EURO GOVT-Bunds and rate futures fall on inflation worries

Reuters: [2008-05-14 17:44:00]

By Kirsten Donovan

LONDON, May 14 (Reuters) - Euro zone government bond and interest rate futures fell further on Wednesday as growing fears of global inflation pervaded fixed income markets and eroded rate cut expectations.

A run of stronger-than-expected inflation data from the UK this week has sent jitters through markets, although Bunds pared losses on Wednesday after data showed U.S. consumer price inflation grew less than expected in April [ID:nN14481285].

Euro zone interest rate futures began to price in a slim possibility of an European Central Bank rate hike, while short-dated euro zone swap rates also came under pressure.

"Some very bond unfriendly data is intensifying upward pressure at the short-end of the euro swap curve. In particular ...inflation data in the UK has put investor nerves on edge in all developed economies and rate expectations have spiked higher," said ICAP economist Don Smith.

At 1524 GMT June Bund futures <FGBLM8> were 65 ticks lower at 113.70, taking their loss this week to 1.3 points. Two-year bond yields <EU2YT=RR> were 9.2 basis points higher at 3.914 percent, while 10-year yields <EU10YT=RR> were 7.1 basis points higher at 4.165 percent.

Euribor interest rate futures <0#FEI:> were up to 13 ticks lower across the 2009 strip.

BNP Paribas strategists Alessandro Tentori meanwhile said Eonia futures were pricing in a between 5 and 10 percent chance of a 25 basis point ECB rate hike by September, while ICAP calculated a 20 percent chance of a hike by October.

The central bank has kept its key rate on hold at 4 percent through the credit crunch in an attempt to contain inflationary pressures.

A Reuters' poll showed the Bank of England will hold off cutting rates from 5.0 percent until the third quarter as it battles soaring inflation [ID:nL14799522].

The interbank cost of borrowing three month funds in dollar, sterling and euro rose on Wednesday, with spreads over secured lending rates widening again as markets trimmed expectations for interest rate cuts [ID:nL14605309] .

Three-month dollar Libor <USD3MFSR=> rose for the first time since April 21, up 4.5 basis points at 2.72000 percent, with OIS dollar spreads pushing back above 70 basis points.

"It's a rate expectation story today. There was a lot of inflation talk out of the U.S. yesterday which might indicate the Fed may not lower rates soon, although the market is probably way ahead of itself in terms of interest rates being raised," said a money markets trader.

Three-month sterling Libor rates rose for the first time since the end of March with the Libor/OIS sterling spread widening over two basis points.

Two-year swap rates <EURAB6E2Y=> were last at 4.61 percent, from 4.43 percent at the start of the week. 10-year rates <EURAB6E10Y=> were 4.59 from 4.44 percent, leaving the curve slightly inverted.

The 10-year swap spread widened to 42.2 basis points.

In supply, Italy sold 6 billion euros of five- and 30-year government bonds on Wednesday which analysts said met with a surprisingly strong bid premium for the long-dated issue [ID:nL14787369]. ((Reporting by Kirsten Donovan; kirsten.donovan.reuters.com@reuters.net, +44 20 7542 8675))

Keywords: MARKETS BONDS EURO

--------------MARKET SNAPSHOT AT 1531 GMT ------------------     
Futures continuous contract basis      
                   FUTURES          CASH YIELD   
THREE MONTH EURO 95.170 (-0.020)  3.982 (-0.007)  
TWO-YEAR SCHATZ  103.56 (-0.15)   3.902 (+0.080)  
10-YEAR BUND     113.71 (-0.64)   4.166 (+0.072)  
30-YEAR BUND                      4.670 (+0.027)  
 Current levels versus prior European close       
----------------------------------------------------------- 
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UK inflation vs growth conflict knocks sterling

Reuters: [2008-05-14 16:14:00]

LONDON, May 14 (Reuters) - Sterling hit a three-month low versus the dollar on Wednesday after the Bank of England's quarterly report showed inflation staying above target for some time to come and economic growth slowing sharply.

The dilemma facing the Bank was illustrated by a UK jobs report earlier in the session, which showed the number of people claiming unemployment benefit rose for the third month running while average earnings growth posted a surprise jump.

Analysts say the two conflicting forces could limit the scope for future interest rate cuts, potentially further hurting the economy and thus sterling.

"What was a surprise in the last few days, is that inflation is worse than expected. And that, as a feedback, is negative for growth. That's what the Bank of England were highlighting," said Peter Frank, currency strategist at Societe Generale.

Sterling fell as low as $1.9366 <GBP=> after the report, its weakest since Feb. 20.

