European govt bonds up after in-line euro zone CPI data

LONDON (Thomson Financial) - European government bonds rose following in-line consumer price data for the euro zone which showed inflation remaining below 2 pct.

The euro zone's harmonised index of consumer prices rose a final 1.9 pct year-on-year in May, unchanged from the provisional estimate and in line with expectations.

"Inflation ... currently remains pretty well behaved, while the European Central Bank should also be pretty pleased to see that wage growth across the euro zone was limited to 2.3 pct year-on-year in the first quarter," said Howard Archer of Global Insight.

Controlled wage growth indicates that tightening labour markets have, so far at least, not pushed up pay markedly in the area.

Also providing some optimism was core inflation -- which excludes energy, food, alcohol and tobacco -- where growth remained stable, up 1.9 pct year-on-year in May, unchanged from the April rate of increase.

Orlando Green of Calyon said that while the stable core inflation figures does not change opinion that a rate hike from the ECB in September still looks inevitable, "it is not so plain sailing" what will happen beyond that.

The market is widely expecting the ECB to hike its key repo rate by a further 25 basis points to 4.25 pct in September, having raised it to 4.00 pct from 3.75 last week.

However, some analysts are already suggesting there could be further increases to 4.50 pct by early 2008, particularly after the ECB earlier reiterated its president Jean-Claude Trichet's comments in a monthly bulletin that monetary policy is still on the accommodative side.

In the UK, gilts were also up, tracking their European counterparts as they reversed recent heavy losses.

Official figures released earlier today showed retail sales in the UK rose by 0.4 pct in May from April, reversing the previous month's 0.1 pct decline and beating expectations for a more modest rise of 0.3 pct.

However, analysts said the Bank of England is likely to be pleased that the retail sales deflator rose at a reduced rate of 0.5 pct year-on-year in May, down from a more than 8-year high of 1.0 pct in April.

Also released today, the Bank of England's inflation attitudes survey showed inflation expectations have stabilised at 2.7 pct, but remain at elevated levels.

The figures will do nothing, however, to alter market expectations that the central bank will raise interest rates by another quarter point to 5.75 pct in the coming months, possibly as soon as next month.

At Yield Change on

1250 BST pct previous close

Sept euribor future (Liffe) 95.645 up 0.005

Dec euribor future (Liffe) 95.46 up 0.015

GERMANY

Sept bund future (Eurex) 110.24 up 0.02

3.75 pct Jul 2017 govt bond 96.96 4.63 up 0.04

FRANCE

3.75 pct Apr 2017 govt bond 92.82 4.67 up 0.05

ITALY

4.00 pct Feb 2017 govt bond 94.00 4.85 down 0.03

UK

Sept gilt future 103.91 up 0.14

4.00 pct Sept 2016 govt bond 89.56 5.45 up 0.14

Sept short sterling future 93.94 up 0.02

Dec short sterling future 93.82 up 0.03

chinny.li@thomson.com

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