Tuesday May 6, 10:18 AM
Gilts boosted by sharp fall in UK services April PMI
LONDON (Thomson Financial) - Gilts jumped higher after a services sector indicator for the United Kingdom fell sharply, boosting the outside chance that the Bank of England may cut rates on Thursday.
The services PMI fell to 50.4 in
April from March's 52.1, marking the lowest level since March 2003 and coming in below analyst expectations for a 51.2 reading. Despite the drop, the input prices component rose to 67.3 in April, the highest since records began in 1996, suggesting inflation will continue to pose a problem.
The data 'gives a slight boost to the chances of another rate cut at this week's meeting,' said Vicky Redwood at Capital Economics.
She estimates that the surveys are consistent with quarterly GDP growth of only 0.3 percent, just below the 0.4 percent seen in the first quarter, meaning the economic slowdown is now underway even before the full effects of the credit crunch of housing slowdown have been felt.
'The Monetary Policy Committee probably still sees the upside risks to inflation as severe enough to pause at least a month before cutting again, but the decision is perhaps now a bit less clear-cut than it previously seemed,' said Redwood.
Government bonds in the rest of Europe were lower than gilts, weighed by a small upward revision in the euro zone's April services PMI, to 52.0 from the flash estimate of 51.8.
Although the number is still much lower than a year ago as the financial crisis weighs on confidence, it suggests the slowdown will be gradual.
High readings for prices in the euro zone survey will keep the European Central Bank talking tough on inflation on Thursday, said Howard Archer at Global Insight.
'Interest rate cuts are set to remain off the bank's agenda for a few more months to come,' said Archer.
However, a steady erosion of growth and confidence will force the ECB to cut towards the end of the year, when price pressures are due to dampen.
At Yield Change on
0855 GMT pct previous close
June euribor future (Liffe) 95.24 up 0.01
Sept euribor future (Liffe) 95.39 up 0.04
GERMANY
June bund future (Eurex) 113.81 up 0.04
4.00 pct Jan 2018 govt bond 98.80 4.15 up 0.02
FRANCE
4.25 pct Oct 2017 govt bond 97.24 4.35 up 0.03
ITALY
4.50 pct Feb 2018 govt bond 99.78 4.58 dn 0.33
UK
June gilt future 108.22 up 0.50
5.00 pct March 2018 govt bond 102.49 4.68 up 0.49
June short sterling future 94.47 up 0.01
Sept short sterling future 94.68 up 0.05
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