U.K. Housing: Timberrrrr!

U.K. Housing: Timberrrrr!

10:07:00, October 12, 2007

The U.K. economy is cooling rapidly and should encourage the BoE to become more dovish in the months ahead. Stay overweight this bond market.

The RICS house price index plunged further into negative territory
(to -14.6%) for September, indicating that the majority of real-estate agents surveyed now see prices dropping. Importantly, this survey tends to lead retail sales swings, suggesting that spending will soften markedly in the coming months and help keep downward pressure on consumer prices. Despite this, BoE Governor Mervyn King still sounded quite hawkish in his comments yesterday, warning that he is not about to bail out the banking sector. However, King did leave the door open for rate cuts if the economy weakens materially (as we expect), pushing inflation lower.

Bottom line: The market will price in further easing as the economy downshifts in the coming months. Our Global Fixed Income Strategy service recommends overweighting gilts within a global hedged fixed income portfolio.

Normxxx    
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