First, on the current pessimism. I think that the continuing rallies in European bond markets have increased currency market participants' comfort with the notion that European rates are solidly on hold. In a currency market in which interest rates are currently the driving variable, this has meant that the existing positive spreads in favour of US fixed cash have proved a powerful incentive for currency traders. The 200 bp spread between core Europe and the US is not bad either. As a group we have long maintained that synchronized global increases in interest rates are likely in 1997.
Yield curve has steepened sharply, currency has fallen further, equities get a boost too.
But I doubt whether today's news alters the medium-term outlook a jot. Similarly, while in retrospect we should have taken the slightly softer John Lewis and notes in circulation data a little more seriously, perhaps, the underlying consumer story appears to remain a strong one. As a result, I'd suggest no change in strategy or economic forecasts, and would urge clients tempted to play in this tactical skirmish to take profits quickly. This memorandum is based on information generally available to the public from sources believed to be reliable. No representation is made that it is accurate or complete.