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Tuesday, 16th April 2024
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All eyes on the US, which holds the key Back  
Interest rates and bonds
Colin Hunt,
Chief Economist, Goodbody Stockbrokers

Fed funds 5.50%
10Y Bond 5.20%
ECB Repo 4.50%
10Y bund 4.70%
BOE base 6.00%
10Y Gilt 4.95%
IRL/GER 10 year yield spread: 21 bps

Looking back: While the economic slowdown in the US has been as expected, the market reaction to it has been somewhat extreme. A welcome moderation in economic activity arrives, we get a few profit warnings from the tech and retail sectors and hey presto the market is getting itself ready for an elongated series of rate cuts in 2001. We think that the bond market rally is overdone at this stage although policy will be loosened significantly over the quarter. That said, our expectation of a turning point in the Anglo-Saxon rate cycle is now realised with both the BOE and the Fed doing what they were supposed to over the quarter. The ECB has taken us by surprise in its new-found relaxed attitude. While the appreciation of the euro will have helped to stave off the final 0.25% hike demanded by our forecast, we are delighted that the ECB is seeing sense on the relationship between interest rates, real economic activity and the currency.

Looking forward: The easing of pace in US economic momentum and volatile equity markets are expected to allow the FOMC to deliver cumulative rate cut of 125bps in the quarter. With policy returning to the loose side of neutrality, we expect growth optimism to make a return over the coming months. The combination of a monetary stimulus, lax fiscal policy from the Bush White House and a rebound in equity markets should be sufficient to push US Treasuries back out towards sensible yield levels. We are expecting policy stability to reign supreme at the MPC due mainly to electoral timetable considerations while the ECB should begin to cut over the quarter.

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