No sign of major central banks tightening the reins

Sun May 18, 2014 5:03am EDT
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By Mike Peacock

LONDON (Reuters) - Government bond yields have tumbled on the basis that the world's major central banks will continue to keep monetary policy easy and in some cases loosen further.

Economic data in the week ahead - most notably May purchasing managers surveys (PMIs) from the United States, China and the euro zone - will be used by investors to test that thesis.

Five senior sources have told Reuters that the European Central Bank is preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

A distinctly mixed bag of euro zone GDP data, which showed Germany charging ahead and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, will have done little to dissuade the ECB from moving.

"While speculation mounts in Europe as to the composition of a package of ECB measures in June, as the central bank seeks to fend off excessively low inflation, across the Atlantic, all eyes will be on the U.S. FOMC minutes next week for hints about a policy exit," said Paul Mortimer-Lee, global head of market economics at BNP Paribas.

Minutes of the Federal Reserve's last policy meeting, at which it reduced its monthly bond purchases to $45 billion from $55 billion, will be released on Wednesday.

At the April 30 meeting the Fed stuck to its assessment that the economy would need near-zero interest rates for a considerable time after asset purchases are fully wound down by year-end. The U.S. economy hardly grew in the first quarter but has gathered pace since.

There may have been discussion about a future exit strategy.   Continued...

People walk by the New York Stock Exchange in New York's financial district March 11, 2014. REUTERS/Brendan McDermid