European govt bonds lower after strong US GDP data, awaiting Fed rate decision

European govt bonds lower after strong US GDP data, awaiting Fed rate decision

	Published : Wed, 31 Oct 2007 17:30 By : Agencies Print this Story

LONDON (Thomson Financial) - European government bonds turned lower after stronger-than-expected US GDP figures reduced the chances of an aggressive interest rate cut by the Federal Reserve tonight.

Third-quarter GDP data showed growth of 3.9 pct year-on-year, way above expectations for 3.0 pct. The ADP national employment report also showed a solid 106,000 new private sector jobs were created in October -- pushing up expectations for the key non-farm payrolls report on Friday.

The market had been fully pricing in a 25 basis point rate cut this evening, with the possibility of a back-to-back 50 point reduction, but the strong data highlight the possibility that the Fed may not do anything at all.

'With the market full convinced that the Fed will cut both the fed funds target and discount rates by 25 basis points today, the greatest market risk is that they do nothing,' said Michael Woolfolk at the Bank of New York Mellon.

The very strong GDP data, however, were slightly offset by a weaker-than-expected Chicago PMI survey, which dropped to its weakest level since February. The index fell to 49.7, down from the 54.2 reading in September and much lower than the 53.0 expected by economists polled by Thomson's IFR Markets.

Trade remains very jittery, however, with all the focus on the Fed outcome. Not only is the decision uncertain, but markets will be monitoring the accompanying statement very closely 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,' analysts at Calyon said.

Though most of the attention today has centred on the US rate meeting, news earlier today of much stronger-than-expected euro zone inflation also weighed on bonds, with the October HICP measure jumping to 2.6 pct from 2.1 pct in September.

Meanwhile over in the UK, gilts were also lower, tracking their European counterparts ahead of the Fed decision.

Earlier today, gilts had underperformed after an expectedly strong 1.1 pct monthly gain in house prices shown in the Nationwide's latest survey made a Bank of England rate cut next month look increasingly unlikely.

'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

1626 GMT pct previous close

Dec euribor future (Liffe) 95.46 dn 0.02

March euribor future (Liffe) 95.58 dn 0.06

GERMANY

Dec bund future (Eurex) 113.33 dn 0.46

4.25 pct July 2017 govt bond 100.04 4.24 dn 0.39

FRANCE

3.75 pct Apr 2017 govt bond 95.53 4.33 dn 0.45

ITALY

4.00 pct Feb 2017 govt bond 96.59 4.50 dn 0.30

Dec gilt future 107.30 dn 0.43

4.00 pct Sept 2016 govt bond 93.41 4.92 dn 0.37

Dec short sterling future 93.84 dn 0.03

Mar short sterling future 94.12 dn 0.04

jessica.mortimer@thomson.com

jkm/lam

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