Market surges on deep US rate cuts

Australian sharemarkets have leapt 3% higher this morning following last night’s US Federal Reserve decision to cut rates there by 0.75%.

The S&P/ASX200 is trading at 5244.9 at 12.15pm, 3.1% up on yesterday’s close. US markets put in a similarly strong showing overnight, with the Dow Jones Index closing up 3.51% to 12,392.66.

Although last night’s move by the Fed was expected – if anything, markets anticipated a larger 1% cut – it was enough to trigger buying on skittish markets desperate for some good news after the trauma of the recent Bear Stearns near collapse.

But, as with previous moves, it may only be effective until the next bit of bad news comes in – and at the moment all eyes are looking towards investment bank Lehmann Brothers.

Lehmann Brothers shares have tanked in recent days on rumours that the bank may suffer from the same sort of liquidity problems that brought Bear Stearns down – and in the current climate, rumours can be as damaging as facts.

In its statement accompany the decision, the US Fed board said the “outlook for economic activity has weakened further”.

“Growth in consumer spending has slowed and labour markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,” the statement said.

Meanwhile, the evidence continues to emerge that things are slowing in Australia, but there is still a bit of petrol left in the nation’s tank.

The Westpac-Melbourne Institute Leading Index of Economic Activity released today predicts 4.1% growth over the next three to six months in annual terms. This is the first time the index has fallen below just below its long term trend (currently 4.2%) since 2005, but suggests the economy is not going into recession any time soon.

The number of new houses and apartments on which construction commenced in the final three months of last year lifted 2.6% on the previous quarter 39 477, according to ABS figures.

And a Mercer survey of 380 Australian businesses has found that wages increased by an average 4.7% over the past 12 months, with workers in the construction and energy sectors both leading the growth with 7% wage average wage rises.

On the downside, however, new Department of Employment and Workplace Relations figures show the number of skilled vacancies advertised by employers fell 2.2% in March.

And in a sign that retailers may be detecting some weakening in consumer sentiment, the value of merchandise imported into Australian in February fell by 1%, or $220 million.