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Capital Markets

Bond Outlook May 10th

Two Governors, each accepting unpalatable events: Bernanke that inflation will come to the USA as the USD weakens; Trichet that the EUR may get stronger than industry would like.

Bond Outlook [by bridport & cie, May 10th 2006]

As the USD continues to weaken, and its continued decline becomes accepted wisdom, let it not be forgotten that world economic rebalancing is not achievable solely through exchange rate adjustment. The other key condition for rebalancing that must eventually come about is for American households to spend no more, and preferably a little less, than they earn. G7 decisions and Fed/People’s Bank of China (PBC) collaboration can and will determine changes in exchange rates, but rebalancing the US economy internally is a quite different matter. The housing bubble appears to be deflating, but very slowly, and in the meantime the stock markets are reflecting behaviour reminiscent of 1999 – “don’t bother us with bad news, we’ve got momentum on our side”. Rising interest rates, end of the housing bubble, through-the-roof commodity prices, the “risk” that Americans might begin saving again, high stock valuations, inflation reappearing – “we do not wish to know that, thank you!”

 

The US Administration is not exactly known for straight talk, be that of the state of, and the risks to, the economy or the progress (or lack thereof) in Iraq.

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