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Greenspan's Latest Should Set Tone for Bonds Today

The fixed-income world in particular awaits the impact of the Fed chairman's testimony before the House Ways and Means Committee today.

All eyes must be focused on

Federal Reserve


Alan Greenspan's

testimony before the

House Ways and Means Committee

this morning. Ahead of it, the dollar was narrowly mixed against the major foreign currencies, slipping a bit against the yen but nudging higher against the euro.

Major equity markets are higher following yesterday's recovery on Wall Street. The strength of equity markets is undermining the attractiveness of fixed-income instruments.

In Japan, the


closed above 14,000 for the first time in a month, helped by a rally in the high-tech sector on the back of some favorable earnings news. Bank shares also moved higher amid continued merger talk. Property shares were boosted by press reports suggesting the government may directly buy real estate to help support the market. Since their peak in 1990, property prices in several key urban areas have lost more than three-quarters of their value. Japanese bonds reversed the losses recorded at the start of the week as the

Bank of Japan

conducted one of its normal "rinban" (coupon pass) operations. The yield on the benchmark #203 bond fell 10 basis points.

Without a doubt, Greenspan has the ability to surprise the market. This time, the surprise could lie in telling the market what it expects to hear but more so. The market believes that U.S. monetary policy is on hold. The collective wisdom as reflected in the fed funds futures market suggests there is little chance of an ease at next month's

Federal Open Market Committee

meeting and less than a 1-in-3 chance of a cut by the end of the first quarter. Greenspan could drive this point home like few others.

Recent comments from Fed officials suggest a strong consensus in favor of a steady hand has emerged after the three rate cuts at the end of last year. The economic slowdown that both the Fed and many private economists have forecast is likely to be more moderate than previously thought. The yield on the benchmark 30-year bond has largely been confined to a 5.05% to 5.30% range for the better part of the past four weeks, and currently it is almost smack in the middle of the range. There's a risk that Greenspan's comments will not be well received by the bond markets. However, losses may not be sustained if the beige book finds pockets of weakness or economic activity moderating when it is released at 2 p.m. EST.

The idea that some Social Security funds could be invested in the equity market -- as proposed by President


in his State of the Union speech -- is expected to help underpin U.S. stocks, at least at the open, even though such proposals are at a very preliminary stage. It is not clear at this juncture when or how it would be enacted, but after yesterday's late recovery, the bulls look poised to flex their muscles. Meanwhile, the Republicans appear to be uniting behind an across-the-board 10% tax cut. This is also likely to fuel bullish sentiment in the equity market, even if it reinforces expectations for a stand-pat monetary policy.

At the same time, the

European Central Bank

warned yesterday that the economic slowdown in the euro-zone could be "more serious than is currently anticipated." In the ebb and flow of sentiment, the ECB is now thought to be more likely to ease policy before the U.S.

The UK reported an expected decline in December retail sales. The market consensus had called for a small rise, but instead the UK reported retail sales fell 0.9%. This brings the year-over-year rise down to 0.7% from 2.5% in November. Although rate cut hopes appeared to fade a bit after yesterday's retail price report that showed somewhat more price pressures than had been expected, today's report effectively revives such talk. This has helped underpin the UK debt markets. The British pound itself is little changed.

The market continues to closely monitor developments in Brazil. Political developments may hold the near-term key to how the financial markets. Yesterday the


approved a measure to increase the tax on financial transactions, which will raise about 4 billion reals. Today the focus shifts back to the

Chamber of Deputies

, which is scheduled to once again take up civil service pension reform. The failure to pass this bill could prompt a reversal in the


, which has simply defied gravity over the past few sessions. The real would also be vulnerable to a renewed slide


the market concluded that Brazil still lacks the political will to address its fiscal challenges.

Marc Chandler is an independent global markets strategist whose analyses of global currency and capital markets appear Monday, Wednesday and Friday mornings. At the time of publication, he held no positions in the currencies or instruments discussed in this column. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to him at