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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: energyplay who wrote (39537)	10/12/2003 11:11:00 PM
From: elmatador	Respond to of 74559

"What's good for the US consumer is not necessarily good for General Motors." <<Nor for Caterpillar or GE, for that matter Elmat would say. Hence a capital flight off the US would be good for the world economy>> Bond investors' concern switches to inflation By Jenny Wiggins Published: October 10 2003 18:00 \| Last Updated: October 10 2003 18:00 news.ft.com Earlier this year, when the US economy appeared to be mired in a slump, deflation fears dominated the bond market. Bond investors, rattled by signals from the US Federal Reserve, which warned of an "unwelcome substantial fall in inflation" and a lack of economic activity, piled into US Treasuries, sending yields down to 40-year lows. But now, despite only marginal increases in US consumer prices, bond investors are starting to wonder if a future rise in inflation may be their biggest risk. Commodity prices are soaring, indicating demand from manufacturers for raw materials is strong, with Moody's Investors Service's industrial metals price index up 28 per cent in the year to date - a rise that points to accelerated global activity. Gold prices, at about $370 per ounce, are at their highest levels since the mid-1990s and are forecast to rise even further by the end of the year. Demand for gold often increases when investors anticipate inflation, although buying has also been driven by investors looking for alternative investments as the US dollar weakened against the yen. Investment managers say fresh worries about future inflation are being reflected by a very steep yield curve. The curve - a line graph that plots the yields of different Treasury securities - is considered one of the best indicators of economic growth. A steep curve shows investors are demanding higher yields to own longer-term debt securities in the expectation that greater activity will lead to higher interest rates. "The fact that the yield curve is steep is somewhat encouraging," said Bill Sterling, chief investment officer at Trilogy Advisors, adding that if investors were seriously worried about deflation they would be keener to own longer-dated bonds at lower yields, and the yield curve would be flatter. However, the Fed is likely to take its time raising interest rates. Although the labour market has improved, it remains unclear whether there is enough job creation taking place to sustain a substantial recovery. Economists add that the Fed can justify keeping interest rates low because US consumer prices have not risen in tandem with commodity prices - in part because US manufacturers are struggling with foreign competition and consumers are spending on overseas goods. "The US tax cuts have done wonders for the Chinese economy," said John Lonski, chief economist at Moody's. "What's good for the US consumer is not necessarily good for General Motors."