Inflation fears give world's markets the jitters

A fresh wave of jitters over the possibility of another rise in US interest rates swept Wall Street yesterday after the release of figures pointing to an unexpected jump in manufacturing during September, reigniting fears of inflationary pressures developing in the fast-expanding American economy.

Late in the day the Dow Jones index was showing a fall of more than 150 points in response to the latest report from the National Association of Purchasing Management, which said its monthly index -- treated as a bellwether in New York - had jumped to 57.8 from 54.2 in August. The Nasdaq market, closely watched because of its high number of technology-related companies, fell more than 1%.

Economists had been forecasting a slight rise on the summer's figures and several market pundits immediately dismissed the NAPM figures as a "blip", arguing that companies were increasing their inventories as protection against possible millennium-bug computer problems. "The Fed has some awareness of the fact there's a flurry of Y2K ordering going on," declared Rosanne Cahn, economist at Credit Suisse First Boston.

But with the Federal Reserve's interest rate-setting body, the open market committee, due to begin meeting on Tuesday, the markets took fright, sending bond yields soaring as stocks fell. American's bellwether 30-year Treasury bond shed one and a half points in price as the yield jumped to 6.14% from Thursday's 6.05%.

Reverberations in London saw the FTSE 100 index of top British companies pushed back below the 6000 level. It finally closed 59.1 points lower at 5970.7.

"It's reasonable for investors to be concerned with inflation, given six months ago we were talking about deflation," James Glassman, senior economist at Chase Securities said. "What we're seeing is the purchasing managers are telling us that the costs of some materials are going up. The question is, can it be passed on to consumers?"

Mr Glassman said it was important to note that the NAPM numbers show that manufacturing, a sector that has lagged the strong growth of the overall economy, was having its own recovery. A reading above 50 indicates growth in the nation's manufacturing economy, while below 50 suggests contraction, and September marks the eighth straight month of growth.

"The overall picture is one of continuing growth in manufacturing activity during the month of September," said Norbert Ore, chair of NAPM's survey committee. "Production and new orders gained momentum and coupled with the continuing strength in new export orders paint a picture of a vigorous manufacturing economy during the third quarter. We see continued strengthening in prices with pricing power apparent in a broad base of commodities."

While most market watchers still expect the Fed to leave American rates unchanged next week, the fact that the European Central Bank and the Bank of England monetary policy committee are also meeting on Wednesday and Thursday has kept the markets in a state of high nervousness.