The week is off to a quiet start. Japanese markets were closed and European markets are awaiting fresh leadership from the U.S. European stocks and bonds were pulled down early by U.S. losses after European markets closed before the weekend. The dollar is slightly firmer, but generally in a consolidative mode.

The dollar continues to find support near the 117-yen level.

Market talk suggests a large player or two may be defending barrier option positions struck just below. Some participants are also wary of possible

Bank of Japan

intervention to ensure a smooth end of the fiscal year next week. At the same time, the dollar has not really bounced off the 117-yen level. Good demand for yen by both domestic and foreign sources is capping the greenback near 117.50-117.80 yen.

There has also been yen-buying against the euro and other European currencies. This, coupled with lingering hopes that the

European Central Bank

may cut rates as early as next month, has helped push the euro nearly 2 cents lower against the dollar since the middle of last week. The euro bears have a running start at the $1.08 support area. Nevertheless, the market may lack sufficient incentive or participation to convincingly cut through the bids thought to lie near there today.

European bonds are lower following the reversal of U.S. Treasury prices before the weekend.

German 10-year bund yields, the benchmark in Europe, rose 4 basis points. European bourses were mixed after early losses. The German

Dax

and the French

CAC

were lower on the day as last Friday's strong gains are consolidated.

The CAC, which had gapped higher last Friday, entered the gap today but failed to close it. The gap extends from 4161.5 to 4175.5. The inability to close this gap is a constructive sign and a higher close today would likely see more follow-through buying in the coming sessions. Europe's biggest bourse, the U.K.'s FTSE, has already turned higher, as have some of Europe's smaller equity markets, though telephony issues are under pressure from profit-taking.

Mergers in Italy's financial sector are lifting those shares. But domestic mergers may curb the ability of the Europe's larger banks to build a continental network and this may be weighing on their shares.

The U.K. reported a slight downward revision to fourth-quarter 1998 GDP growth, but the real surprise was the current-account surplus.

Fourth-quarter GDP rose 0.1% rather than the 0.2% previously estimated. This puts year-over-year growth at 1.1% rather than 1.3%. The current account was in surplus by 954 million pounds. That compares with expectations of a 1.5 billion-sterling deficit and the third quarter's 2.4 billion-pound deficit. A surge in investment income offset the deterioration of the trade balance.

The Sunday

Times

tried to throw cold water on hopes that the BOE will cut rates again by playing up the inflation risk of the rally in oil prices. But the story has not convinced market participants. The June short sterling futures contract is off a single tick and continues to reflect strong expectations of a 25-basis-point cut. The BOE's next monetary policy committee meeting is scheduled for April 7-8.

Europe seems split on who is going to be the next president of the European Commission.

Italy's former Prime Minister

Prodi

seems like the odds on favorite. However, the Nordic countries (Sweden, Denmark, and Finland) have different ideas. It is not clear at this juncture how seriously they will push for their own candidate -- apparently the Dutch Prime Minister

Wim Kok

-- or use the issue as a political chit to get another concession later on.

The weekend press suggested that Germany's

Schroeder

was sympathetic to the Kok lobby, but other reports today seem to contradict the earlier report. It will be recalled that given that the ECB would be based in Frankfurt, it was not politic for Germany to press for its own candidate as ECB president, so it supported the Dutch central banker

Duisenberg

over France's

Trichet

. It will also be recalled that many German officials were reluctant to support Italy's candidacy for EMU.

Meanwhile, the Bundesbank and the German government appear to be at odds over the proposal for the IMF to sell gold to raise funds for debt relief.

The U.S., U.K., France and the IMF already have endorsed the proposal. The Bundesbank has opposed such proposals in the recent past. The German government seems more favorable and is likely to formalize the proposal to sell 5 million-10 million ounces of gold in time for the Bonn

G7

Summit in June. Meanwhile, press reports indicate that the German government is considering boosting its value-added tax to help finance other tax cuts it plans on delivering. Germany has one of the lowest VAT rates in Europe. The report may be a trial balloon as government officials indicate no decision has been made.

Producer prices in the eurozone fell 0.3% in January to bring the year-over-year decline to 2.7% from 2.5% in December 1998. Germany reports its March cost-of-living data starting in the middle of the week. The average rate of consumer inflation in the eurozone, on a harmonized basis, is running at about 0.8% year over year. German inflation is running at around 0.2% year over year and even this is thought to be overstating price pressures. Deflation, defined as a decline in general prices, continues to be a threat. ECB council member Guy Quanden, the head of the Belgian central bank, did not rule out additional rate cuts by the ECB. Many market participants are beginning to talk of a rate cut as early as next month.

There are no key U.S. economic reports due out this week.

The durable goods orders report, due Wednesday, is too volatile a time series to have much market impact. The consensus calls for more than a 2% decline after a 3.6% rise in January. Existing home sales on Thursday are expected to have slipped, but remain at lofty levels. Tomororw's OPEC meeting and 2 million-barrel-per-day planned cut in production, and the disruption in supply caused by a couple pipeline problems, have already been largely discounted.

The planned sales of corporate and agency issues may be a more significant factor for U.S. bonds than this week's data.

A break of 121-00 in the June bond would allow for another 0.5-0.75-point decline. The fed funds futures strip still shows the market attributing practically no chance of a rate hike at next week's

FOMC

meeting.

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