Gilts perk up as factory output slows

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KENNETH CLARKE, the new Chancellor of the Exchequer, was yesterday handed further evidence that recovery may be slowing as the gilts and futures markets speculated on a summer cut in interest rates.

Growth in factory output slowed sharply last month, according to the latest survey of purchasing managers by the Institute of Purchasing and Supply. Its output index fell from 60.4 in April to 54.9 in May, with figures above 50 suggesting that output is growing.

New orders, purchases and prices all grew in May, but less quickly than in the previous month. Higher domestic demand was the main reason for price rises, with few manufacturers citing higher import prices as an explanation. Manufacturers are still shedding jobs on balance, the survey suggests, but at the slowest rate this year.

Signs that the economy may be slowing were accompanied by a flurry of speculation in the money markets that Mr Clarke might cut base rates in the coming weeks. September short sterling jumped 20 basis points, suggesting a base rate of 5.7 per cent before the autumn.

The yield on the short-dated 12 per cent gilt due 1995 fell from 6.24 to 6.1 per cent, reflecting the growing prospect of a rate cut. The yield on the long-dated 8 3/4 per cent gilt due 2017 also fell, from 8.64 to 8.61 per cent, suggesting dealers do not believe a rate cut would have serious inflationary consequences.

The pound was little affected, falling 0.2 points to 80.2 per cent of its 1985 value.