European government bonds lower after Fed last night, ahead of ECB today |
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Published
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Thu, 10 May 2007 10:06
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LONDON (Thomson Financial) - European government bonds were lower after the US Federal Reserve last night failed to signal the possibility of a rate cut, as some market watchers were hoping, and ahead of the European Central Bank's policy meeting today.The Fed left interest rates unchanged at 5.25 pct, as expected, but also left its statement nearly unchanged from the last meeting, whereas some analysts were expecting it to close the door on the possibility of a hike and soften its rhetoric.'They have obviously learnt the lesson that tinkering with the wording can lead to misinterpretation by a market, which still wants to look for a rate cut rationale at every possible instance,' said Marc Ostwald at Insinger de Beaufort.He said the lack of acknowledgement of the lower core inflation and the fact that the labour market remains tight make up for weak consumer spending and should make a rate cut unlikely in coming months. Weaker growth seems to be enough to ease inflationary pressures, so the Fed seems to be fine with a wait-and-see mood.Meanwhile, markets are now firmly looking to the ECB's policy decision today, when it is widely expected to also leave rates unchanged, at 3.75 pct, but to signal a hike next month.'We expect (ECB president) Trichet to indicate a June hike by uttering the usual 'strongly vigilant' rhetoric (or some minor variation),' said Orlando Green at Calyon.While bonds may come under some pressure, Green noted that an 85 pct chance of a June hike is already priced in, so the downside may be limited.In the UK, gilts were also softer in anticipation of a monetary policy meeting there as well, with the Bank of England widely expected to raise rates by a quarter point to 5.50 pct, with an outside chance of a larger move.'Current market pricing actually shows a small expectation for a 50 basis point move, so the highly probable 25 point move could even result in a small up-tick in (bond) prices,' said Green.The accompanying inflation report will be scrutinised for the BoE's forecasts and the likelihood of another rate hike this year.At Yield Change on0935 BST pct previous closeJune euribor future (Liffe) 95.86 dn 0.01Sept euribor future (Liffe) 95.72 dn 0.01GERMANYJune bund future (Eurex) 113.56 dn 0.143.75 pct Jan 2017 govt bond 96.26 4.23 dn 0.15FRANCE3.75 pct Apr 2017 govt bond 95.86 4.27 dn 0.13ITALY4.00 pct Feb 2017 govt bond 96.98 4.43 dn 0.14UKJune gilt future 106.77 dn 0.064.00 pct Sept 2016 govt bond 91.98 5.09 dn 0.05June short sterling future 94.18 up 0.01September short sterling future 94.07 up 0.01carlo.piovano@thomson.comcp/cp/vlb
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TFN NEWS BRIEFING: Macroeconomics highlights to 10:10 BST 