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European Bonds May Drop; French October Consumer Spending Rose
Loan , Tân Bình, 0902002077
By Gavin Finch
Nov. 22 (Bloomberg) -- European government bonds may decline after a report showed consumer spending in France, Europe's third largest economy, rose in October and unemployment dropped.
Benchmark debt fell yesterday after Morgan Stanley joined Goldman Sachs Group Inc. and Commerzbank AG in raising its forecasts for European Central Bank borrowing costs next year. ECB President Jean-Claude Trichet said yesterday there's no room ``for complacency in terms of inflationary pressure.''
``Shorter-dated debt is going to remain under pressure from all the hawkish rhetoric coming out of the ECB on inflation and the need for future rate hikes,'' said Cyril Beuzit, head of interest-rate strategy in London at BNP Paribas SA. ``No doubt Trichet will continue to be hawkish.''
The yield on the benchmark two-year note, which is more sensitive to changes in rate expectations than longer-dated debt, was little changed at 3.68 percent at 11:55 a.m. in London. The price of the 3.5 percent security due September 2008 rose 0.01, or 10 euro cents per 1,000 euro ($1,286), face amount to 99.69.
French consumer spending rose in October as unemployment fell to a five-year low. Spending gained 0.9 percent from September, when it fell a revised 2.5 percent, Insee, the national statistics office, said. Economists expected a 1 percent gain, according to a Bloomberg survey.
Rate Forecasts
The ECB kept its benchmark rate at 3.25 percent on Nov. 2, after lifting it five times since last December. Morgan Stanley raised its forecast for borrowing costs today to 4 percent by the end of 2007, from a previous forecast of 3 percent.
Morgan Stanley said it now expects the economy of the dozen euro nations to expand 2.6 percent this year and 1.9 percent in 2007, compared with September forecasts of 2.1 percent and 1.4 percent respectively.
The International Monetary Fund is also raising its growth forecasts for Germany, the Financial Times Deutschland said yesterday, citing an interview with Ajai Chopra, who heads the fund's Germany unit.
The IMF expects the German economy to grow 2.5 percent this year, up from its current prediction of 2 percent, and 1.5 percent in 2007, up from 1.3 percent.
Goldman expects the ECB to lift its key rate to 4 percent by the middle of next year, and Commerzbank said it would be raised to 3.75 percent. Both previously anticipated the Frankfurt-based ECB would keep rates on hold after raising it a quarter point to 3.5 percent next month.
Optimism Slipping
Trichet has already signaled the central bank will lift borrowing costs to 3.5 percent next month. He said yesterday the ECB must be ``strongly vigilant'' on the risk of inflation, the phrase used to signal an imminent rate increase.
Benchmark two-year yields rose to a four-year high last week on speculation the ECB would need to keep raising rates in the $10 trillion economy into 2007.
Declines for bunds may be limited before two reports which are expected to show German and French business confidence fell this month, surveys of economists show.
The Ifo institute will report tomorrow its sentiment index, based on a poll of German executives, fell to 105.2 from 105.3 in October, according to a Bloomberg survey. A gauge of French business optimism, due on Nov. 24, probably fell to 107 from 108, a separate survey shows.
Traders are betting on at least one more interest-rate increase from the ECB next year, futures prices show. The yield on the three month Euribor futures contract for March was at 3.83 percent today.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.