Bond Outlook August 23rd

August 23, 2006

Our attempt at answering key macro questions includes Fed hikes later in the year and another hike in the UK and Euroland. It will a close thing to avoid recession.

Bond Outlook [by bridport & cie, August 23^rd 2006]

All investors are, or should be, asking themselves some very basic but difficult questions:

Will the slowdown in the US economy be gentle or severe? Merely slower growth or a recession?
Will the slowdown in itself bring inflation down to acceptable levels?
Has the Fed stopped hiking the overnight rate?
Will the decline in 10-year USD yields continue?
Is there now a “Bernanke put” in place, with the Fed ready to lower rates as soon as early 2007 if the slowdown borders on recession? (Or if the stock markets move down?).
Will USD weakness reassert itself?

Those are merely the USD-focused questions. To them should be added:

Will the ECB raise the refi rate one more time and then stop (perhaps in the light of the loss of confidence in Germany)?
Will the long end of the EUR yield curve stay down?
Will the BoE raise rates still more in view of inflation still being above the target rate?
Will the Chinese authorities succeed in slowing growth and switching funds flow from investment to consumption?

Our own answers follow but are necessarily modest and tentative.