Economy

Market plummets on sub-prime fears: Economy roundup

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Australian sharemarkets have dived today after data released in the US on Friday raised the spector of stagflation in the world’s biggest economy.

By 12.35pm the S&P/ASX200 had dropped 2.4% from Friday’s close to 6338.4, while the Australian dollar is trading at US86.43c, down from Friday’s US87.78c Sydney close.

Consumer prices in the US jumped 0.8% in November, the sharpest monthly climb since September 2005 and well above market expectations.

That means makes it much less likely we are likely to see the US Federal Reserve follow up this month’s 0.25% rate cut with another cut any time in the near future – despite the fact that many economists now believe the US is heading towards recession.

And that raises the prospect of the economists’ worst nightmare: stagflation, a vicious combination of falling economic growth and rising inflation not seen in the US economy since the oil shocks of the 1970s.

Markets were also spooked by an announcement by Centro Property Group after it downgraded profit forecasts because of higher lending costs associated with the sub-prime crisis and halted withdrawals from its key managed funds.

Securities in Centro, Australia’s second-biggest shopping mall owner, plunged 70% to $1.74 on the announcement, while Centro Retail Group, a unit of Centro, dropped 43% to 81.5 cents.

In other economic data out today, new housing and apartment construction starts lifted 1.3% in the June quarter, a result that is below market expectations but still an improvement on the June quarter’s 2.5% decline.

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