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German Bunds Fall on Inflation Data; Euro Gains With Oil

(Bloomberg) — German bunds fell and the euro strengthened as consumer prices in the region signaled an easing of deflation risks. Oil extended its biggest monthly gain since 2009 while European stocks traded near a seven-year high.

The yield on 10-year German securities jumped three basis points to 0.33 percent at 7 a.m. in New York. That helped cut the gap with Italian rates to less than 100 basis points for the first time since 2010. The euro rose 0.2 percent to $ 1.1224. The Stoxx Europe 600 Index slid 0.1 percent and Standard & Poor’s 500 Index futures lost 0.2 percent. The lira fell to a record as Turkey’s economy minister said the government should discuss changing central bank regulations. Brent crude gained 1.5 percent on speculation global demand will recover.

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Italian inflation was 0.1 percent this month, better than the minus 0.3 percent rate forecast by economists in a Bloomberg News survey, and data from four German states also showed improvement while Spanish prices fell less than estimated. A bigger-than-forecast increase in U.S. core inflation sent the dollar soaring on Thursday after Federal Reserve Chair Janet Yellen signaled this week that while inflation is still too low for an imminent rate increase, the bank’s patience has limits. U.S. fourth-quarter economic growth will probably be revised lower, economists said before a Commerce Department report.

“After such a great start to the year for risky assets, the potential for a correction is rising,” said Alessandro Bee, a strategist at Bank J Safra Sarasin AG in Zurich. “All the good news of the past few months has been priced in. The big problem is that everything is expensive at the moment. But investors are still on the hunt for yield.”

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French Bonds

French bonds declined with Germany’s, pushing 10-year yields higher for the first time in six days as they climbed two basis points to 0.59 percent.

U.K. gilts also fell, sending 10-year yields four basis points higher to 1.78 percent. The yield has climbed 45 basis points in February, the first increase since September, after the Bank of England signaled it may raise interest rates sooner than is priced into the market.

Italian bonds rose for a second day, pushing the 10-year yield three basis points lower to 1.32 percent. That’s the lowest relative to German bunds, Europe’s benchmark sovereign securities, since May 2010. The securities are rallying as the prospect of the European Central Bank’s imminent 1.1 trillion euro ($ 1.2 trillion) stimulus plan suppresses borrowing costs.

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IAG SA added 4.9 percent after the company, the parent of British Airways, said full-year earnings surged 81 percent. Lloyds Banking Group Plc advanced 1.5 percent. Britain’s largest mortgage lender said it will resume dividend payments after reporting its first annual profit in five years.

Gap Gains

In the U.S., Gap Inc., the clothing retailer, added 2.9 percent after fourth-quarter profit beat estimates. Apparel retailer Ross Stores Inc. gained 4.6 percent after announcing a buyback and boosting its dividend.

J.C. Penney Co. plunged as much as 11 percent in extended trading after the department-store chain yesterday said it expects free cash flow to be flat this year, from $ 57 million in 2014. Analysts had forecast free cash flow of $ 25.4 million for the current fiscal year, according to data compiled by Bloomberg.

U.S. gross domestic product probably grew 2 percent in the four quarter, according to the median of 83 estimates in a Bloomberg survey of economists. That’s down from an initial reading of 2.6 percent.

Fed Bank of St. Louis President James Bullard said Thursday that the Fed Open Market Committee should remove its pledge to be “patient” in raising rates in March to give it flexibility to tighten policy as soon as June. The central bank has kept key rates near zero since 2008.

Rate Outlook

San Francisco Fed President John Williams, who votes on policy this year, expects inflation to return to the central bank’s target level of 2 percent by the end of 2015, and advocated for raising borrowing costs before then.

The MSCI Emerging Markets Index declined 0.2 percent, trimming February’s gain to 3.2 percent, the biggest monthly increase since May.

The lira dropped as much as 0.8 percent to 2.2548 per dollar and two-year notes jumped 37 basis points to 8.85 percent. Economy Minister Nihat Zeybekci said the Central Bank of Turkey’s independence should be conditional on the body taking “national interest” into account.

Russia’s ruble headed for its best-ever monthly advance as oil gained and the adversaries in the Ukraine conflict began pulling back heavy weapons. The currency advanced 0.1 percent and is up 13 percent in February. The dollar-denominated RTS index of stocks slipped 0.3 percent, trimming this month’s gain to 23 percent, the best performance worldwide after Greece.

The Shanghai Composite Index added 0.6 percent, poised for a monthly gain, before the start of the annual National People’s Congress meeting next week. The Hang Seng China Enterprises Index advanced 0.2 percent today.

Modi’s Budget

India’s S&P BSE Sensex added 1.1 percent, paring the monthly drop to 0.3 percent. Prime Minister Narendra Modi’s government presents its first full-year federal budget tomorrow.

The cost of insuring European corporate bonds is heading for the biggest monthly decline since October 2013, with the Markit iTraxx Europe Index of credit-default swaps on investment-grade companies down 11 basis points to a more than seven-year low of 49 basis points, according to data compiled by Bloomberg.

Coca-Cola Co. sold 8.5 billion euros of bonds in euros Thursday, the biggest sale by a U.S. issuer and bringing this week’s euro borrowing by American companies including Oreo cookies maker Mondelez International Inc. to an all-time high.

Credit-default swaps insuring $ 10 million of Greek government bonds for five years cost $ 3.8 million in advance and $ 100,000 annually, signaling a 65 percent probability of default, according to CMA.

Swedish Growth

Sweden’s krona rose against all of its 16 major peers after a report showed gross domestic product grew 1.1 percent in the fourth quarter from the period before, versus economist estimates for a 0.5 percent increase. The currency climbed 0.7 percent to 9.3472 per euro.

The Bloomberg Dollar Spot Index slipped 0.2 percent after surging 0.9 percent on Thursday and was little changed at 119.32 yen.

Brent crude, the benchmark for more than half the world’s oil, climbed $ 1.06 to $ 61.11 a barrel in London and is up 15 percent this month. The market will rebalance in the next several months as consumption gains and supply is curbed, according to the International Energy Agency, while Saudi Arabia’s oil minister said this week that demand is growing.

West Texas Intermediate climbed 1.9 percent to $ 49.10 a barrel in New York after tumbling 5.5 percent on Thursday. WTI’s discount to Brent crude widened to the most in 13 months after a report Wednesday showed U.S. crude supplies rose to the highest level since at least 1982.

To contact the reporters on this story: Nick Gentle in Hong Kong at [email protected]; Stephen Kirkland in London at [email protected]

To contact the editors responsible for this story: Stephen Kirkland at [email protected]; Stuart Wallace at [email protected] Stuart Wallace

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