Market storms back – but inflation bogey looms

Australian sharemarkets have recovered much of the value lost in yesterday’s 7.05% rout in just a couple of hours of trading this morning.

At midday the S&P/ASX200 is trading up 4.9% on yesterday’s close to 5440.7, after being up by more than 6.5% earlier in the morning.

The positive sentiment has lifted all boats, but stocks that suffered most heavily yesterday such as the big resources companies and the banks have made the biggest gains.

But markets immediately shifted to a downward trajectory after the release of a stronger than expected underlying consumer price index figure of 1% at 11.30am. (The headline figure is 0.9%.)

This morning’s positive market sentiment is a product of dramatic remedial action by the US Federal Reserve overnight to cut interest rates there by 0.75% in an attempt to stave off recession and restore confidence in the world’s biggest economy.

The action immediately reversed what would have otherwise been big losses on US markets, leaving the benchmark US Dow Jones Index to close down a relatively modest 1.06% to 11,971.19.

In Australia the market recovery could be stalled by the release of the 1% December 2007 CPI figure, a result that is just above market expectations and suggests inflationary pressures in the Australian economy are reaching boiling point.

Inflation is now running at 3.4% in annual terms, well above the Reserve Bank of Australia’s 2% to 3% target band.

In normal circumstances the 1% core CPI result would almost certainly mean the RBA would lift interest rates when it next meets on 5 February, but the sharemarket volatility and uncertainty about the health of the US economy means the likely outcome of the RBA’s February meeting remains an open question.

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