Markets wake up to the economic gloom (Jul 08)

The recent problems of the US government sponsored enterprises, Fannie Mae and Freddie Mac, have contributed to an apparent shift in the markets’ attention away from the upward pressure on inflation and towards the increasingly bleak outlook for activity. Indeed, global bond yields and global equity prices have fallen sharply. And in the UK, for the first time in two months, the markets have started to discount the possibility that the MPC will cut interest rates some time within the next 12 months. Our forecast that the MPC will cut rates sharply once the inflation threat fades suggests that bond yields and market interest rate expectations have further to fall.