Economic News

Thursday May 15, 10:52 AM
European bonds slump after strong euro zone GDP, inflation data

LONDON (Thomson Financial) - European government bonds came under pressure following strong euro zone GDP growth and inflation data, which kept in place market expectations that the European Central Bank will not be cutting interest rates any time soon.

Euro zone GDP rose a provisional 2.2 percent in the first quarter from a year earlier following strong GDP readings from France and Germany, and well above expectations for a 1.9 percent increase.

Meanwhile, inflation remained well above the European Central Bank's target of below but close to 2.0 percent, with the euro zone's harmonised index of consumer prices rising a final 3.3 percent year-on-year in April, unchanged from the provisional estimate.

'Above-trend euro zone GDP growth in the first quarter is most unlikely to lead the ECB into raising interest rates, even though inflation levels and risks remain elevated,' said Howard Archer, chief European economist at Global Insight.

'However, it makes it even more unlikely that interest rates will be cut any time soon,' said Archer.

Rising inflationary pressures are likely to become more of a headache for the central bank rate setters as they try to balance this with the prospect of slowing growth.

Economists surveyed in the ECB's latest monthly bulletin raised their forecast for euro zone inflation this year to 3.0 percent from 2.5 percent, but downgraded forecasts for euro zone growth to 1.6 percent from 1.8 percent.

The markets' attention will now turn to a slew of speeches from ECB policy makers later, including from president Jean-Claude Trichet.

In the UK, gilts were underperforming their European counterparts as markets continued to pare back their expectations for the number of Bank of England interest rate cuts this year, after economic news this week indicated that inflation is likely to increase sharply in the coming months.

Data on Tuesday showed annual CPI (NYSE: CPY - news) inflation hit 3.0 percent in April, only just below the level that would trigger Bank of England governor Mervyn King into writing a letter to the Chancellor of the Exchequer to explain why inflation is more than one percentage point above the 2.0 percent target.

Then on Wednesday, the central bank warned in its quarterly Inflation Report that inflation could reach near 4 percent by autumn if interest rates fall in line with markets' previous expectations.

King has also said there will likely be 'plenty of opportunities to write letters' on why inflation is running so far above its target.

'In the wake of this week's poor inflation data, and a correspondingly troublesome near term CPI profile in yesterday's Inflation Report, the market has completely erased its earlier expectations of some modest degree of easing from the BoE this year,' said a strategist at RBC Markets.

At Yield Change on

0932 GMT pct previous close

June euribor future (Liffe) 95.15 dn 0.02

Sept euribor future (Liffe) 95.22 dn 0.04

GERMANY

June bund future (Eurex) 112.93 dn 0.79

4.00 pct Jan 2018 govt bond 97.96 4.26 dn 0.68

FRANCE

4.25 pct Oct 2017 govt bond 96.36 4.46 dn 0.59

ITALY

4.50 pct Feb 2018 govt bond 98.94 4.69 dn 0.49

June gilt future 106.63 dn 0.72