Yesterday's comments by Federal Reserve Chairman Alan Greenspan reverberated around the world, taking most major equity markets lower. Greenspan, as he has done in the past, warned that the U.S. stock market may be overvalued. Global bond markets are not displaying as great a correlation with the U.S. Treasury market, as weak growth in Japan and Europe helps blunt the effect of the rise in U.S. yields. The dollar is little changed as foreign-exchange participants await the U.S. jobs data.

Japan's finance minister, Kiichi Miyazawa, reiterated that there is no need for an immediate boost in government spending. This helped lend support to the government bond market, where the yield on the 10-year benchmark slipped 1.5 basis points to 1.315%. U.S. and Japanese bonds have moved in opposite directions. The 10-year yield spread stands at around 419 basis points, a 77-basis-point increase over the past month. The


shed 2.1%, pushing the index back below the 17,000 threshold. Most other Asian equity markets fell as well, led by technology shares. Korea's


bucked the trend and rose 1.4% after


upgraded the country's largest refinery.

European equity markets are also lower, where technology stocks are setting the pace. Bond markets are little changed. The yield on the 10-year German bund, which is the benchmark in the


, rose 1 basis point to cap an 18-basis-point climb in the past six sessions. Economic weakness in the region, coupled with hopes of peace in Yugoslavia, helped offset the pressure inflicted by the sharper selloff in U.S. Treasuries.

German unemployment unexpectedly rose in April, highlighting the continued divergence of the European economic performance compared with the United States'. On a seasonally adjusted basis, German unemployment rose 10,000 in April, offsetting part of the recent decline. In March unemployment fell by 3,000 jobs. The unemployment rate rose to 10.6% from 10.5%. The effect of the government's decision to require social security contributions from employers and employees of jobs that pay 630 marks ($340) a month was noticeable. The law went into effect in April and the economy shed some 31,000 part-time jobs. DHT, the German business group, warned recently that the measure could cost as many as 700,000 jobs.

When the Bank of England left key interest rates unchanged yesterday, it warned that if the pound remained strong, inflation would likely undershoot its target and the BOE would have to reduce interest rates. Today, BOE Governor Eddie George drove home the point in an interview on

Reuters Financial Television

, warning sterling was too strong to join

European monetary union

. For many foreign-exchange participants, George seemed to demonstrate a firm grasp on the obvious. The strength of sterling has brought cries for relief from British industry. Sterling is trading above what was its central rate in the

European exchange rate mechanism

before getting ejected.

The Bank of England also announced that it will sell 125 tons of gold over the next 10 months in five auctions. It will keep the proceeds in its reserves, likely in interest-bearing securities. The BOE holds 715 million tons of gold and plans on reducing it to 300 tons over the medium term. This announcement, which appeared to come out of the blue, stopped the rally in gold prices dead in its tracks. The price of gold was $5 to $6 lower today after rallying to roughly $10 an ounce over the past week and a half.

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The fall in gold prices encouraged profit-taking on the Australian dollar, which had been trading at 13-month highs against the U.S. dollar. The pullback in the Aussie looks to be corrective in nature and a new buying opportunity as initial support near the $0.663 level held.

George also indicated he plans on retiring at the end of his term, which concludes in 2003. In contrast, the latest issue of

Business Week

reports that the


administration is considering reappointing Greenspan for another four-year term when the current one expires next year. The decision seems largely tactical as another Clinton nominee, potentially



Robert Rubin

, might not get Congress' approval as the national election heats up. Greenspan also appeared to be poised to win the battle against Rubin on influencing the banking reform bill coming out of the

Senate Banking Committee


Also, rogue rumors that Greece may join Europe's monetary union as early as this weekend were officially denied. The baseless rumors had prompted a 1.5% decline in the Greek drachma against the euro on ideas that its current level was too strong for entry into EMU. Bond yields fell as much as 50 basis points in the ensuing panic as Greek interest rates had not converged as much as would be required for it to participate in monetary union. Intervention by the central bank to support the drachma and the official denial of the rumor helped steady the market.

The focus of the markets for today's session is undoubtedly on the U.S. jobs reports. Surveys suggest the consensus estimate is for a 250,000-to-275,000-job rise in nonfarm payrolls. If anything, rumors and whispers warn of an even stronger number. The market has historically had difficulty forecasting the April nonfarm payrolls. According to research at one investment house, the market has overestimated the rise in April jobs in 10 of the last 14 years.

The selloff in U.S. debt instruments and Greenspan's warning (again) about the risks posed by the tight labor market suggest the market has already discounted a report. The risk, it seems to me, is for a "sell the rumor, buy the fact" type of activity following the report, if it is anywhere in line with expectations. A significantly weaker number, perhaps because of an early Easter, or some other quirk, may trigger a dramatic short squeeze.

The market has upgraded its perception of the likelihood of a rate hike by the Federal Reserve. Two elements are particularly noteworthy. First, the market still assesses little chance of a hike at the May 18 FOMC meeting. The June fed funds futures contract settled at 95-20, implying no more than a 20% chance a hike. When evaluating the June fed futures contract, keep in mind that quarter-end and half-year-end pressures may distort the average fed funds rate, often to the upside.

The July fed funds futures contract, which gives better insight into the June 30 FOMC meeting, settled at 95-15 yesterday. That means that market has discounted 10 of a possible 25 basis points of a hike or, to say the same thing, the collective wisdom puts the odds of a hike at about 40%. The September futures contract, which is the best gauge of the market's thinking of the only FOMC meeting in the third quarter (Aug. 24), settled at 95-07. Here the market has priced in about 18 of a possible 25 basis point hike or a little more than a 70% chance. The second important insight generated by a review of the fed funds futures strip is that the market currently expects a 25-basis-point rate hike to be a one-off event and not necessarily the beginning of a tightening cycle.

The risk seems to be for a hike earlier rather than later. In addition to the usual arguments, note that the Federal Reserve appears to be on the verge of revising higher its GDP forecast for the year to at least 3%. Given the backing-up in U.S. yields and the consequent steepening of the yield curve, the Federal Reserve could argue that it is simply following rather than leading the market.

Marc Chandler is an independent global markets strategist who writes daily for 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