US Markets Relax, – Maybe Too Soon

The US markets recovered overnight following the release of CPI inflation figures which seemed to dispel the fears created last week by the PPI. The CPI rose by 0.4% compared with the 1.1% rise in the PPI.

Market players relaxed assuming that because the CPI is used as the most crucial measure of inflation, the threat from last Friday’s PPI has not eventuated. They therefore believe that Alan Greenspan will sit on his hands at the November 16 meeting of the US Federal Reserve.

One of us must have it wrong! The PPI measures prices to producers and is therefore a leading indicator of inflation. Rises in production costs, if they are to occur, will take time to flow through the system to consumers, so the real effect will not be known until the October or November CPI figure is announced.

Don’t discount a further 0.25% rise in US rates, or the same in Australia. If the US does move it will merely bring rates back to where they were last year before the three quick cuts designed to stave off any dangers from economic crises elsewhere in the World – Asia, Russia and South America in particular.

Meanwhile the US long bond rate rose last night to 6.35%, its highest level in two years.

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