Mortgage equity withdrawal ("MEW"), the source of spending by US households despite stagnant earnings, is nearly over. Consider the implications: could savings turn positive? Will the Fed fear curve inversion?

The USA is not even trying to rebalance the "one-consumer" world economy, but expect a change with profound implications in China's policy from "growth at all costs" to "added value".

The concept of the "platform company" needs integrating into our macroeconomic analysis, a process we begin in this Weekly. Low inflation and yields is but one implication. Others more debatable.

Recent short-term events are in tension with long-term fundamentals. Today we compare and contrast. Beware of currency risk, and be slow to lengthen maturities.

There has been a shift in interest expectations towards the Fed not going quite so far and the ECB raising rates. Complacency on US macro-economic policy is now current.

The strong dollar results directly from relative interest rates. The current cycle will move upward till the housing bubble deflates and then reverse. Next Spring? After four more Fed hikes?

European weakness should mean the long end of yield curve stay low as the ECB raises the refi rate. Just as for USD recently, EUR barbelling now seems appropriate.

The ECB will soon raise the refi rate, but will then happen to the euro yield curve? Flattening or an overall rise?

Adulation all round for Fed Chairmen outgoing and incoming. We shall reserve our praise till the Fed discourages an economy based on debt at household, federal and national level.

US capital flows have now changed to massive inflows for bonds, but net outflows for equity. This is propping up the dollar. We take the inflation danger very seriously.

We continue to hope that Greenspan will engineer only a bumpy landing (merely "stagflation") from the excesses of the current Administration, now criticized from all sides, including Republican.

For five months we have recommended a barbell for USD fixed-income. However, the time has come to discontinue the long end as the risk grows of its yield rising.

Time for optimism on Europe? German firms have made breakthroughs in their struggle to achieve competitive labour costs. The French Government is fighting the Marseilles mutineers. We see hope.

A full 70% of the world's economic imbalance is due to overspending by the USA, and Katrina has just made the situation much worse. Will forthcoming interest increases change this?

The longer-term impact of Katrina is now becoming clearer: a big increase in the supply of both corporate and government bonds in the USA. This must eventually affect yields.

Dreadful human suffering and property loss have only temporary impact financial markets. Debt-financed consumer spending will still be reined in mainly by the end of the housing bubble.

More rises in the USD yield curve is resulting from RMB unpegging. Rebalancing has now started and but needs the US housing bubble to deflate to cut excess consumer spending.

The Chinese have revalued the CNY, we provide a clear summary of the forces behind the revaluation and the impact that it is likely to have on the global economy.

Bond Outlook [by bridport & cie, July 20th 2005]

The new head of the French "patronat" pushes for a liberal EU and the European Parliament rejects Trichet's justification of tight money. Things are looking up!

One view says the Fed must soon stop raising rates, while another, which we support, says there will be no stop before 4¼%. The Greenspan legacy is in play.

Thierry Breton and Le Figaro are questioning the French model and giving a glimpse of the Battle for France - a struggle within the Blair/Chirac Battle for Europe.

To tensions of US deficit financing must be added the most important political debate Europe has faced since the beginning of the "European project". Blair New Europe vs. Chirac Old!

There is so much agreement that USD 10-year yields can only fall that great awareness is needed for events like RMB revaluation, which can reverse the trend.

The French idea of Europe, with reforms stopped, is dominating this week, but many countries support the alternative of market reforms with some social protection, and will yet be heard.

There is a lot of protesting going on in Europe, especially about government by bureaucrats. What might be the economic implications? And can Italy stay in the euro zone?

We thought that spreads on low-credit would widen as a result of rising T-Bond yields. Yet now losses at hedge funds may be the trigger of a vicious circle.

The downgrades of GM and Ford are but one of many possible events that could finally break the overconfidence in the USA's debt-ridden economy and trigger a vicious circle.

Politics is seriously damaging market forces as the means to world rebalancing, and now the protectionism raises it ugly head. Congress is developing a serious "bash-China" mood.

Bond Outlook [by bridport & cie, January 25th 2006]