Bond Outlook [by bridport & cie, October 18th 2006]
| Even though most of the big banks – the exception being JP Morgan – see a major slowdown coming for the US economy, stock markets remain bullish. The implications for interest rates of the two views, the former pessimistic about the US economy as a whole, the latter optimistic, are diametrically opposite. The one sees the Fed having to bail out the economy with a rate cut early next year, the latter sees rates continuing to rise to contain demand-pull inflation. (The risk of cost-push inflation is being discounted – possibly too soon – because of lower energy prices.) |
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| Where do we stand on this? Where we have been since last month, seeing no need to raise rates, because inflation is modest, or to lower them, since the extra spending power amongst US households from lower fuel costs mitigates the ending (still delayed) of mortgage equity withdrawal. In the battle between the two views, the mood can shift literally on the words of a given pundit or official, or even a retired official such as Robert Reischauer, the former Director of the Congressional Budget Office, who has attached himself to the pessimists’ camp. |