With the ECB adamant that it will continue to raise rates this would seem to be the most untimely of questions, but there are now signs that this may well be the case.
Firstly this in Bloomberg today:
Federal Reserve to Cut Rates in 2007, Corporate Bond Sales Show
Thinking about refinancing your mortgage in the U.S.? Wait a year. Considering a certificate of deposit? Sign up now. While economists debate whether the Federal Reserve will cut its target interest rate for overnight loans between banks from 5.25 percent, investors have already decided the central bank will reduce borrowing costs next year. Nowhere is that clearer than in the market for floating-rate notes, whose interest payments rise and fall with central bank policy. Sales of so-called floaters are slowing for the first time since the Fed started raising interest rates in June 2004. They’ve fallen to $21.5 billion in September from a monthly average of $35 billion this year through August, according to data compiled by JPMorgan Chase & Co.
Now one swallow doesn’t make a summer, and it is early days yet, but take a look at ten year US Treasury Bonds:
U.S. 10-year Treasuries fell, halting a five-day rally, before a report today forecast to show consumer confidence gained this month.The gains ended on speculation yields at their lowest since March will deter some investors. The yield on the benchmark 10-year note rose 2 basis points, or 0.02 percentage point, to 4.56 percent as of 6:37 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 7/8 security due August 2016 fell 5/32, or $1.56 per $1,000 face amount, to 102 15/32. Bond yields move inversely to prices.
So today we have nudged the yield back up a little, but the rate has been dropping steadily since March. And yesterday Bloomberg were being even more explicit:
U.S. Treasuries rose, pushing yields on 10-year notes to a seven-month low, after an industry report showed the pace of previously owned home sales slowed. Ten-year yields are lower than the Federal Reserve’s target for the overnight lending rate between banks by the biggest margin since March 2001. The growing gap reflects speculation that falling home prices will curb consumer spending, the largest part of the economy, prompting the central bank to lower rates.
And this is in fact the point, noone really knows at this point what the impact of the US housing slowdown will be, or what is going to happen to oil prices:
Bill Gross, manager of the world’s biggest bond fund, said investors should increase bets on the debt market. A rally in Treasuries is just getting started and fund managers should add securities beyond those in the bond indexes they use to gauge performance, according to Gross, who is chief investment officer at Pacific Investment Management Co. The strategy will increase volatility in their holdings but may bring bigger gains, he wrote in a report.
A slowdown in the U.S. housing market will prompt the Fed to reduce its benchmark rate, Gross wrote.“The Fed at some point in 2007 will be forced to cut short rates,” the report said. “
At the same time signs that the eurozone is slowing are everywhere to be seen. German inflation yesterday was one pointer, French industrial output another. (Claus Vistesen has more on all of this). Now as Sebastian Dullien (Eurozonewatch Blog) pointed out to me in a mail:
Concerning the French Insee figures from today: You are probably right that the euro-zone economy is slowing, but so far this slow-down seems to be rather benign (and we couldn’t expect growth to continue at 3.6 percent in annualized terms as it did in the second quarter, could we?). In fact, the Insee climate seems to be holding up quite well.
Some sort of slowdown was to be expected, the only real issue is how fast and how far. Personally I think Trichet and company have put themselves out on a limb, and the sooner they ‘correct’ the better.