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Capital Markets

Bond Outlook August 2nd

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.

Bond Outlook [by bridport & cie, August 2nd 2006]

It seems that our surmise last week that the Fed would continue raising the overnight rate, possibly as far as 6%, was controversial. We therefore take the opportunity this week to present the arguments for and against, while maintaining our position. We begin with the counter-argument.

 

US economic growth has quite suddenly declined (from 5.6% per annum in the 1st quarter to 2.5% in the second). A component of this is the ending of the housing bubble, the second of the two-legged “wealth binge” (to use Stephen Roach’s expression), the first leg being the dotcom equity bubble. In terms of where the US economic cycle is, there is some debate as to whether GDP growth is a few months short of its peak or is already past it. Either way, the Fed has done enough to slow the economy and therefore inflation has been tamed.

 

It is with the “therefore” that we part company from this view, despite it being widely held, probably by the majority (see “Focus” below).

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