LONDON (Thomson Financial) - European government bonds lost some of their
gains Tuesday after hawkish comments by Philadelphia Federal Reserve president
Charles Plosser raised fresh speculation of a rate hike this year.
Plosser, typically more worried about inflation than some of his other
colleagues at the Fed, said rates should be raised "sooner rather than later"
and that this would have to be done before labour and financial markets
improved.
Plosser said the Fed should pay attention to broader inflation measures, not
just the core measure, and that the headline PCE inflation indicator would touch
an annual 4.0 percent this year.
While Plosser is known to be one of the Fed's hawks, his comments had an
extra impact on markets because of the almost total lack of economic indicators
on both sides of the Atlantic today.
The Fed is expected by most to leave interest rates unchanged in coming
months as the economic downturn has not yet reached its trough -- as evident in
continued losses of jobs and house prices as well as stock markets.
Equities have indeed been a major driver for bond markets today, with heavy
losses making up for Monday's gains.
Poor earnings overnight by American Express and Apple and by Wachovia today
have offset previous optimism from upbeat reports by Bank of America and other
financial corporations.
Analysts said sell-offs in current bond market conditions are limited by a
sense that bad news is never far away. With U.S. stocks opening lower, bonds are
expected to remain buoyed.
"Developments on the equity and credit markets will continue to dominate
direction for bond markets and should therefore be followed closely," said john
Davies at WestLB.
In the UK, gilts tracked the wider market after a testimony by Bank of
England governor Mervyn King and deputy governor John Gieve failed to give much
clues on interest rate policy.
The rate-setters spoke mostly about banking reform, leaving the focus on the
minutes to the BoE's July policy meeting, when it kept rates unchanged.
The consensus is for a 8-1 vote with a lone dissenter seeking a rate cut,
although recent hawkish comments from a Andrew Sentance and Tim Besley suggest
there may have been a vote for a hike as well, which would weigh heavily on
gilts on Wednesday.
At Yield Change on
1330 GMT pct previous close
Sept euribor future (Liffe) 94.950 up 0.020
Dec euribor future (Liffe) 94.810 up 0.035
GERMANY
Sept bund future (Eurex) 110.31 up 0.11
4.25 pct July 2018 govt bond 96.99 4.63 up 0.03
FRANCE
4.00 pct April 2018 govt bond 93.78 4.81 up 0.11
ITALY
4.50 pct Feb 2018 govt bond 95.07 5.20 up 0.14
UK
Sept gilt future 105.72 up 0.38
5.00 pct March 2018 govt bond 100.00 5.00 up 0.37
Sept short sterling future 94.11 up 0.02
Dec short sterling future 94.14 up 0.05
carlo.piovano@thomsonreuters.com
cp/rfw
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