Bond Outlook
December 6th 2006
| On the issue “soft landing versus hard” for the US economy, there is only a single key domestic determinant: the extent and speed of the housing bubble deflation. If it is gentle, then the relative health of the service part of the economy, a shift in the “share of the cake” from capital to labour in a reversal of “squeezeflation” and lower energy prices could save the day. If, on the other hand, it is brutal, then the US and world economy is in for a beating. As usual, data pull both ways at once; to take a current example, manufacturing is down but non-manufacturing up. However, it is still housing that will be decisive, with first a decline in prices and housing starts, then of construction activity, followed by a knock-on effect to related industries and on household borrowing capacity. At the end of 2006, this process is still at the very first stage. Nevertheless, the HSBC announcement that the bank is losing money in the USA on its retail mortgage portfolio (because of defaults) is a sure and quite disconcerting sign of things to come. |