Friday, 15 June 2007

Latest news still point to higher rates

Bond markets have steadied somewhat recently, but bond yields are likely to stay on an uptrend if recent reports are anything to go by.

Yesterday, European Central Bank council member Axel Weber kept his reputation as a hawk on interest rates intact. From Bloomberg:

"Our monetary-policy stance is still on the accommodative side and far from being restrictive," Weber said in the text of a speech he gave in London today. "Inflation is projected to remain above our stability threshold" and the ECB "will do what is necessary to maintain price stability."

But inflation in the euro area remained below the ECB's limit in May, according to another Bloomberg report.

Consumer prices in the 13-nation euro region increased 1.9 percent from a year earlier, the same inflation rate as in April, the European Union's statistics office in Luxembourg said today. Labor costs rose 2.2 percent in the first quarter from a year earlier, the same pace as in the previous three months, according to a separate report.

While the ECB mulls over further rate hikes, the Swiss central bank took action yesterday. Bloomberg reports:

The Swiss National Bank increased the three-month Libor target rate by a quarter-point to 2.5 percent, the highest since September 2001...

"We have a Swiss economy stimulated by the weakness of the Swiss franc," [SNB President Jean-Pierre] Roth said in an interview in Bern. "On the other hand, we have import prices increasing. We see a need for further interest-rate increases if the situation does not calm down. We're optimistic about the Swiss economy."

Further interest rate increases could also be coming from the Bank of England after UK retail sales rebounded 0.4 percent in May while unemployment fell to the lowest since September 2005. However, growth in UK house prices slowed in May.

More tightening is also expected from China, especially after industrial production rose 18.1 percent in May from a year ealier.

But the Federal Reserve will probably not raise rates soon despite a relatively hot number yesterday on producer prices. From Bloomberg:

Prices paid to U.S. producers rose more than forecast in May, reflecting a fourth consecutive jump in fuel costs that threatens a broader pickup in inflation.

The 0.9 percent increase followed a 0.7 percent rise in April, the Labor Department said today in Washington. So-called core prices, which exclude fuel and food costs, rose 0.2 percent...

The number of Americans filing first-time claims for unemployment benefits held at 311,000 for a second week, pointing to a buoyant labor market, the Labor Department reported separately. The four-week average, a less volatile measure, rose to 311,250.

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