It trimmed losses later, piggy-backing on a broad dollar sell-off after news of an unexpected fall in U.S. inflation, to trade at $1.9425 by 1402 GMT.

The euro was at 79.50 pence <EURGBP=>, up 0.1 percent on the day and over eight percent higher since the start of the year.

BoE Governor Mervyn King said the fall in sterling will support the rebalancing of the economy, while the inflation report itself attributed some of the weakness in the currency in recent months to "a reassessment by investors of the sustainable value of sterling or an increase in the risk premium required for holding sterling assets".

"In my opinion, this is a repeat of the Governor's invitation to sell pounds back in November," Nick Parsons, head of markets strategy at nabCapital, said in a note to clients.

For more on the inflation report see [ID:nBOE001421]. (Reporting by Toni Vorobyova; editing by Stephen Nisbet) ((antonina.vorobyova@reuters.com; Tel: +44207 542 7958, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net))

Keywords: MARKETS STERLING/CLOSE

UPDATE 2-Spanish economy's slide raises euro zone growth fears

Reuters: [2008-05-14 16:10:00]

(Recasts, adds details, analyst comment)

By Andrew Hay

MADRID, May 14 (Reuters) - Spain's economy grew at its slowest pace in nearly 15 years between January and March as housing and credit problems snowballed, raising concerns other parts of the euro zone may be sharing a sharper than expected downturn.

Spain, the first of the euro zone's big four economies to report first quarter growth, grew by 0.3 percent according to preliminary government data -- less than half the 0.8 percent rate of last year's final quarter and below the 0.4 percent pace forecast by both a Reuters poll and the Bank of Spain.

Wednesday's data showed quarter-on-quarter growth was the lowest since a 1993 recession and Spain looked set to underperform the wider euro zone growth rate, forecast at 0.5 percent in the first quarter, for the first time since 1997.

Economists are waiting to see if Germany, France and the Netherlands also disappoint when they report growth data on Thursday. Reuters polls forecast quarterly growth of 0.7 percent, 0.4 percent and 0.3 percent respectively for these three economies <ECONEUROPE>.

"The pace of the (Spanish) slowdown is remarkable," said Ken Wattret at BNP Paribas in London. "The situation is taking a radical turn for the worse and that has ... serious implications for the euro area too."

TRIPLE SHOCK

Spain has outperformed the euro zone for a decade but is suffering a rapid change of fortunes as its credit-hungry economy is hit by the end of a housing boom, tighter borrowing conditions and soaring global food and oil prices.

Problems have spread from construction and property into services and manufacturing as indebted households cut spending, given expectations house prices will fall over the next two years as the unemployment rate enters double digits.

On an annual basis, the Spanish economy grew 2.7 percent in the first quarter, its slowest pace in 5-1/2 years and down from 3.5 percent growth in the final quarter of 2007, the National Statistics Institute reported.

A Reuters poll had forecast 2.8 percent growth.

Economists saw a possible contraction in quarterly growth later this year and heightened chances of a recession -- two consecutive quarters of negative growth.

"Spain is nearing recessionary territory and we see no strong bounceback," said David Owen at Dresdner Kleinwort Wasserstein.

Problems in Spain will hit Europe, given it drives around 11 percent of euro zone GDP and generated 36 percent of all new jobs in the European Union between 2004 and 2006.

The European Commission on Monday cut its forecasts for growth in the 15 countries that use the euro to 1.7 percent this year and 1.5 percent in 2009.

A rapid slowdown in countries like Italy and Spain has created a dilemma for the European Central Bank as it keeps interest rates on hold, given more robust performance in northern economies and high inflation across the currency bloc.

EMPTY HOUSES

Spain's Socialist government, reelected in March, is banking on ECB rate cuts to support activity and will offer 10 billion euros ($15.46 billion) in tax rebates and cheap credit this year to keep the economy out of recession.

Fashion, furniture and decoration shops are closing after retail sales declined or stagnated in the past six months.

The number of Spaniards claiming unemployment benefits rose for the first April since the early 1980s after the jobless rate hit a 3-year high of 9.6 percent in the first quarter -- the highest rate among European Union states, according to Eurostat.

"This marks the beginning of a long and painful period of adjustment," said Susana Garcia at Deutsche Bank. "I expect a mild contraction in the second quarter and a rebound in the third because of the government fiscal package."

The International Monetary Fund expects Spain's solvent banking system, healthy public accounts and rapid population growth to help spark an economic recovery in 2010.

