Bond Outlook [by bridport & cie, April 18th 2007]
| There was a time when inflation in the UK led to a weaker currency to maintain a semblance of international competitiveness in trade terms. Now, the effect is quite the opposite: the strong likelihood of the BoE lifting the bank rate further has pushed Sterling to uncomfortably high levels. Within the much tighter standards for inflation reigning today, the UK economy is overheating, along with the euro zone, whereas the US economy is not. The implications for interest rates are obvious: higher in Europe, but unlikely to be raised in the USA. The 5¼% US rate is, fortunately for the Fed, quite comfortable. The economy would appreciate a lower rate, but the impact of a drop on the already weak USD stays the hand of the Fed. We, along with the markets, would suppose no change in the Fed rate for months to come. |
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| In February it looked as though almost all the excesses in financial markets were unwinding: the JPY carry-trade, ridiculously low spreads on credit, high stock valuations. All are now back in full flood. |