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Global Briefing: Quiet Markets Look to U.S. for Leadership

Watching the bond auction and perhaps for an end to the impeachment debacle.

Global capital markets are quiet, helped by the national holiday in Japan, and won't impart much of a bias on the U.S. session.

European bonds are little changed and major bourses are struggling to hold on to their early gains. The dollar is modestly firmer against major European currencies and softer against the yen. Leadership from the U.S. markets is sought and, fortunately, today's calendar is full of potentially market-moving developments.

The U.S. reports January retail-sales figures today. Through last week's employment report, the market (and policy makers) consistently underestimated the strength of the domestic economy. Today's retail sales report is likely to be consistent with this pattern. The consensus calls for about a 0.2% rise in the headline figure and a 0.5% increase when auto sales are excluded. Car and truck sales rose 9.4% year-over year in January and chain-store sales increased 5.6% in the same period. We also know that through Feb. 5, tax returns as reported by the

Internal Revenue Service

were up 11% compared to the same period a year ago, suggesting households may have the wherewithal to have increased their spending despite fueling the heady economic expansion in the fourth quarter of 1998.

The market will scrutinize Fed Chairman Greenspan's comments to the House Committee on Financial Services for clues into the central bank's next move.

The fact that the ink has hardly dried on last week's FOMC meeting and that there are hardly any new significant economic data suggests little in the way of fresh insight into the trajectory of monetary policy will be gleaned from his testimony.

The Treasury completes its quarterly refunding today with the 30-year bond auction. The first two legs of the refunding have gone off without a hitch, even if unspectacular. The March bond futures contract staged a reversal yesterday by first rising above the previous day's high and then falling below the previous day's low before settling below Tuesday's low. The risk is that the contract is going to retest key support near 124. Stops have likely be stacked up just below there and, if triggered, a decline could turn into a rout.

Today could also finally see the end Clinton's trial in the Senate.

With some key moderate Republicans indicating they will not vote to remove the president, it is all over but the crying. The conclusion of this embarrassing chapter of our political history means the country's focus can return to real issues. Tax cuts and social security reform will likely be among the key issues on the domestic agenda.

Germany's disappointing retail sales report today offers a stark contrast with the U.S.' December retail sales fell 4.7% in Germany, according to the Federal Statistics Office. This translates into a mere 1% rise year over year. The consensus had expected a year-over-year gain of 1.8%. The report provides more evidence that the German economy ground to a near halt in the fourth quarter. Fourth-quarter GDP reports from both Germany and France will be released in a couple of weeks. Officials throughout the eurozone have acknowledged that the slowdown is more than they had anticipated. It is too late to take pre-emptive steps, as the Federal Reserve and

Bank of England

did last year, but eurozone officials are not yet prepared to move. There is little evidence that they appreciate the urgency of the situation. The EMU project was built on a weak fiscal reform. Increased growth in Europe in 1997-1998 helped make it appear that there was greater improvement in the fiscal ledgers that there really was. This in turn allowed the eurozone countries to paper over many key differences as a rising tide lifted all boats.

But the danger now is the reverse. Slowing growth curbs tax revenue and leads to greater counter-cyclical spending and larger deficits. Some may argue that the softness of the euro mitigates the need to lower interest rates because a weaker currency is itself stimulative. Yet foreign exchange is a blunt monetary instrument and, moreover, the euro's weakness is thus far of too small of a magnitude at this juncture (less than 3.5% against the dollar) to have much impact. Meanwhile, the German government's employment initiative is likely to be dealt a major blow if, as expected,

IG Metall

decides to strike. A decision is expected over the weekend.

The British pound has slipped to its lowest level in about half a year against the dollar and is down almost 6% over the past six weeks.

The Bank of England has cut interest rates by 200 basis points since the beginning of the fourth quarter. Its rather somber report yesterday, warning of stagnation in the first half of the year and a 1 in 5 chance of an outright recession, suggests more rate cuts will be delivered. The market is anticipating roughly another 75 basis point cut in the base rate this year. With so much bad news already discounted, it should not be surprising if sterling stages a corrective comeback over the coming days. This week it has begun bouncing back against the euro, which may be a indication that gains against the dollar are in the offing, too. A close above $1.6250-$1.6270 area today could prompt a bout of short-covering tomorrow. Sterling tested key support near 2.80 against the mark and a strong close today would also help sentiment.

Marc Chandler is an independent global markets strategist. 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 by sending a letter to