Outlook: Wall Street
Friday 30 July 1999
IS THIS it, finally? Wall Street's tumble yesterday was accompanied by significant weakness in the bond markets, and in the international foreign exchanges, in the dollar too. There were rumours that at least one hedge fund was moving out of US assets sharpish. Shares in London, already undermined by disappointing corporate news, obediently followed the Dow.
In market corrections, it is usually some economic statistic which is the trigger, and this time it was Alan Greenspan's favourite, the employment cost index. The business cycle in the US has reached the point where growth is slowing but inflationary pressures are catching up with previous excesses. Those pressures are revealing themselves in America's tight-as-anything jobs market and a cavernous trade deficit.
There is now an odds-on chance that, following his warnings voiced in testimony this week and last, Mr Greenspan will raise short-term interest rates at the end of August. Fewer analysts now think he can wait until October, the next opportunity.
However, even though the business cycle turns out not to have been abolished, the turnaround has to be kept in perspective. One quarter point rate rise will still leave US rates below their level last August. There might be more inflation in the pipeline, but there was almost none to start with. Yesterday's figures showed that the broadest measure of inflation, the increase in the GDP deflator, was still only 1.6 per cent.
The bond market has probably already over-reacted. Real yields have risen sharply. With inflation of - at worst - 2 or 2.5 per cent in the pipeline, it is hard to know why this should be so. Some special factors might help explain the phenomenon. There is a rush of new corporate issues ahead of the year-end, and a general anxiety about the effect of the Y2K computer bug. Yet at 3.5 to 4 per cent, real yields on Treasuries are well above their long term average, which points to a sharp correction in equities.
Investors should nonetheless hold on to the thought through any impending Wall Street turmoil that there have been great gains in productivity and structural changes in the economy that mean this cycle should be less adverse than in the past. And if it gets too bad, Mr Greenspan will bring interest rates right back down again.
- 1 Five-year-old Iris Grace is raising awareness of autism through her extraordinary paintings
- 2 HeForShe campaign: Iceland to follow up Emma Watson speech with UN women's rights conference – for men only
- 3 Car tax disc changes: Two days to go - and they affect you much more than just not displaying a piece of paper
- 4 Teenagers irritable because early school hours mess with their biological clocks
- 5 Now we know whose fault it is if you end up being murdered in Thailand
Isis could become 'world’s first truly terrorist state' and bomb UK with nuclear and chemical weapons, Theresa May warns
Five-year-old Iris Grace is raising awareness of autism through her extraordinary paintings
Car tax disc changes: Five facts you never knew about your (almost obsolete) tax disc
Car tax disc changes: Two days to go - and they affect you much more than just not displaying a piece of paper
Isis an hour away from Baghdad - with no sign of Iraq army being able to make a successful counter-attack
Isis, we are told, is a 'clear and dangerous threat to our way of life'. I’m sorry, but I just don’t buy it
Exclusive: 'Putin's Russia has been my biggest regret,' says Nato's outgoing Secretary General
The Osborne Ultimatum: Chancellor’s benefits freeze bombshell will affect ten million households
There’s no excuse for Dave Lee Travis’s behaviour, but we need to keep a sense of proportion
Should gay sex be illegal? 16% of Britons think so
Mark Reckless becomes second Tory MP to defect to Ukip in a month
- < Previous
- Next >
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...
£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...
Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...