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Bond Outlook January 10th

Over the last week the market has espoused the view that a decline in the Fed rate is unlikely even after a few months. But there are arguments both ways.

Bond Outlook [by bridport & cie, January 10th 2007]

Recently we have been arguing that the current rising trend for interest rates applies even to the USA (some months now of no change, followed by a modest rise). This week the currency markets swung in favour of that outlook, leading to a recovery in the USD/EUR exchange rate. This does not change our view of the secular decline in the USD, and stresses how much its exchange rate depends on perceived relative interest rates. We cannot help but be reminded of Sterling 40 years ago. It is hard to give up being a reserve currency!


The main argument for a rising Fed rate lies in what we have called the reversal of “squeezeflation”. This week Roach (MSI) points out that the new Democratic control of Congress coincides with profits taking an historically high share of US GDP, and labour a historically low share. This adds a fourth, political reason to the three economic reasons we advanced last week to explain a squeezeflation reversal (slowdown of outsourcing, Asian inflation, non-tradable services).

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