However, the construction sector drives a fifth of growth -- more than twice the average in euro zone countries -- and an estimated 650,000 new homes now stand empty in Spain. House prices, which have yet to fall by official measures, are estimated to be up to 30 percent overvalued.

Debt default rates are expected to triple over the next two years after the heaviest period of private sector borrowing in Spain's modern history between 2002-2005.

Spanish annual growth is expected to more than halve to 1.8 percent this year from 3.8 percent in 2007, according to a Reuters survey of analysts.

Spain's National Statistics Institute will report final GDP numbers, and a breakdown of results, on May 21. (Additional reporting by Ben Harding and Jason Webb; Editing by Ruth Pitchford)

((andrew.hay@reuters.com, +34 91585 2158; Reuters messaging andrew.hay.reuters.net@reuters.com)) ($1=.6467 Euro)

Keywords: SPAIN GDP

EURO GOVT-Bunds pare losses after U.S. CPI data

Reuters: [2008-05-14 14:51:00]

LONDON, May 14 (Reuters) - Bund futures pared losses on Wednesday after U.S. consumer prices grew less than expected in April.

At 1245 GMT, June Bund futures <FGBLM8> were 53 ticks lower on the day at 113.81, compared with around 113.67 shortly before the data was released.

Two-year yields <EU2YT=RR> were 6.8 basis points higher at 3.891 percent, while 10-year yields <EU10YT=RR> were 5.8 basis points higher at 4.152 percent.

U.S. consumer prices rose a smaller-than-expected 0.2 percent in April as energy prices held steady, a Labor Department report said.

The rise in April prices was less than the 0.3 percent gain Wall Street analysts polled by Reuters were expecting after a 0.3 percent advance in March. Core prices, which exclude volatile food and energy, were up just 0.1 percent, half the increase analysts had forecast. ((Reporting by Kirsten Donovan; kirsten.donovan.reuters.com@reuters.net, +44 20 7542 8675))

UPDATE 1-Irish finmin: short-term economic outlook unclear

Reuters: [2008-05-14 14:50:00]

(Adds more comments, background)

By Huw Jones

BRUSSELS, May 14 (Reuters) - New Irish Finance Minister Brian Lenihan said on Wednesday there was "considerable uncertainty" in the short-term outlook for his country's economy but Irish banks were in a sound position.

The uncertainty was largely due to external factors such as hikes in oil and food prices that have stoked inflation, said Lenihan who took over as finance minister last week.

"We can't afford to compensate ourselves for these developments, that would simply lead to a further loss of competitiveness and additional job losses," he told reporters.

Lenihan was in Brussels for a regular meeting of European Union finance ministers where calls for wage restraint have featured prominently.

"There is considerable uncertainty in the short-term economic outlook in Ireland," Lenihan said, adding that Irish banks were in a "sound" situation.

An adjustment has been taking place in Ireland's once-booming property sector, slowing the economy which in recent years enjoyed the nickname of the Celtic Tiger because of its fast pace of growth.

"The sector has slowed down substantially and that has had an impact on the economy," Lenihan said, urging restraint in pay claims generally.

"We have an opportunity to continue to resume the track we were on, to have sustainable levels of growth in the future, if we take the necessary steps now to ensure we are in a position to benefit from that when it happens."

Fellow EU finance ministers were anxious to know how preparations were going for Ireland's June 12 referendum on the new EU Lisbon Treaty, he said.

Ireland is the only EU state planning a referendum on the treaty. A "no" vote would be a big setback for the project designed to end years of diplomatic wrangling over how to reform the workings of the bloc's core institutions.

Lenihan said the euro's strength has not been an issue in the campaigning and a "no" vote would damage the Irish economy.

"For me a 'no' vote is a step into isolation for Ireland," Lenihan said.

Ireland is fighting any move by Brussels to introduce an EU-wide system for computing corporate tax bases, fearing it is a first step on a "slippery slope" to harmonised tax rates.

Ireland has one of the lowest rates of corporate tax in the EU, helping to attract big flows of foreign investment.

Lenihan said the new EU treaty would not alter the need for unanimity among European states on tax matters.

EU Tax Commissioner Laszlo Kovacs has suggested a group of states could decide to go ahead with introducing a common corporate tax base if there was no unanimity but Lenihan cast doubt on how this would work.

"There is no agreement on it. I think it's difficult to see enhanced cooperation being invoked," Lenihan said, refering to the possibility of a group of EU states pressing ahead with changes without unanimity.

(editing by William Schomberg)

((Reuters Messaging: huw.jones.reuters.com@reuters.net; + 32 2 287 6817; huw.jones@reuters.com))

Keywords: IRELAND ECONOMY/LENIHAN