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.