European Market Update - The BOE Voted 7-2 to Keep Rates Unchanged in February

- The European indices are currently trading lower across the board after opening the session in positive territory. Downside weight came into the European indices as investors contextualized earnings outlooks provided by companies such as Nutreco who reported results ahead of the open.
- European government bonds are trading higher in the session as French and Italian CPI data fell in January. Over in the UK gilts are trading sharply higher, paring some of yesterday’s losses after poor auction results on the 2037 I/L gilt, after the BOE minutes showed that the February vote was a 7-2 split.
- French CPI for the month of January fell by the most in two years on both a normal and harmonized m/m basis as a result of declining energy prices. Despite recent data in the Euro-Area some analysts speculate that the ECB will not drop its guard, as wage negotiations and oil prices still pose upside inflation risks.
- Final fourth-quarter GDP in Spain was revised up to 1.2% q/q from the previous reading of 1.1%, while the y/y figure was left unchanged at 4.0%. The q/q GDP figure rose to its highest level since Q1 of 2000 as a decrease in unemployment helped to drive economic growth.
- Final Italian CPI was revised down from its previous reading on a harmonized basis to –1.1% m/m and 1.9% y/y from –1.0% and 2.0% respectively. On a m/m basis harmonized CPI fell to its lowest level since records began in February of 2001.
- Minutes from the Bank of England’s February 7/8 monetary policy meeting showed that the BOE voted 7-2 to keep rates unchanged at 5.25%. Regarding their decisions, dissenting members Beasley and Sentance said that the BOE policy tightening is still modest. Looking further into the minutes the majority of voters agreed that they saw a risk of too much policy tightening, furthermore indicating that more time is necessary in order to absorb rates, and to gauge if more interest rate hikes are needed. Note that some analysts suggested that a 6-3 vote would have been an indication of an interest rate hike as early as March or April, while a vote with few dissenters would indicate a later rate hike.
- Comments from an interview with the Swiss National Bank’s Roth were published overnight. Roth said that interest rates are too low to contain inflation, noting that the Swiss Franc is not in line with fundamentals. Furthermore Roth said that, thus far, wage increases have been rather moderate, and followed by warning that the Swiss economy is seen weakening during the second-half of 2007. Roth continued by warning of the risks associated with the carry trade, and concluded by saying that vigilance is needed on the Swiss Franc.
- In an 8-1 vote the Bank of Japan raised interest rates by 25bps to 0.50% for the first time since July of 2006. The BOJ said that CPI is expected to maintain its upward trend. The BOJ said that policy aims to achieve sustainable growth, noting that the BOJ can maintain an accommodative monetary environment.
- Front month crude oil futures are currently trading lower in the session as warmer weather makes its way into the Eastern US as well as parts of Europe. Although the demand for heating oil in the Northeast is expected to be 3% above normal in the week ending February 27, oil is trading lower as heating demand was initially forecasted to be 8.4% above normal.