I don't think PS3 graphics will improve beyond what the 360 can do, simply because of the fact that the 360 actually has a better GPU in it. That's not just an opinion, the GPU specs say exactly that and PS3 developers confirm it. *But* the CPU power of the PS3 will be able to make up for the 'lower quality' graphics (in terms of texture resolution, shader functions, antialiasing, etc) when its full potential is unlocked. Think much better physics, better animations, more NPC's, constant high framerates etc. These also add to the 'graphical experience' of a game, although you cannot see it on screenshots.
This also explains why 360 games already look great: enhancing graphics by using better textures, lighting, etc. is relatively easy, PC games have been there for years. But enhancing graphics by using better animations/physics/more NPC's/etc actually takes programming effort. Eventually I think PS3 games will look better than 360 games, but it will take a while. Just compare 1st-gen PS2 titles to the latest PS2 games. The early games look like late PSX games, while the late games look like early PS3 ones.