May 2, 2019 / 7:26 AM / 22 days ago

Fed pause pushes euro zone bond yields higher

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Virginia Furness

LONDON, May 2 (Reuters) - Core euro zone bond yields opened higher after a pause in trading for the May Day holiday, tracking the rise in U.S. Treasuries after the Federal Reserve held interest rates steady and signalled little appetite to adjust them any time soon.

Fed Chair Jerome Powell shook off pressure from U.S. President Donald Trump to cut interest rates by one percent and was unwavering the policy rate outlook, saying the recent relapse in inflation rates was likely temporary.

Powell acknowledged a modest pick-up in growth in Q1, which marked a shift from previous statements, but analysts noted the reference was past tense, and took the comments to mean the Fed did not expect growth to necessarily continue.

“There’s concern among the Fed that the positive impact of the tax cuts is beginning to wane, and growth may indeed prove softer going forward,” said Matt Cairns, rates strategist at Rabobank. “The language is neither prompting an acceleration in terms of monetary policy, or a deceleration.”

The policy statement, and particularly Powell’s insistence the Fed saw no compelling reason to consider a rate cut in response to weak inflation, prompted a modest selloff in stock markets and pushed bond yields higher.

Indeed data on Wednesday supported the view that signs of growth in Q1 will not be sustained.

Weakness in global manufacturing is driving dovish monetary policy on both sides of the pond and the euro zone print later this session will be closely watched.

U.S. manufacturing activity — released on Wednesday —slowed to a 2-1/2-year low in April amid a sharp drop in new orders while construction spending unexpectedly fell in March, suggesting economic growth was moderating after surging in the first quarter.

One of the reports from the Institute for Supply Management (ISM) on Wednesday showed businesses increasingly anxious that President Donald Trump’s threats to close the U.S.-Mexico boarder would further disrupt the supply chain. Washington’s trade war with China has created bottlenecks at factories.

Ten-year U.S. Treasury yields fell below 2.48 percent after the factory data disappointed and fuelled fears of a slowdown.

Germany’s 10-year government bond yield, the benchmark for the region opened two basis points higher at 0.029 percent, matching the move higher in most other core 10-year bond yields in the bloc.,,

German retail sales fell by 0.2 percent on the month in March, due largely to sharp drops in sales of food, drink and tobacco, data showed on Thursday.

In the UK, the Bank of England is expected to keep rates no hold with the focus of the market on the outcome of today’s local elections. (Reporting by Virginia Furness Editing by Raissa Kasolowsky)

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