Bond Outlook January 11th
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Foreign Exchange

Bond Outlook January 11th

Among all those economic data, only two things really matter: what happens when the mewing stops, and when will the Chinese withdraw dollar support.

Bond Outlook [by bridport & cie, January 11th 2006]

Is it possible to reduce the arguments on whither the economy to two key factors? We shall be so bold as to say that it is. To put it another way, we identify two driving forces, with most other variables dependent on them:

 

  • Mortgage equity withdrawal (MEW) as the means of maintaining US consumer spending
  • The Chinese policy towards supporting the dollar.

 

The first of these lends itself to conventional economic analysis; the second falls more into the realm of politics. So let us begin with the easier task.

 

Since the beginning of the decade (when the post-dotcom recession was not allowed to work its way through the economy), household earnings have grown far less than either spending or what may be considered normal during a recovery. The shortfall has been made up by "mewing", a phenomenon dependent on rising house prices with easily available and cheap credit.

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