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Amid the panic last week, traders are clinging to one silver lining.
At least, they think, the Bank of England won't raise the base interest rate to 6% this month. Not now.
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And it's true, that with all the upheaval in the global credit markets finally making its presence felt in equities, the Bank is likely to feel extremely reluctant to pile on the pressure while the City is feeling so wobbly.
That doesn't mean that it shouldn't though
Most commentators are now expecting the Bank of England to hold interest rates this week. And it seems likely that it would take a lot more courage of conviction than the Monetary Policy Committee is currently demonstrating to actually hike interest rates this week.
But if the Bank does hold rates, it'll be a mistake. There's been a lot of vague talk of consumers and house prices showing signs of slowing down, but the reality is that most of this talk comes from companies and estate agents warning that people might slow down in the future.
Retailers and property pundits aren't daft - they know how to spin their results and their surveys at a time like this. Put on a glum face, make comments about rates starting to bite', let the newspapers do the rest, and suddenly you have a mild climate of fear.
But its important to remember that if we are slowing down, we're right at the start of it. John Lewis, for example, came out with an extremely strong set of results last week. If there's a consumer slowdown burgeoning, the department store chain hasn't noticed.
As for house prices, inflation still remains strong - with annual house price growth still in the high-single digits, according to most surveys. And lenders are still finding new ways to get people to take out bigger loans - the latest wheeze, judging from the amount of coverage its got in the papers recently - is to take out a foreign currency mortgage.
Nobody mentions that this is probably the single most toxic form of the carry trade there is - borrowing money in a foreign currency to pay for your home. Fine, you get a lower interest rate - but that's not much use to you if the euro suddenly strengthens sharply against the pound. Even your average hedge fund manager would think twice before betting his home on his ability to read the forex markets. Yet the personal finance sections of most newspapers will happily include this as a way to pay for what is the most important asset in most people's lives.
Anyway - back to the Bank. The point is, most commentators are expecting another rise to 6% this year - and if the current market turmoil hadn't erupted, there'd be a lot more people looking for it to happen this Thursday.
So it's not as if a further hike would astound the markets. It would just drive home the fact that the Bank of England isn't going to allow a few days of extra volatility- which after all, as US Treasury Secretary Hank Paulson said last week, "we are always going to have" - derail its attempts to bring inflation under control.
And that's the important point - inflation isn't going away. Oil prices remain higher than anyone really expected them to be at this time last year. And meanwhile, food price inflation is becoming a real theme. We've been talking about it for a long time now the last time was back in May, when we suggested how you could profit from rising prices (to read the story, click here: Harvesting profits.
But now we're not the only ones talking about it. Investing in soft commodities has hit the front pages of at least two investment magazines in the past fortnight, while historian Niall Ferguson warned in this week's Sunday Telegraph that he's more concerned about peak grain, than peak oil (if you didn't read the piece, it's well worth five minutes of your time (https://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/07/29/do2901.xml).
So while the credit markets may be collapsing, input costs are set to keep on rising. Those costs have to go somewhere and shop price inflation is the most likely destination. So while the Bank may well pay more attention to the market's current spasms when it meets on Wednesday and Thursday, it would be better for us all if it focused on its long-term game of catching up with and squashing inflation before it becomes any more entrenched.
Turning to the wider markets
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In London, a second day of losses on Wall Street saw the FTSE 100 end Friday 36 points lower at 6,215, although the blue-chip index was off an earlier low of 6,192. Household goods group Reckitt Benckiser topped the FTSE risers following Thursday's bumper results and housebuilders also performed well. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was 31 points lower, at 5,643, and the Frankfurt DAX-30 was down 57 points at 7,451.
On Wall Street, stocks extended Thursday's losses as strong economic data failed to offset concerns over credit markets. The Dow Jones tumbled 208 points to close at 13,265, registering its largest weekly fall in over four years. The tech-heavy Nasdaq was down 37 points at 2,562. And the S&P 500 was 23 points lower, at 1,459.
Although Friday's losses on Wall Street saw the Nikkei fall earlier in the session, the Japanese index clawed back losses to end 5 points higher - at 17,289 - today. In Hong Kong, the Hang Seng was 97 points higher, at 22,667.
Crude oil was down 40c at $76.62 today, and Brent spot was at $76.65 in London.
Having fallen as low as $656.90 in New York on Friday, spot gold was back up to $661.60 this morning. (For in-depth daily gold reports, see: investing in gold. Silver had climbed to $12.71.
In the currency markets, the pound was at 2.0280 against the dollar and 1.4840 against the euro this morning. And the dollar was at 0.7315 against the euro and 118.95 against the Japanese yen.
And in London this morning, publisher Pearson posted a first-half loss of £104m as the weak dollar hurt revenue growth. However, the group raised forecasts for its professional education and Interactive Data Corps. units. Shares in Pearson were up by as much as 2.5% in early trading.
And our two recommended articles for today...
Superpound is heading for a fall
- For the first time the dollar has breached the $2 mark and UK holidaymakers are taking advantage by heading stateside to bag cheap deals on the high street. But how long will things stay this way? For more on the factors underpinning the strong pound - or, rather, the weak dollar, click here: Superpound is heading for a fall
Why banks are getting back to basics
- Remember when banks lent money using the cash deposited with them? Even today, many people still believe that banks work in this way. In fact, as regular MoneyMorning readers will know, the debt markets are far more complicated than that. But with the credit market turning, are we about to see a return to old-fashioned banking once more: Why banks are getting back to basics
