Bonds

Wednesday April 30, 04:23 PM
European govt bonds track U.S. Treasuries higher ahead of Fed rate decision

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LONDON (Thomson Financial) - European bonds were tracking their U.S. counterparts higher as market players digested a raft of data ahead of the Federal Reserve's interest rate decision on Wednesday.

Although data revealed that

the world's largest economy did not contract in the first quarter, repeating the growth rate of 0.6 percent seen in the fourth quarter, analysts saw reasons to be cautious when looking in finer detail at the report.

'The initial estimate of GDP growth was just the same as in the fourth quarter, but the mix was decidedly less healthy,' said Nigel Gault, chief U.S. economist at Global Insight.

'Growth in the first quarter was positive only because firms began adding to their inventories again; final sales actually fell,' said Gault.

Support also came from a weaker-than-expected rise in U.S. employment costs in the first quarter, adding to the view that the Fed has room to keep cutting interest rates.

Overall employment costs were up 0.7 pct in the quarter, the slowest rise in two years and just below Thomson IFR Markets' consensus forecast for a 0.8 percent increase.

'The weak gains in employment costs are non-inflationary and suggest that the Fed has room to cut rates more,' said Myra Dsouza, an analyst at Thomson IFR Markets.

Elsewhere, the market took in its stride the stronger-than-expected ADP National Employment Report and an unexpected improvement in the Chicago PMI, as attention turned to Wednesday evening's Federal Open Market Committee's rate setting meeting and the accompanying statement.

Financial markets have priced in about an 80 percent probability that the Federal Reserve will cut the key Fed funds rate by a quarter point to 2.00 percent.

'The accompanying statement will be watched closely for evidence that the balance on the committee may be shifting to a more neutral stance, in order to assess the impact of the liquidity measures and the easing already in place,' said Mark Miller, economist at Bank of Scotland Treasury.

In the UK, gilts were tracking the positive trend on the rest of the bonds market, with support also coming from dismal showings in GfK NOP's consumer confidence and Nationwide's house price surveys.

Markets will focus on CIPS manufacturing PMI on Thursday, which is expected to show a decline to 50.7 in April from 51.3 in the previous month. This would leave it only marginally above the 50 level that indicates the sector is still growing.

At Yield Change on

1504 GMT pct previous close

June euribor future (Liffe) 95.23 up 0.03

Sept euribor future (Liffe) 95.42 up 0.01

GERMANY

June bund future (Eurex) 114.04 dn 0.01

4.00 pct Jan 2018 govt bond 99.03 4.12 up 0.12

FRANCE

4.25 pct Oct 2017 govt bond 97.43 4.32 up 0.20

ITALY

4.50 pct Feb 2018 govt bond 99.84 4.57 up 0.21

June gilt future 108.29 up 0.03