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Funds expect US rates to reach 4%

Funds expect US rates to reach 4%
By Andrei Postelnicu in London
Tue Jul 19, 7:40 PM ET

Global fund managers expect the benchmark US interest rates to rise to 4 per cent before the
Federal Reserve will stop tightening monetary policy, a Merrill Lynch (NYSE:MER - news) poll showed on Tuesday.

Its latest monthly survey of 300 portfolio global managers, Merrill found greater confidence about the outlook for the world's largest economy in the wake of a consistent stream of better-than-expected economic data.

The figures have led fund managers to believe that the Fed will raise benchmark interest rates by a further 75 basis points to reach a so-called neutral stance in monetary policy - the point at which borrowing costs do not slow down economic growth, while inflationary pressures are kept in check.

The findings come as
Alan Greenspan, the Fed chairman, is due to testify before US lawmakers on the outlook for the US economy.

David Bowers, the chief equity strategist at Merrill, said: "There's a greater consensus that interest rates need to rise further."

He added that while fund managers thought growth was improving, they were unconvinced that it would support corporate margins.

Their scepticism is reflected in higher cash positions, with a net 19 per cent of managers saying they hold overweight positions in cash. The net refers to the balance of fund managers' views.

At the same time, inflation has returned to the managers' list of concerns this month and a net 37 per cent of investors said they believed global core inflation would increase in the next year. Last month, a net 22 per cent of survey respondents gave the same answer.

US stocks remained out of favour, with a net 29 per cent of global fund managers saying they were underweight in Wall Street shares.

In Europe, two-thirds of fund managers said an opposition victory at German elections in autumn would speed up restructuring of companies there.

Even among the group of the 30 per cent of European fund managers who believed the result would not affect the pace of reform, about 43 per cent said restructuring would happen regardless of who was in power.

Meanwhile, an index of investor confidence from State Street Global Markets fell to 81.1 for July, from 85 last month. Michael Metcalfe, senior strategist at State Street, said the index was near its lowest point this year, reached in March, and warned "[it] highlights that the economic outlook is perhaps not as rosy as a cursory glance at the fundamentals might suggest".


LINK: http://news.yahoo.com/s/ft/20050719/bs_ft/fto071920051957233542;_ylt=Av2E0Bb5eTGUtRCqkint3vP2ULEF;_y...