EURO GOVT-Bunds extend decline; inflation, stocks weigh

Reuters: [2008-05-19 17:47:00]

(Updates to late trade)

By Ian Chua

LONDON, May 19 (Reuters) - Euro zone government bonds fell on Monday, extending last week's sharp decline as persistent worries about inflation and gains in stocks dulled the allure of safe-haven government debt.

A key forecasting gauge suggesting the weak U.S. economy has avoided a recession helped send stocks higher. The private Conference Board's Leading Economic Indicators index rose a better-than-expected 0.1 percent in April, after a matching increase in March, which was unrevised. See [ID:nN19531921]

"The very short-term view for the bond market is not supportive because market participants are more and more focused on inflation concerns rather than growth concerns," said Nathalie Fillet, senior interest rate strategist at BNP Paribas.

"And with equities continuing to edge higher ... we think Bunds could continue to go lower this week."

At 1521 GMT, June Bund futures <FGBLc1> were at 113.19, down 44 ticks from Friday's settlement close. But turnover was paltry with less than 650,000 lots traded.

The two-year Schatz yield <EU2YT=RR> gained 2.5 basis points to 4.025 percent, while the 10-year Bund yield <EU10YT=RR> advanced 5.3 basis points to 4.231 percent, nearing the 4-1/2 month peak of 4.272 percent set last Thursday.

These moves saw the two-10 year yield curve steepen slightly to 21 basis points from around 19 basis points late Friday.

Still, the curve remained near its flattest this year, well off levels above 80 basis points set in February when markets were expecting interest rate cuts by the European Central Bank.

Constant tough talk on fighting inflation from ECB officials has convinced investors that the central bank will not lower interest rates soon.

ECB President Jean-Claude Trichet reiterated on Monday that policymakers needed to make containing inflation their top priority, saying price stability was the best way to have a high level of sustainable economic growth.

Underscoring those worries, the Bundesbank warned in its monthly report that German inflation will probably accelerate markedly in coming months and is unlikely to slow significantly before late autumn due to high oil prices.

Analysts said minutes of the latest policy meetings from the Federal Reserve and Bank of England's Monetary Policy Committee (MPC) due this week could shed light on how central banks will balance the opposing influences of inflation and slower growth on their policy stance.

"They look set to shore up the more hawkish leaning of market expectations in recent weeks, especially the MPC minutes," said ICAP Europe Research analysts.

"However, with consumer spending and sentiment, and the housing market being relentlessly ground lower by the ongoing credit crunch, we are still a long way away from a situation where central banks feel the need to actually tighten policy."

Euribor interest rate futures <0#FEI:> fell as much as 5.5 basis points, pushing their implied yield higher still as the market priced in the slim possibility of a ECB rate hike.

The euro zone 2/10 swap spread curve remained inverted -- with 2-year rates higher than 10-year rates -- by around 7 basis points, the most since the introduction of the euro in 1999.

Also in focus this week are the German investor sentiment and business surveys as well as producer prices <G7/MAY>.

European stocks <.FTEU3> were up nearly 1 percent in late trade while the U.S. S&P 500 index <.SPX> added 0.8 percent. (Editing by Gerrard Raven) ((ian.chua@reuters.com; +44 207 542 1028; Reuters Messaging: ian.chua.reuters.com@reuters.net))

EURO GOVT-Bunds extend decline as stocks climb

Reuters: [2008-05-19 16:20:00]

LONDON, May 19 (Reuters) - Bund futures pushed deeper into negative territory in afternoon trade on Monday as European and U.S. stocks extended gains after a key economic forecasting gauge suggested the U.S. economy has sidestepped a recession.

The private Conference Board said its Leading Economic Indicators index rose 0.1 percent, after a matching increase in March, which was unrevised. See [ID:nN19531921]

At 1415 GMT, June Bund futures <FGBLc1> had fallen 33 ticks to 113.30 on the day. The 10-year yield <EU10YT=RR> climbed 3.6 basis points to 4.214 percent, while the two-year yield <EU2YT=RR> added nearly 1 basis point to 4.001 percent. ((ian.chua@reuters.com; +44 207 542 1028; Reuters Messaging: ian.chua.reuters.com@reuters.net))

Keywords: MARKETS BONDS EURO

Sterling falls despite robust UK house data

Reuters: [2008-05-19 16:09:00]

LONDON, May 19 (Reuters) - Sterling fell against the dollar and euro on Monday, shrugging off a robust housing market survey, with sentiment staying heavy due a recent run of poor data and expectations for the UK economy to slow further.

