Analysts said an increase in US interest rates in the next two weeks had become almost inevitable after the National Association of Purchasing Managers published figures showing manufacturing prices and output at their highest levels since August 1988.
James O'Sullivan, an economist at Morgan Guaranty Trust in New York, said: 'There is no sign that manufacturing industry is slowing down. The process of tightening policy has a long way to go.'
The Federal Reserve decided not to raise interest rates immediately at its policy meeting last week. It is now expected to move either after US employment figures for September, due on Friday, or factory gate prices out next week, unless they show unexpectedly weak job creation or inflation.
The NAPM index of business activity was 58.2 in September, up from 56.2 in August. The closely- watched prices component jumped from 74.5 to 77.1, while orders, exports, deliveries and inventories also increased.
Medium and long US Treasury bonds fell and the Dow Jones index spent the day in negative territory before recovering to close 3.70 points higher at 3,846.89. The dollar, expected to make strong gains after the conclusion of a Japan-US trade deal, closed in New York at 99.55 yen and 1.5540 marks, only fractionally higher than Friday's close and down on the day's opening of Y99.90 and DM1.5595.
Jerry Zukowski, a money markets analyst at Paine Webber, said: 'The markets could really use some relief from bad news. They won't get it.' Analysts said the next Fed move would not bring calm as there would be uncertainty over subsequent increases in rates.
In Britain the year-on-year growth of M0, the narrow measure of the money supply, rose to 7.1 per cent in September from 6.3 per cent. The Treasury said an erratic increase in bankers' balances at the Bank of England, one component of the series, explained the 1 per cent surge during the month.
The increase in the more stable cash-in-circulation component, closely linked to retail sales, was 0.6 per cent over the month and 7 per cent in the 12 months to September. The gilts market reacted badly to the evidence that spending was still strong.
A UBS study published today suggests that rapid narrow money growth so far this year suggests official statistics underestimate consumer spending.
Speaking at the IMF/World Bank meeting in Madrid, Eddie George, Governor of the Bank of England, said consumer spending would have to moderate, but it was too soon to tell how effective last month's base rate increase would be in slowing the pace of spending.
Kevin Darlington, UK economist at Hoare Govett, said: 'Although the markets reacted to the money figures, there was no news in them for the Governor or Chancellor. They already knew that M0 was growing above its target range.' The monitoring range for M0 is 1-4 per cent.
In London the FT-SE 100 index closed down 42.8 points at 2,983.5, while gilts fell nearly a full point.
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