European Bond Market Preview 2/27

- European government bonds closed sharply higher in yesterday’s session. EGB’s moved higher early on in the session after the release of lower than expected GFK consumer confidence in Germany, and gained further support later following treasuries as they rose in the US.
- Spain’s Finance Minister Pedro Solbes said yesterday that inflation is improving all over Europe, noting that the current inflation outlook depends on oil prices. Regarding currencies Solbes said that currency volatility is unfavorable.
- The ECB’s Quaden reiterated overnight that the ECB has a posture of strong vigilance, noting that the current rate policy remains accommodative and does not hamper growth. Despite calling the policy accommodative, Quaden admitted that the current policy may be less accommodative than last year. Quaden concluded saying that the ECB will base its policy decisions on growth rates and inflation prospects.
- The EU’s Juncker said overnight that inflation in the Euro-Area is likely to fall below 2.0% in 2007. On wage developments, a recent hot topic in the Euro-Area, Juncker said that wage developments have, thus far, been highly moderate. Furthermore Juncker said that wage moderation has been applied, and pointed out that it was most necessary in Germany. Echoing a comment made by German Finance Minister Steinbrueck earlier on, Juncker said that as long as wages are in line with productivity wage hikes will not fan inflation. Juncker concluded saying that employment rates in the Euro-Area are still too high.
- The IG Metall union formally demanded a 6.5% wage hike during 2007. German finance minister Steinbrueck said of the demand that wage hikes will not pose inflation risks as long as productivity is in line with wages. Furthermore Stienbrueck said that harmonized CPI levels of 1.8 to 2.0% are acceptable.
- In focus today will be the release of the German import price index for the month of January, due out at 2:00 ET, as well as M3 money supply in the Euro-Area, which is due out at 4:00 ET. Additional focus will fall upon the regional CPI data, which will be coming out of Germany throughout the night.
- In new supply Italy will be selling €4.0B in 3-Year 4.0% bonds, €2.0B in 7-Year floating rate notes, and €2.5B in 10-Year 4.0% bonds. Results are expected shortly after 5;00 ET.
- Over in the UK gilts closed sharply higher as well, tracking movements elsewhere as yesterday’s session was pretty quiet for the UK.
- Overnight the BOE’s Blanchflower said that inflation may reach its target by the summer, and that inflation may fall below 2.0% within two years. Blanchflower said that inflation expectations will fall back, pointing out that the economy can grow without inflation. Blanchflower said that labor supply in the UK is not meeting demand as slack has increased. Regarding the exchange rate, Blanchflower said that he sees the pound falling over the next two years.
- In focus today will be the release of BBA mortgage lending figures for the month of January. While there are no estimates for this data, the previous mortgage lending was £18.2B, while the previous approvals figure was 45,533.