Another batch of soft US economic data helped Treasury bonds stage a modest rally on Thursday.
Sales of new homes in the US fell by 4.3 per cent in July, the biggest fall since February and more than economists had expected.
The data came hard on the heels of Wednesday’s soft existing home sales numbers.
“Both the existing and new home sales reports confirm the Federal Reserve’s view of a further weakening in the US housing market,” said Dimitry Fleming, economist at ING.
“We think an orderly cool-down should start hurting consumer demand soon, inspiring the Fed to leave rates on hold for now, despite the likelihood of further short term upward inflationary pressure.
“We continue to believe a peak in the Fed funds rate has been reached.”
Further evidence of a slowdown in the US economy came from a sharp drop in headline durable goods orders last month. The yield on the 10-year Treasury was down 2 basis points at 4.8 per cent.
But it was a different story in Europe as news of a smaller than forecast drop in the German Ifo institute’s business climate index helped soothe recent concerns about the eurozone’s most important economy.
“The August Ifo confirms that the German economy remains in pretty good shape,” said Dirk Schumacher, economist at Goldman Sachs.
“There is nothing in this report that would make the European Central Bank change its mind with respect to an October [interest rate] hike.”
But Lombard Street Research offered a different assessment of the German economy following the publication of the breakdown of the country’s second-quarter gross domestic product data.
Gabriel Stein, economist, said the GDP data contained a number of surprises, including a fall in household spending and weak net exports.
“They strengthen our view that leading indicators for Germany may have peaked, implying growth falling back to, or around, the country’s 1-1.5 per cent trend rate in 2007,” he said.
“This should mean that the good times for German equities may be coming to an end. On the other hand, it should be good news for German bonds from early 2007 onwards.”
The euro initially moved higher against the dollar after the Ifo survey, but relinquished its gains as the session wore on.
European stock markets took heart from the report, and the FTSE Eurofirst 300 index rose 0.4 per cent.
US stocks gave back early gains in response to the weak housing data. By midday in New York, the Dow Jones Industrial Average was down 0.1 per cent and the S&P 500 index was flat, while the Nasdaq Composite was 0.4 per cent lower.
Asian equities were also unsettled by fears that a weak US housing market could presage a slowdown in consumer demand in the US.
The Nikkei 225 Average in Tokyo fell 1.3 per cent, Seoul declined 0.7 per cent and Singapore shed 1.1 per cent, with export stocks leading declines.
US benchmark oil futures remained stuck below the $72 a barrel mark following Wednesday’s news of an unexpected rise in gasoline supplies last week.
But analysts suggested further weakness in oil prices was likely to be limited by the possibility of sanctions against Iran.
Elsewhere in commodities, gold traded in a narrow range but palladium hit an 11-week high. Coffee ran into profit-taking after recently hitting seven-year peaks.