Bonds/Interest Rates

Financial markets have begun to factor in rate cuts in Australia this year but brokers suggest ongoing inflationary pressures mean the bias remains in favour of higher rates.

The annualised growth rate of the Westpac-Melbourne Institute Leading Index of Economic Activity fell below long term trend in January.

A Fed rate cut of only 75bps was still enough to add impetus to a rally started when Goldman and Lehman beat the Street. The Dow jumped 420 points.

A 21 point rise in the Dow belied another rollercoaster session in which traders tried to decide whether Bear Stearns could have signalled a bottom. The commodities bubble popped in a dash for cash.

JP Morgan has acquired Bear Stearns not for US$20ps, but for US$2ps – all scrip. Goldman Sachs set to announce big losses. The Fed cuts the discount rate.

JP Morgan may have bought Bear Stearns by this morning while the Fed could cut 100 points.

There were two casualties of war on Wall Street on Friday – the truth, and Bear Stearns. Dow down 194. Gold over US$1001/oz.

Last night’s announcement by Standard & Poors that an end to subprime write-downs is in sight means little in the wider scope of the credit crunch.

It was down, up, and down again on Wall Street to only a small rise while the numbers 111 and 1000 made their debuts.

Australia’s unemployment rate has fallen to its lowest level since 1974 and this puts added pressure on the RBA as it tries to bring inflation under control.