European govt bonds fall on strong US economic data

European govt bonds fall on strong US economic data

	Published : Sun, 14 Oct 2007 20:53 By : Agencies Print this Story

LONDON (Thomson Financial) - European government bonds fell, tracking Treasuries after US economic data came in above consensus, decreasing the likelihood of a rate cut by the Federal Reserve at the end of the month.

US PPI rose 1.1 pct in September, far above the 0.5 pct expected by analysts, although the core PPI rose only 0.1 pct, below forecasts for 0.2 pct.

Retail sales grew by 0.6 pct, twice the 0.3 pct growth rate the market was looking for, suggesting that there is so far little evidence that the summer's crunch in the US housing and credit markets is weighing on US consumption.

'Consumer resilience in the face of a softer housing sector is likely to give some members of the FOMC food for thought ahead of the next meeting on 31 October,' said Stuart Bennett at Calyon.

The key to the rise on consumption, is that the labour market remains relatively tight, while wage earnings continue to rise at a strong pace.

'This (data) takes us one step further from the hard landing scenario in 2008 that many feared less than a month ago,' said Michael Woolfolk at Bank of New York.

The fall to bond prices was tempered somewhat by a weaker University of Michigan index, which fell slightly to 82.0 in early October against expectations for an 83.0 reading.

With the week's data out of the way, traders will now look to a speech on Monday by Fed Chairman Ben Bernanke for more clues as to the Fed's interpretation of recent economic data.

Meanwhile, euro zone rate views remain relatively hawkish, after industrial production data suggested there would be a rebound in economic growth in Q3 and as comments from the European Central Bank continue to sound hawkish.

Last night Bundesbank President Axel Weber said there would be a need for extra ECB action to create a restrictive monetary policy if inflation increases.

In the UK, gilts have tracked global flows in the absence of any domestic data.

Like other government debt, gilts have suffered this week on more hawkish rate assumptions by investors, particularly after Bank of England Governor Mervyn King on Tuesday said he wouldn't cut rates simply to make life easier for the financial sector and that inflation pressures persisted.

At Yield Change on

1530 GMT pct previous close

Dec euribor future (Liffe) 95.53 up 0.03

March euribor future 95.61 dn 0.01

GERMANY

Dec bund future (Eurex) 111.86 dn 0.21

4.25 pct July 2017 govt bond 98.68 4.42 dn 0.20

FRANCE

3.75 pct Apr 2017 govt bond 94.44 4.48 dn 0.21

ITALY

4.00 pct Feb 2017 govt bond 95.65 4.63 dn 0.16

Dec gilt future 106.33 dn 0.39

4.00 pct Sept 2016 govt bond 92.46 5.06 dn 0.27

Dec short sterling future 93.84 up 0.01

Mar short sterling future 94.06 dn 0.02

carlo.piovano@thomson.com

cp/lam