Bond Outlook December 13th

The last Weekly of the year allows us to look back over the year to see which event was the most significant to us in macro-economic terms. Our clear winner is the moderation of crude oil prices. The consequence was a shift of US household spending from petrol and heating oil to other consumer goods. We had been very conscious that household spending had been consistently higher than earnings, and that increased house prices were providing a source of borrowed funds. Could the lower oil prices allow households to carry on spending even after mortgage equity withdrawal was no longer available? We thought and still think so. Thus, for the first time in many years we allowed ourselves a modicum of optimism about the US economy – a slowdown in growth rather than a recession; a soft landing rather than a hard landing.

In addition, our hope of a rebalancing of the world economy, with a partial replacement of reduced US consumption in other regions, has been reinforced by the relatively good performance of European economies and the beginnings of a shift in China towards domestic consumption.