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Tom Becket's uninspiring US road trip

by Tom Becket on Apr 30, 2014 at 14:04

This suggests the current low inflation environment in the US will persist (nobody mentioned inflation without my prompting on the entire visit).

Rates unlikely to rise

So if they are right and inflationary pressures are contained, it would surely give credence to the view that US rates are unlikely to rise in the next 12 months and indeed not at all in 2015.

The only thing likely to force the Fed to hike rates next year would be if any economic improvement was finally accompanied by rising wages, one of the Fed’s chief focuses in its refreshed ‘qualitative’ review.

Even if that happens, everything we have heard from Fed chair Janet Yellen in recent weeks implies a shallow progression in rate increases after the first hike.

The other major reason for rate rises to be delayed further than expected is that the Fed recognises the need for looser policy to help engineer an ongoing housing recovery. There has been a rebound, but prices in many states are still a long way from their 2006 peaks, especially on an inflation-adjusted basis.

The Fed sees rising house prices as the most efficient way to boost consumer spending and allow the wider populous to enjoy the fruits of their labours, in the same way the rich have through stock prices.

My expectation is that housing prices should recover by around 8-10% this year, a decent rate but below the stronger gains of last year. This will help consumer confidence and spending to recover at a modest pace. So what does that mean for asset markets?

I focused chiefly on opportunities in fixed interest and it is clear we are coming towards the end of the greatest credit rally in the history of financial markets.

We should ensure clients’ expectations are contained. With yields incredibly low by historical standards and spreads tight, we have to rein in our forecasts for credit returns in the coming years. However, the default outlook remains low and we should be comfortable we can clip coupons from our existing holdings.

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