Asking prices for property in England and Wales hit a record high in May and house price inflation accelerated, a survey from property website Rightmove showed, despite expectations for a much weaker housing market this year [ID:nL1635815].

Economists are predicting falls in house prices of about 10 percent this year and Bank of England policymaker David Blanchflower has warned prices could dive by about one-third unless aggressive, immediate action is taken.

At the same time, interest rates are unlikely to come down fast given worries over inflation after a decade in which house prices nearly trebled.

As growth slows and inflation rises, the pound has suffered from expectations of economic misery ahead, falling to three-month lows versus the dollar last week and hovering near record troughs against the euro.

"The UK data out overnight hasn't had any major impact at all...in general the downside risks remain. Confidence will be undermined by the high inflation, low growth outlook that has been painted by the Bank of England," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

By 1357 GMT the pound was down 0.28 percent on the day at $1.9510 <GBP=>, having hit its lowest since late February last week at $1.9363. The euro was up 0.1 percent at 79.74 pence -- staying fairly close to last month's record high at 80.98 <EURGBP=>.

Analysts said pressure on sterling was unlikely to ease ahead of key events this week including Wednesday's Bank of England minutes from its last policy meeting and key UK retail sales numbers on Thursday.

Even though expectations for a June interest rate cut from the current 5 percent have now been largely unwound, the pound has found little relief on the policy front because credit crunch worries are strangling confidence. Some analysts are braced for recession.

"The UK recession will be deep and prolonged and so will the pound's performance," BNP Paribas said in a note to clients.

European Central Bank President Jean-Claude Trichet said earlier that the world was experiencing an "ongoing and very significant market correction" and policymakers should make price stability their top priority.

(Reporting by Veronica Brown; Editing by Ian Jones)

((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))

Keywords: MARKETS STERLING CLOSE

Take fewer loans, c.bank governor urges Slovenia

Reuters: [2008-05-19 15:45:00]

LJUBLJANA, May 19 (Reuters) - Slovenia's financial system is in a good shape but there is a tendency of growing indebtedness, central bank governor Marko Kranjec said on Monday.

He urged Slovenian citizens, companies and banks to take fewer loans in order to prevent the financial system from worsening in the future.

"We are perhaps taking too many loans for our development, which is not critical yet but we do not wish to see any surprises there in the future," Kranjec told a news conference.

According to the central bank Slovenian households last year increased the part of their wage income used for paying debts by 3 percentage points to 22 percent of total income.

The debt of Slovenian companies in year 2007 rose to 79 percent of GDP, said the central bank but gave no comparable figure.

"The financial system is in a relatively good shape, we do not see major problems but as a regulator we are always ready (to act) and are watching what is happening," he added.

Kranjec said banks have significanly increased their idebtedness abroad in order to be able to give out more loans and urged banks to retain or improve their capital adequacy. (Reporting by Marja Novak, Editing by Ian Jones)

((marja.novak@reuters.com; 386-1-47-00-545; Reuters Messaging: marja.novak.reuters.com@reuters.net))

Keywords: SLOVENIA BANKING/

FOREX-US inflation, growth worries keep dlr under pressure

Reuters: [2008-05-19 12:41:00]

(Changes byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON, May 19 (Reuters) - The dollar slipped to a 2-1/2 week low against a basket of major currencies on Monday, as the worst U.S. consumer confidence reading in nearly three decades raised concerns about stagflation.

The May Reuters/University of Michigan index of U.S. consumer confidence dropped to 59.5 on Friday, the lowest level since June 1980, while short-term inflation expectations surged to their highest in a quarter of a century [ID:nN16406494].

