European govt bonds surge after US CPI data
Friday, July 16, 2004 3:16:55 PM
LONDON (AFX) - European government bonds surged higher after US inflation data cemented expectations that the US Federal Reserve will raise the cost of borrowing in a measured manner in the months to come
Even though energy prices moved higher in June, the US's core rate of inflation fell to its lowest rate of the year, the Labor Department said
The consumer price index increased 0.3 pct in June, slightly ahead of expectations of a 0.2 pct gain. However, the core CPI -- which excludes food and energy costs -- rose just 0.1 pct, a tick less than the 0.2 pct expected. "Overall, confidence remains at healthy levels, but following the soft core CPI reading in June, the drop in portfolio capital inflows registered in May, the weaker-than-expected outcome will act as yet another blow to the dollar, whilst fixed income markets will continue to benefit," said Mitul Kotecha, analyst at CALYON
Though the Fed switched gears last month by raising short-term interest rates by a quarter point from 46-year lows of 1.00 pct in a first step to head off inflation, concern about the pace of the US recovery heightened expectations that upcoming rate increases would not be aggressive. "Along with the recent run of weaker activity data in June, it suggests the Fed was right to keep its pledge to be measured and will accordingly raise rates by another quarter point to 1.5 pct at its mid-August meeting," said Paul Ashworth, international economist at Capital Economics
Another closely watched survey also helped bonds
Though consumer sentiment improved slightly in early July, it did not grow as much as analysts had anticipated
The University of Michigan's consumer sentiment index rose to 96.0 from 95.6 in June and expectations of a larger pick-up to 96.6
In the UK, gilts surged higher too even though the economy remains buoyant and another interest rate in August looks likely
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