Bond Outlook August 24th

Rather quietly, over the summer, a number of significant politico-economic changes have appeared, and which, taken together, are quite encouraging in the context of world economic rebalancing:

• Japan may have turned a corner with a pick up in domestic demand, the end of deflation in sight and the forthcoming election likely to allow Koizumi to proceed with reforms
• The German economy has returned to growth (and with it the Swiss)
• Germany under Merkel is likely to continue to turn eastward, depriving France of its main partner in the EU
• The US housing bubble is looking close to its end
• Following the Chinese change in its peg policy, Asian countries are diversifying their purchases of foreign Government bonds.

The reason that this is an encouraging mix is that a reduction in US consumer spending is inevitable on the simple grounds that no one, not even a superpower, can live indefinitely beyond their means. The immediate cause of a decrease in spending is likely to be the end of remortgaging as a source of funds.