar can continue to strengthen on a trend basis.
A break of C$1.50 could send the U.S. dollar toward C$1.48. Contrary to what seems intutitively true, higher interest rates are not a sign of a strong currency. If they were, wouldn't the Russian ruble, for example, be a great deal stronger? High interest rates are often a sign of a weak currency and the high rate being offered, no demanded, to compensate for some other risk.
Look for liquidity in the U.S. markets to slacken off after the NAPM is released at 10 a.m. EST. The market is anxiously waiting to see if the national survey confirms the strength of the Chicago and other regional surveys. In particular, the sharp rise in prices paid caught the market a bit off guard.
The U.S. Treasuries have recorded their worst quarterly performance in three years and strong data today and tomorrow, when the March jobs report is released, will likely propel the bonds lower. The June bond can easily slip another full point, but it will take a break of the March low near 119-05 to really get the ball rolling. The market has long taken on the view that strong growth alone would not get the Fed to tighten. Rather price pressures were the key. Therefore the price component of today's NAPM and the hourly earnings in tomorrow's report will be the market's focus rather than simply the headline numbers.
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