Tuesday, September 07, 2004

More interesting evidence on the US economy's summer "soft patch".
. . . a genuine financial markets peculiarity, which will either prove to be a moment of summer madness or will show that the world is evolving in unexpected ways.

The peculiarity is the performance of bond markets. When was the last time that US 10-year Treasury yields fell against a background of rising oil prices? When was the last time that 10-year Treasury yields fell at the beginning of an apparently prolonged period of monetary tightening? Why is it that investors are buying bonds - pushing up their prices and, hence, lowering their yields - when most economic fundamentals should be telling them to sell? Tighter monetary policy, higher oil prices: in normal circumstances, these alone would be enough to drive bond yields significantly higher. Yet . . . as short-term interest rates have risen, long-term rates have come down. . . .

Janet Henry, at HSBC, has looked at all the occasions when Fed tightening has been followed by a sizeable decline in bond yields. There are less than a handful of occasions, and, if there is a common thread - bearing in mind the sample size is small - it is that these periods that signal the end of monetary tightening. In other words, the next move in official interest rates is usually downwards.

It is difficult to believe that we are in this situation now.
Does the bond market really believe 1.5% is the end of the road for Alan Greenspan?? Apparently so says Stephen King, this opinion rooted in a view that the soft patch is here to stay which will thus cut off the Fed's tightening post haste. As King sums up,
we had better get used to a world of fragile and short-lived recoveries.
The General has been saying for a while now that in this Brave New World Economy you can't tell the difference between recession and recovery. The bond market seems to agree.

We here at the Globblog hoped you enjoyed the economic boom of 2003-04. Please come again -- say, in three or four years. This whole current account deficit thing should be worked out by then . . .


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