Bonds

Thursday April 24, 11:52 AM
European government bonds rise as Germany's Ifo confidence survey falls

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LONDON (Thomson Financial) - European government bonds got a shot in the arm after a key survey of confidence in the area's biggest economy signalled a worrying slowdown.

The German Ifo research institute said its April business

climate index fell to 102.4 from 104.8 in March, well below analysts' forecasts of a more modest decline to 104.3. There were also steep falls in the sub-indices measuring sentiment on current conditions and expectations over the coming six months.

'After a brief brightening at the beginning of the year, the survey results indicate a slower pace of business activity,' Ifo president Hans-Werner Sinn said in a statement.

By all accounts, the fallout from the subprime mortgage market and the ensuing strains in the wholesale credit market are now having an impact across Europe and in turn dampening growth.

'The decline of the Ifo index should wake up all decoupling believers who over the last months steadily advocated that the German economy had been able to shrug off the financial crisis and the U.S. slowdown,' said Carsten Brzeski at ING.

The evidence of weak business confidence in what is viewed to be the euro zone's most robust economy comes on the back of Wednesday's weak PMI survey of the manufacturing sector, and a disappointing performance recently in the retail sector.

Should the German economy continue to falter, the European Central Bank may soon have to review its current hawkish stance, especially given that there have already been signs of declines in the rest of the euro zone.

'If this last bastion is about to fall, the ECB could run out of arguments for its hawkishness,' said Brzeski.

But with the ECB still uncomfortable with the current high inflation levels, the central bank cannot immediately consider easing monetary policy for fear of exacerbating inflationary pressures in the single currency zone further.

'We need to see some retracement in the pace of inflation before the ECB starts to think about supporting growth in the economy,' said David Page, an economist at Investec (LSE: INVP.L - news) .

However, with signs that the euro zone's largest economy is slowing, and the outlook for growth in the rest of the single currency zone looking less than rosy, inflationary pressures should eventually ease, in turn becoming less of an issue for the ECB.

'The euro zone economy looks like it's going to slow markedly year-on-year and that should create medium-term disinflationary pressures, which should offset the inflationary pressures coming from oil and commodities at the moment,' said Page.

European bonds were already higher ahead of the Ifo survey after the Bank of France's Christian Noyer 'clarified' some remarks he had made previously to give them a slightly less hawkish gloss.

Noyer joined other officials from Europe in airing concerns about the faster rise in consumer prices and said that the central bank will do whatever is necessary to keep a lid on inflation. The ECB's inflation rate stood at 3.6 percent in the year to March, way ahead of the central bank's target of around 2 percent.

That stoked market talk that the ECB's next interest rate move may actually be up, prompting a sharp retreat in European issues, particularly at the front- end.

But Noyer told the Wall Street Journal that his comment was taken out of context, with the newspaper reporting him as saying 'I would never engage in a discussion about the future path of interest rates, simply because nobody knows. It (Frankfurt: A0MLX5 - news) would be dangerous to make predictions in either direction.'

In the UK, gilts were also up, but by much smaller margins after news that retail sales fell at their fastest pace in more than a year in March. The effect was watered down by upward revisions to figures for January and February.

David Page, at Investec, said the firm trend of sales 'on face value reduces the odds of a near-term cut in interest rates', but he stressed the official figures are 'totally at odds' with anecdotal evidence on the high street, as well as measures of consumer confidence that are at 15-year lows.

'The Monetary Policy Committee will be confused by this picture,' Page said.

Vicky Redwood, economist at Capital Economics, agreed.

'The continued mixed news about the strength of the consumer sector boosts the chances that the MPC (A050540.KQ - news) will proceed fairly cautiously in cutting interest rates,' she said, noting that the firm official data contrast markedly with downbeat surveys and other snapshots of the high street.

At Yield Change on

1020 GMT pct previous close

June euribor future (Liffe) 95.14 unchanged

Sept euribor future (Liffe) 95.32 up 0.03

GERMANY

June bund future (Eurex) 114.27 up 0.36

4.00 pct Jan 2018 govt bond 99.16 4.10 up 0.37

FRANCE

4.25 pct Oct 2017 govt bond 97.50 4.31 up 0.36

ITALY

4.50 pct Feb 2018 govt bond 99.64 4.60 up 0.22

June gilt future 108.39 dn 0.11