U.S. inflation data boosts bond futures, shares

LONDON, Feb 22: U.S. bond futures pared earlier losses and stock futures indicated Wall Street should open modestly firmer on Wednesday after core U.S. inflation data came in close to expectations.

But the dollar was little affected and European equity markets remained almost flat on the day.

U.S. consumer prices rose a surprisingly large 0.7 per cent in January, but costs outside of food and energy were up just 0.2 per cent as expected, suggesting underlying inflation remains tame, a report by the Labor Department showed.

Economists had forecast consumer prices would climb 0.5 per cent last month after December's unexpected 0.1 per cent decline.

''It's very clear that higher energy prices are now being passed along to consumers and it's not difficult to do that when the economy is as strong as it is,'' said Hugh Johnson, chief investment officer at Johnson Illington Advisors in New York.

''This will put additional pressure on the Federal Reserve to continue to raise short-term interest rates.'' The euro initially edged higher against the dollar, trading at .1879, from about .1865. The dollar fell against the yen, trading at 118.56 yen from about 118.65 yen before the data.

''We had dollar gains going into this number and I just don't think the data is enough to get the euro below the .1860 area,'' said Lara Rhame, foreign exchange strategist at Credit Suisse in New York.

U.S. Treasury debt prices pared losses with the benchmark 10-year Treasury note down 1/32 to yield 4.575 per cent.

The benchmark FTSEurofirst index of 300 leading European stocks was up 0.05 per cent while Japan's Nikkei earlier closed down 0.71 per cent.

RATE RISES

The inflation data followed minutes of the U.S. Federal Reserve's January 31 meeting released on Tuesday which showed officials felt further rate rises might be needed to prevent price pressures from picking up.

However they also said the central bank's policy stance was ''close to where it needed to be''.

Analysts said the release supported the market's belief that the Fed is likely to raise rates at least twice more, taking the Fed funds rate to 5 per cent from the current 4.5 per cent by mid-year.

''The minutes confirmed the current pricing of rate hikes in the market,'' said Niels Christensen, senior currency strategist at Societe Generale in Paris.

Eurozone government bonds extended losses after data showed new industrial orders unexpectedly rose in December, bolstering the view that the European Central Bank may raise interest rates to 2.5 per cent next week as growth picks up.

As the U.S. and eurozone braced for higher rates, unexpectedly hawkish minutes from the Bank of England poured cold water on the idea of a British rate cut in the near future.

Only one member of the rate-setting Monetary Policy Committee voted for lower rates this month when the committee held rates unchanged at 4.5 per cent. Market talk had centred on a vote of 7-2 but the minutes showed an 8-1 result.

''There is no indication here that the MPC is at present minded to move rates in either direction in the near term,'' said Simon Hayes at Barclays Capital.

Short sterling interest rate futures fell sharply after the minutes as the pound rose a third of a cent against the dollar.

There was especially high volume in the March contract as dealers liquidated bets on a near-term rate cut.

U.S. crude oil traded 69 cents lower at .07 a barrel, shedding some gains from a major disruption in Nigerian exports as dealers anticipated a further build-up in already robust U.S.

fuel stockpiles.

Spot gold was also weaker, trading at 1.10/551.80 an ounce, down from 4.70/5.40 last quoted in New York on Tuesday.

HIGH YIELDERS SUFFER

High-yielding currencies were under pressure in the wake of sharp falls in the Icelandic crown which served as a reminder to investors to pay heed to macro imbalances brewing in economies offering higher interest rates.

''The markets could now turn their attention to other high-yielding currencies with large imbalances,'' said Copenhagen-based Lars Christensen, senior analyst at Danske Bank.

Ratings agency Fitch on Tuesday cut its outlook on Iceland to negative from stable, citing inflation, a high current account deficit and soaring external indebtedness.

The Icelandic crown fell about four percent to 68.70 against the dollar, after dropping nearly four percent in the previous session.

Other high-yielders under the cosh included the New Zealand dollar which slumped to a 17-month low versus the U.S. dollar on weakening economic fundamentals, while some eastern European currencies like the Hungarian forint and Polish zloty lost ground after the steep fall in the Icelandic crown.

REUTERS