The sharp falls in equity prices in recent months have narrowed the unusual gap that had opened up between the equity market’s apparent expectations for the economy and those of the bond market. Both the equity and bond markets now appear to be expecting a fairly marked economic slowdown. Meanwhile, the money markets are coming round to our view that the slower interest rates are cut, the further they will have to fall. Looking ahead, we would not rule out further falls in equity prices, bond yields and market interest rate expectations as it becomes clearer that the economic slowdown is likely to be deep and prolonged, rather than short and shallow.
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