In contrast, analysts said that there was scope for relatively robust readings from key German sentiment surveys this week to support the euro by reinforcing the case for the European Central Bank to leave rates on hold a while longer rather than cutting them.

"For now it looks as though markets are going to continue to press the (euro's) top up towards $1.5650... but I don't think we are really going to have the momentum to break out of the current ranges," said Jeremy Stretch, strategist at Rabobank.

"Investors might be buying into the idea that the German data -- ZEW and Ifo later this week -- might be a little bit on the firmer side of expectations," Stretch said.

"And at the same time there's increasing nervousness about the inflation picture in the U.S. ... if growth remains weak and inflation is elevated then that's not a particularly comfortable place to be," he added.

The euro rose to its highest level since May 1 at $1.5632, according to Reuters data <EUR=>, before paring gains to stand at $1.5588 by 1018 GMT.

The dollar also fell as low as 72.552 against a basket of major currencies <.DXY>, its weakest in over two weeks.

The yen edged up to 103.92 per dollar <JPY=>.

The Australian dollar scaled a 24-year peak of $0.9564 <AUD=>, boosted by firm commodity prices, better risk appetite and expectations that domestic interest rates will stay high.

CENTRAL BANKS

The surprisingly steep fall in U.S. consumer confidence slightly tempered market expectations for the Federal Reserve to raise interest rates later in the year. <FEDWATCH>

U.S. short-term interest rate futures show a roughly 80 to 85 percent chance of the Fed raising rates by 0.25 percentage point to 2.25 percent by year-end. They had been fully pricing in such an increase before the consumer confidence data.

Investors will look for more clues on the outlook for U.S. monetary policy from minutes of the Federal Open Market Committee that will be released on Wednesday.

The Bank of Japan is widely expected to keep interest rates at 0.50 percent at a two-day policy meeting that starts on Monday. [ID:nT305710]

The European Central Bank's rate decision is due next week, and most analysts expect inflation worries will keep it hawkish as long as economic data holds up reasonably well.

German ZEW economic sentiment data on Tuesday, the Ifo index of German business sentiment on Wednesday and euro zone services and manufacturing PMI data on Friday.

"ZEW survey may edge higher given it is a poll of investment professionals where sentiment has likely improved alongside greater market stability, and also in the wake of Germany's impressive Q1 GDP growth," Calyon said in a note to clients.

"The greater test for euro bulls though will come later in the week when softer readings on the PMI estimates and a lower German Ifo point to a moderation in activity entering Q2."

(Editing by David Christian-Edwards) ((antonina.vorobyova@reuters.com; Tel: +44207 542 7958, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net))

Keywords: MARKETS FOREX

Currency bid prices at 1019 GMT.  All data taken from Reuters 
with percent change calculated from the daily U.S. 
close at 2130 GMT. 
 
                       Last     US Close  % Chg   YTD %   2007 
                                16 May.                   Close 
                       ----------------------------------------- 
 Euro/dlr   <EUR=>     1.5586   1.5575   +0.07    +6.83   1.4589 
 Dlr/yen    <JPY=>     103.95   104.03   -0.08    -6.63   111.33 
 Euro/yen   <EURJPY=>  162.03   162.08   -0.03    -0.31   162.53 
 Dlr/swiss  <CHF=>     1.0454   1.0474   -0.19    -7.77   1.1335 
 Stg/dlr    <GBP=>     1.9563   1.9563   +0.00    -1.43   1.9847 
 Dlr/cad    <CAD=>     0.9937   0.9990   -0.53    -0.27   0.9964 
 Aus/dlr    <AUD=>     0.9541   0.9552   -0.12    +8.95   0.8757 
 NZD/Dlr    <NZD=>     0.7745   0.7739   +0.08    +1.03   0.7666 
 Euro/swiss <EURCHF=>  1.6294   1.6320   -0.16    -1.48   1.6539 
 Euro/stg   <EURGBP=>  0.7964   0.7961   +0.04    +8.37   0.7349 
 Euro/sek   <EURSEK=>  9.3090   9.3100   -0.01    -1.29   9.4304 
 Dlr/Nok    <NOK=>     5.0148   5.0228   -0.16    -7.73   5.4347 
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