Bond Outlook [by bridport & cie, July 19th 2006]
| Cast your mind back to the confusion of the emerging market sell off in the third week of May that was based on not a fig leaf of fundament. Closer examination led us to reason that the panic stemmed from two conflicting beliefs: global growth was slowly coming to a halt crushing commodities and future earnings, and the US was expanding too quickly driving inflation and providing the catalyst for further rate hikes. We have long remained optimistic that the world will pick up the slack as the US consumer has their wings clipped. The turnaround in Europe’s economic outlook and the emergence of a middle class in India and China is already beginning to impress on global demand. Systematic inflation was harder to gauge, and decreasing yields and the non-performance of inflation-linked bonds started to give the impression that inflation was being beaten off. Do not be dissuaded though, recent economic data from both sides of the Atlantic is communicating a clear message to hitherto undecided markets: the risk of inflation is real. |
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| US 12-month PPI came in yesterday at 4.5%, |