Global equity markets are advancing, while bonds and currencies are continuing to consolidate after last week's large moves. Unable to sustain yesterday's initial rally, the Nikkei fared better today, rising 2.2% for the first close above 15,000 in three months. European bourses are also doing a better job holding onto their initial gains as well, with most major indices up around 1% near midsession.

Improved earnings prospects and a recovery in oil stocks are helping European equities participate in the global rally. Individual issues in drugs, chemicals, cement and telecommunications are setting the tone. Better-than-expected economic data from Germany and France are also providing a conducive environment for equities. Germany reported an unexpected fall in its seasonally adjusted measure of unemployment. The jobless rolls shrank by 6,000 in February, while early rumors suggested as much as a 20,000-job increase. By the


calculation the unemployment rate (on a seasonally adjusted basis) fell to 10.5% from 10.6% in January. On an unadjusted basis, unemployment did in fact rise, but by just 10,000 jobs, though this was sufficient to increase the unadjusted rate to 11.6% from 11.5%. For its part, France reported consumer confidence in February remained at a 12-year high, giving hope of better growth prospects going forward.

Global bonds are putting in a mixed performance.

The yield on Japanese government bonds backed up today amid a warning from the


governor that long-term interest rates will rise over time. Officials also indicated that last month's rate cut has achieved its objectives and that the foreign exchange market is stabilizing.

The yield on the benchmark JGB rose 7 basis points to 1.70%. The BOJ refrained from open market operations, which left a 1.2 trillion-yen surplus in the banking system. Despite the BOJ's more accommodative stance over the past two weeks, during which it has maintained a surplus of over 1 trillion yen, there is concern about the ongoing liquidity trap. Simply put, the liquidity trap is illustrated by the BOJ's provisions of a large surplus in the banking system, which does not translate into higher bank lending. Early today Japan reported that bank lending fell 4.3% on a year-over-year basis in February. There has been no increase in Japanese bank lending in 29 months. The BOJ holds a policy meeting on Friday. Few expect a change in policy, though there continues to be talk of an inflation target and/or a reduction in reserve requirements.

Meanwhile, European bonds have given back their initial upticks.

The stronger-than-expected data from Germany and France is seen as reducing the likelihood that the

European Central Bank

will lower key interest rates. And the bounce in equities may be attracting some flows from the debt markets. The U.K. bond or gilt market is lower as players anxiously await Chancellor of the Exchequer


budget speech. Because of the U.K.'s budget surplus, the government has not issued conventional gilts since the end of July 1998. This dearth of supply, easing wage and price pressures, and a soft economy underpin the gilt market on a fundamental basis.

Emerging from the

Bank for International Settlements

meeting in Basle yesterday,




reaffirmed what

European Union

officials have been saying, namely there is no concern about the weakess of the euro at this juncture. Yet a German magazine that hit the newsstands yesterday suggests that at the recent policy meeting of the

European Central Bank

, officials drew a line in the sand. They "secretly" agreed to intervene if the euro falls through last year's lows, which come in near $1.05. Over the last couple of weeks there has been increased speculation that the euro may fall to parity with the dollar. This seems to be a bit too aggressive, even for a dollar bull like myself. Such a move would seem to require two major fundamental developments:

    An acceleration of the U.S. economy and/or price pressures that would encourage the market to expected more aggressive tightening by the Federal Reserve; and A further deterioration in EU growth prospects.

The market has lengthened the odds that the Federal Reserve will boost U.S. rates in the near term

, but continues to price in, with a high degree of confidence, a third-quarter tightening. For the FOMC meeting held late this month, the April fed funds futures contract offers the best gauge. It its low point last week, the April contract reflected about a 1 in 3 chance of a 25-basis-point tightening. That has been downgraded to about a 1 in 8 chance as of the close of yesterday. Last week, the July contract, which given the late June FOMC meeting offers useful insight, had priced in a 25-basis-point hike with almost 100% confidence. That confidence has waned and now "only" 14 of 25 basis points is priced in, suggesting about 56% confidence. The September contract, though less liquid, has 23 of a possible 25-basis-point move priced in still.

Today's fourth-quarter productivity report may further encourage a relaxation of near-term Fed tightening ideas. According to a

Market News Service

survey, the consensus calls for a upward revision of the 3.7% preliminary guesstimate to 4.2%. Such productivity gains are impressive in their own right and especially this far along in an expansion cycle. This also means that despite the amazing job growth, unit labor costs are not the source of price pressures. Unit labor costs are expected to have fallen 1% in the fourth quarter, according to the same

Market News Service


Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he was long U.S. bonds and some mutual funds with investments in Europe, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at