Wonderland is no place for rates

The market is still confused about interest rates. Maybe confused is the wrong word - the majority view is that they're going up, but, like Alice In Wonderland it's hikes tomorrow, hikes yesterday but never hikes today.

The Fed, European Central Bank and Monetary Policy Committee elected to leave rates unchanged recently although they all made comments about risks to the upside and higher inflation. But they still stopped short of actually pushing official rates higher which has resulted in pages of will they-won't they research about the November meetings of those august bodies.

On the day of the ECB meeting I was e-mailed two different pieces of research, one of which told me that the bank was definitely going to push rates higher, the other of which said that it was unlikely. If the authorities really want to raise rates, though, they should do it sooner rather than later because the intervening uncertainty makes life hell in the markets.

The closest we've seen to finding the magic formula of noninflationary growth (the Holy Grail for all economists) is in the US where, after the last Federal Open Markets Committee meeting, the Fed said that it would be specially alert in the months ahead when it came to inflation. It's always been specially alert to inflation but people deconstruct their comments so much that it's like being back in school and being asked to find the real meaning behind Yeats's poetry.

Apparently, too, remarks from the ECB sounded much more hawkish in French than in English. Sacre bleu, and all that, but have we gone around the twist completely? Either statements are hawkish or they're not. Concerned about inflation or not. Concerned about being concerned - actually, maybe it's Alice Through The Looking Glass I'm thinking of.

One of the main contributors to inflation indexes lately has been the price of oil, which had steadily increased since OPEC limited the amount of production of member countries. However, the price has now stabilised and has even dropped back a little (Brent crude is now $20 [€18.80] per barrel from $24 last month), which gives some comfort to those concerned about higher prices.

In the US, labour shortages are still a worry and poorly paid MacJobs are almost a thing of the past as fast-food joints offer "starting" bonuses to attract workers. There are more people with more money to spend in the US than ever before and spend it they do. The fear is that the trade deficit will continue to widen which would lead to a weaker dollar which might, in itself, be inflationary. But then, the Europeans want a weaker dollar, don't they? Or the media thinks that Europe wants a weaker dollar because although the euro's decline since the beginning of the year has worked out well for the ECB, the media likes to think that its weakness is a sign of failure.

And yet . . . manufacturing orders in Germany were up 5.1 per cent in August which was much higher than anyone had predicted. Exceptional items were cited, but the highest forecast was 0.5 per cent so exceptional items or not, it was a pretty big increase.

Yes, the signs of a pickup in growth in the rest of Europe are there, rates will eventually go higher but I can't help thinking that the mandarins of the ECB are far more relaxed about it than those of us who churn out pages and pages of angst on whether a 25 basis point hike will make any difference to economic growth or not.

Equity markets are also unsettled by the on-again off-again rate hike scenario.

Nevertheless I await with interest the results of an experiment by Swedish artist Ola Pehrson who has, according to Reuters, attached electrodes to the leaves of a Yucca plant to allow it to issue buy and sell orders on the Swedish Stock Exchange's 16 most traded shares. I confess I read this piece a number of times because I couldn't believe it. How is the plant coming to its investment decisions, I wondered. (The fact that a plant is dealing doesn't surprise me at all - I was once informed that all dealers are, in fact, vegetables.)

Is it being read daily investor notes regarding interest rate movements? Does it know anything about Volvo's recent corporate bond issue? What does it think about the Swedish krone becoming part of the euro?

If the Yucca's eventual choices outperform the general index it's given water and light. If it doesn't, it remains waterless and in the dark. In the dark would put it on a par with half of the investors in the world at the moment, I'd have thought. The whole thing sounds pretty unfair on the Yucca and I haven't seen any more stories about how it's faring. I'm actually quite concerned about it!

It's an interesting way to approach investing all the same. Can you imagine how fund managers around the world would react if they were told that they wouldn't get watered or fed if their stock selections underperformed the index in any particular period?

Imagine how those who bought in to Marks & Spencer would feel, for example. Now, before you think I'm going to launch into an attack on the company yet again, I have to confess that I actually bought something in the Henry Street store last week. OK, so nothing that I'd wear outside the house obviously - it was jogging pants and a sweatshirt in which to lounge in front of the TV in the winter months. . . I was so surprised by the fact that I'd bought them at all that I nearly succumbed to buying some M&S shares as well on the back of my impulse purchase.

But I held back because I'm still not convinced about the store's future. I think it'll be bought out in the end because the franchise is still worth a lot and I suppose the shares will perform if that's the case. But I'm not sure I want to be hanging around waterless and in the dark until that happens. Sheila O'Flanagan is a fixed- income specialist at NCB Stockbrokers