The Australian reported over the weekend:

Record highs across commodities, China, the US and the Australian dollar have reignited resource stocks to drive Australian markets to a new record.

Mining giants BHP Billiton and Rio Tinto have made up ground lost earlier this week, buoyed by Thursday’s news that China’s economy is expanding at a phenomenal 12 per cent annual rate”. This is great news, except that goods and services inflation in China is now running at an annual rate of more than 4 % and almost certain to go higher.

The strong economic growth data out of China really helped the markets that were having a nervous time and wondering what the next direction was going to be,” Fat Profits head of mining and resources research Gavin Wendt said yesterday.

As Henry announced slightly ahead of time last week (Oooops!) the People’s Bank of China has raised interest rates.

So today should see some reflection from the raging bulls, especially as The Australian’s business guru David Uren is today discussing the role of central banks – specifically, Australia’s vs. New Zealand’s – in combating asset inflation. If this seems familiar, try Henry’s recent article on the subject.

Asset booms lead inevitably to asset busts, with sub-prime mortgages in the US causing lots of heart-burn. Now hedge funds have emerged as a new but related cause for concern:

Senior bankers have said the crisis enveloping hedge fund operator Basis Capital is serious, with warning signs flashing for local capital markets.

Alan Wood reports in the Weekend Oz:

Next Wednesday’s inflation figures are the most important economic indicator for the Reserve Bank as it debates whether to put up interest rates in August.

In financial futures markets, there is only a 30 per cent expectation of a rate rise next month, but as we have seen often enough, that can change in a flash.

So called “Underlying inflation” in the last two quarters has been 0.5 per cent, a downside surprise. What sort of underlying inflation number for June could get our central bankers off their bums in August?

Underlying inflation approaching 1 % for the June quarter would rattle the central bankers, but actual (“Headline”) goods and services inflation of that sort of level should also cause concern, for reasons recently spelt out by The Economist.

David Uren quotes William White from the Bank for International Settlements (BIS): “It’s better to have monetary and fiscal tightening in upswings”.

Is this what we’ve had gentle readers? “Not much” is the answer, and the next question is what sort of damage will be the result.

Henry’s “Lexington” provides his comments from ringside in Washington.

Read more at  Henry Thornton.