The current rally in financial markets is being driven, and might well be driven further, by a sharp easing in monetary conditions after the May sell-off. Long-term rates fell in the US and Europe, and monetary tightening in Japan was more than offset by exchange-rate weakness.
So where do we go from here? One of the factors that could cause liquidity to contract is inflation. In the US, wages and salaries in the private sector grew at an annualized rate of more than 15% in the first quarter of 2006 and 8.5%
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