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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: TH who wrote (21637)	1/18/2005 10:05:12 AM
From: mishedlo	Respond to of 116555

Fund managers raise US rate forecasts after hawkish Fed minutes - Merrill survey Tuesday, January 18, 2005 2:45:11 PM afxpress.com LONDON (AFX) - Fund managers have raised their forecasts for US interest rates in the wake of the very hawkish tone to the minutes of the last Federal Reserve Open Market Committee meeting, according to a survey by Merrill Lynch Merrill Lynch's survey of global fund managers for January reveals that the assessment of what constitutes a 'neutral' Fed Funds rate has risen from 3 pct six months ago to 3.4 pct in the case of equity fund managers and 3.5 pct for debt fund managers David Bowers, chief global investment strategist at Merrill Lynch, pointed to two aspects of the FOMC minutes which had a significant impact on market expectations Firstly, investors were surprised at the extent to which the FOMC is concerned about inflation risks. Secondly, some FOMC members felt that high levels of liquidity are leading to excessive risk-taking, a warning which investors "ignore at their peril", Bowers said Concerns over possible aggressive interest rate hikes by the Fed have lowered fund managers' risk appetite this month and prompted a shift out of cyclical sectors such as basic materials and into more defensive sectors such as consumer staples, he said The hawkish tone of the recent Fed minutes also appears to have "awakened the hawks in Europe", with European fund managers far less relaxed about the prospects for monetary policy and inflation this time round, the survey found Among European fund managers, 71 pct believe the next rate move by the European Central Bank will be up, a rise from 51 pct last month, and reckon a 'neutral' rate to be around 2.6 pct against 2.4 pct in December Among UK managers too, 55 pct believe the next rate move by the Bank of England will be up, against 33 pct last time, while 36 pct believe the next move will be down. They see a 'neutral' rate at around 5.0 pct Bowers pointed again to the FOMC's concerns about excess liquidity and said they appear to have prompted concerns across the board "If excess liquidity is a risk in the US, it is probably a risk elsewhere too," he said Inflation is also more of a concern, with 71 pct of global managers expecting core inflation to be higher one year from now "For the first time in six months, higher wages and lower productivity combined are believed to constitute a greater threat of inflation than higher commodity prices," the survey said Among other findings in the survey, Merrill Lynch global strategy analyst Sarah Franks pointed to a notable bullishness on the European banking sector. Investors are overweight on the sector to a degree not seen since the first quarter of 2004 and continue to view it as undervalued, she said Investors in Asia and Japan are more optimistic on the regional economic and profit outlook -- although they still expect growth in China to slow and inflation to rise -- and are also very positive on the outlook for the banking sector Global fund managers continue to want to see companies return cash to shareholders, more than for them to use the money to increase capital spending or to improve their balance sheets, the survey said