Bond Outlook [by bridport & cie, January 17th 2007]
| The lower commodity prices reflect more than a change in the supply/demand relationship, even though some of the fall reflects the decline in Chinese demand growth (not absolute levels of demand), and supply must have increased as high prices have attracted more investment. The additional factor has to be the withdrawal from the market of “financial investors” as they take profits and conclude that the entire asset class is losing its attraction. The immediate impact on inflation is, naturally, favourable, but at the risk of obscuring wage inflation. Central Banks, however, remain very conscious of the gathering wage pressures and the likelihood of a knock-on effect on inflation. That explains why the BoE surprised markets with a ¼ % rise in the bank rate, the ECB is clearly going to move higher and the Fed is also threatening to. In addition, the BoJ may also raise rates, but that may reflect political pressure given that the JPY is so weak that it needs a “helping hand” from higher interest rates to regain its poise. It is not obvious that 25 bps will be sufficient help. |