Financial markets look wonderful, but the real US economy, where goods and services are exchange, might better be described as “woeful”. When will the two align to each other?

Two root causes lie behind the loss of confidence this week: the poor results for US durable goods and sub-prime mortgages resulting from the end of the housing bubble.

What can upset the unstable structure of the world economy? A rebound in the JPY for one thing, a relentless shift away from central bank buying of T-bonds for another.

None of the longstanding problems of the US economy have been properly addressed, so we are beginning to doubt our own optimism of recent weeks. What a challenge for Bernanke!

Is the future of the CHF linked to the JPY’s and possible unwinding of the carry trade? For those expecting curve steeping in Euroland, new CMSs are available. But beware!

The CHF has weakened further and must be worrying the SNB by now. In the meantime, the Fed is trying to remove excess liquidity, but failing miserably.

Diversification in the currency mix of fixed-income portfolios is the order of the day. However, the CHF seems left out of the party as it loses safe-haven status.

Over the last week the market has espoused the view that a decline in the Fed rate is unlikely even after a few months. But there are arguments both ways.

Central Banks loath wage inflation. Whether governments want to see greater household spending or not, Central Banks will always apply brakes. Do not therefore expect a decline in interest rates.

Our optimism about a US soft landing based on lower oil prices has been encouraged by wage increases improving households’ spending power. Expect no quick change in the Fed rate.

Just two things really matter: the US housing bubble deflation and Chinese policy on the USD. If these allow a soft landing, rest of the world may escape serious problems.

The cracks in currency parities are starting to show, and it looks like they will widen further. Bernanke’s speech is not quite in line with market perceptions about interest rates.

We all remember the “Greenspan put”. Central Bankers are doing something similar with currency markets, and the consequences are similar: to delude investors into discounting risk, and delaying the inevitable.

When interest rates are moving little or predictably, it is time for fixed-interest investors to turn to thoughts of … currency. Our view is necessarily long term.

Yield curve inversion usually signals a coming recession, but, overall, the global economy looks good. Can there be another explanation for inversion linked to high global liquidity?

Will the rest of the world pick up where the USA leaves off? Opinions vary totally, but on that question hangs the future of the world economy.

The great debate goes on: will the next change in the Fed rate, some months off, be up or down? Most of the banks think "down" because the US economy will stall; most of the fund managers think "up" because inflation is still threatening. Either way the stock markets are bullish, be that because they expect lower rates, or because the economy will do so well that higher rates will be required, or, rather, justified for the right reason.

Financial markets in direct contradiction with most major banks! Who is right? Our optimism on the USA is very cautious, although quite high for the rest of the world.

The delay in the ending of mortgage equity withdrawal means it is far too early to declare the impact of the housing correction to be over as Mr Greenspan suggests.

The key issue to determine soft or hard landing – geopolitics aside – is whether US household gains from cheaper energy will compensate the return to savings as the housing bubble deflates.

If the current more-moderate oil prices persist, the fear of returning inflation is much attenuated, as is that of recession. The Fed rate can stay where it is.

Is this a commodity bubble? Are emerging markets becoming dominant? Two further key questions for all investors, beyond that of whether the Fed will raise rates again and when.

We still favour an optimistic scenario with a soft landing, but note with some concern that mortgage equity withdrawal has not yet ceased as the housing bubble deflates.

We consider four economic scenarios ranging from “Goldilocks” to “Catastrophe”, and argue for the one we favour (a fairly soft landing), while admitting a risk of something worse.

Our attempt at answering key macro questions includes Fed hikes later in the year and another hike in the UK and Euroland. It will a close thing to avoid recession.

At first sight PPI and CPI figures give hope that inflation has been beaten. We doubt it, although the markets inclines that way. Those cost-push pressures are still present.

The Fed pauses lest the slow down be too severe, but continued tightening is likely everywhere. Our old idea of a monolithic and centralised economy is in need of correction.

We still do not believe that Fed tightening to over, and present four arguments this week as to why we take that view, minority though it may be.

Bernanke saying that the economy is slowing, therefore inflation beaten, is both premature and another example of a flip-flop. The Fed will have to continue tightening to control inflation.

A look a continued inflationary pressures coming through in the US and likely effects on US Monetary Policy. Is the Middle East situation a buying opportunity?