Bond Outlook April 30th

The eye of the storm: a moment of calm before the wind and the rain returns in full force. Is that where the US economy is now? There is a strong case for supposing so:

• Housing is still in dire straights with falling prices, excess inventory and a bottom to the market two or three years away
• The announcements of 1st quarter losses by banks on both sides of the Atlantic have been so commonplace that they are now almost ignored
• Sub-prime losses may have been revealed by banks, but what about pension funds and insurers where transparency is practised less? What of Alt A (mortgages of quality between sub-prime and prime)? As housing prices fall mortgage delinquencies are climbing into better quality mortgages, but Alt A losses have scarcely been reckoned
• US GDP managed a tiny increase in Q1, but that was due to inventory increases. That will lead to production cuts in Q2
• Consumer spending is still growing, but at a slowing pace (0.7 % at annual rate in Q1)
• The clouds around credit card financing are gathering
• If cuts in the Fed rate are coming to an end, it is because of the fear of inflation and of negative real rates rather than “mission accomplished”

Yet some real good has been achieved by the action of the central banks.