Buttonwood: Peering into the entrails

Posted: March 21, 2014 in economy
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The new world order

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Downbeat signals from the markets

ARE financial markets useful indicators of how an economy is about to perform? If they are, then they are not telling an upbeat story. This year equity markets are flat-to-lower, government-bond markets are up and, as for commodities, the “wrong” raw materials are falling in price.
Economists have adopted some financial variables for their soothsaying efforts. In America, for example, the composite leading indicator uses, among other things, the change in the S&P 500 index and the spread between short- and long-term interest rates.

The theoretical link between markets and economies runs like this. When an economy expands, spare capacity starts to shrink. This puts upward pressure on wages and prices of raw materials as companies compete for resources. As inflation picks up, bond yields rise and the spread between short- and long-term rates widens. Profits rise rapidly in the first stages of recovery; the corporate sector has a high …

via Economic Crisis http://ift.tt/1gYJiGI


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