Laws of Motion in the Futures Market

ECB President Wim Duisenberg confirmed the bank's policy shift after the meeting by saying, "This clarification underlines the ECB's commitment to provide a sufficient safety margin to guard against the risks of deflation." In short, we have the three economies that produce about half of the world's GDP expressing concern about deflation. Their collective concern works to underpin the upward momentum in debt prices.

Inflation vs. Deflation

But while the central banks try to stave off deflation by keeping the rally in debt prices alive, other markets appear to already be discounting inflation.

Momentum in Swiss francs is tied to the debasement in the value of the dollar vs. the euro. The Swiss unit is highly correlated with the euro, and euro strength naturally equates to a stronger Swiss franc. But the momentum here also appears to be the search for a secure, safe-haven store of value, a traditional role of the currency.

Gold, the other safe-haven, store-of-value play, is also in rally mode. In fact, gold is on the cusp of becoming a nascent momentum market itself. The rallies in the Swiss franc and gold look like plays guarding against inflation, not deflation. So where else are the signs of inflation when central banks around the world are cautioning against deflation?

The surge in corn is representative of recent rises in a wide variety of commodity prices. Soybeans, soybean meal and soybean oil are at contract highs. Cattle and pork are also trading at new contract peaks. Wheat surged 40 cents a bushel and finished its best week in years last Friday. And crude oil, unleaded gasoline, heating oil, natural gas and orange juice are trading at two-week highs.

Cotton and copper are conspicuously absent from the group, but they are excused after having been battered in large measure by the SARS outbreak in China. Collective markups in commodity prices generally accompany expectations of higher inflation as higher raw-material input costs are a precursor to higher prices in finished goods.

Expected Fed action -- buying debt or lowering rates that already stand at 40-year lows -- has set the inflation bug in motion. So while central banks around the world attempt to ward of deflation -- until a new external force is applied -- look for markets to adjust to the inertia of higher prices across the board.