European govt bonds higher ahead of key US rate decision; Gilts underperform

European govt bonds higher ahead of key US rate decision; Gilts underperform

	Published : Wed, 31 Oct 2007 10:49 By : Agencies Print this Story

LONDON (Thomson Financial) - European government bonds were higher as market participants awaited this evening's key US interest rate decision, where a further interest rate cut is widely expected.

Trade was cautious, however, with the decision looking finely balanced. September saw a surprise aggressive 50 basis point rate cut by the Federal Reserve and a string of weak US data following that had led to talk of a back-to-back half-point cut, or at least a quarter point cut.

Bonds fell back yesterday, however, as jitters set in and market players began to speculate about the possibility that the Fed may even opt to leave rates unchanged.

'There is a three-way split among market commentators spanning from no cut to 50 basis point cut,' analysts at Calyon said.

In addition to the decision itself, however, the accompanying statement will also be closely monitored for clues on the future rate outlook.

'The accompanying statement will add to the event risk as some believe the Fed may hint that rates will be on hold for the foreseeable future,' Calyon said.

Ahead of the decision, however, investors will have a string of data releases to chew over.

Euro zone inflation data will provide the highlight of this morning's European numbers, though unemployment data and European Commission sentiment indicators will also be of interest.

The figures are likely to add to the European Central Bank's current dilemma, with inflation figures expected to come in on the strong side, while the remaining data highlight the downside risks to growth.

Beyond that, US GDP, ADP employment and Chicago PMI figures this afternoon will be closely watched ahead of the Fed decision.

Over in the UK meanwhile, gilts were also higher but were underperforming their European counterparts after a much stronger-than-expected Nationwide house price survey this morning suggested that the UK housing market may not be slowing anything like as much as people previously thought.

Nationwide reported that house prices rose by 1.1 pct during October from September, well below forecasts for a much slower 0.4 pct gain, making a Bank of England interest rate cut as early as next month look increasingly unlikely and causing short sterling futures -- a gauge of interest rate expectations -- to fall.

'The marked 1.1 pct jump in house prices in October reported by the

Nationwide is a real eye opener, and substantially dilutes the case for an interest rate cut in November,' said Howard Archer at Global Insight.

At Yield Change on

0945 GMT pct previous close

Dec euribor future (Liffe) 95.48 unchanged

March euribor future (Liffe) 95.64 unchanged

GERMANY

Dec bund future (Eurex) 113.77 dn 0.02

4.25 pct July 2017 govt bond 100.61 4.16 up 0.18

FRANCE

3.75 pct Apr 2017 govt bond 96.09 4.26 up 0.12

ITALY

4.00 pct Feb 2017 govt bond 97.02 4.44 up 0.11

Dec gilt future 107.55 dn 0.18

4.00 pct Sept 2016 govt bond 93.82 4.86 up 0.04

Dec short sterling future 93.86 dn 0.01

Mar short sterling future 94.13 dn 0.03

jessica.mortimer@thomson.com

jkm/lam

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