Aussie market defies US gloom

Australian markets have defied the increasingly negative economic sentiment in the US to post modest gains this morning.

At midday the S&P/ASX200 is up 0.5% to 5836.9, despite the overnight release of a clutch of economic data that confirms the progress of the US economy towards recession.

In its Biege Book summary of economic conditions, the US Federal Reserve estimated that while the US economy is still growing, it slowed its pace over the Christmas period, with retail spending “subdued” and the housing market continue to exhibit weakness.

Industrial production was also flat in December, although that result was better than the decline most economists had predicted.

The results are even more worrying in the context of a separate report released overnight that showed inflation in the US is not falling despite the slowing of the economy. US Labour Department figures show consumer prices increased 0.3% in December, following a 0.8% gain in November – strong results that could constrain the US Federal Reserve’s ability to stimulate economic activity by cutting rates.

But there was a glimpse of economic good news, with data from the Mortgage Bankers Association showing the number of mortgage applications for new or refinancing loans increased 28.4% in December and early January.

The result could be interpreted as the beginning of a cautious return to the housing market by bargain hunting house buyers, although evidence of growth over a more sustained period will be needed to confirm any housing sector rebound.

And the International Monetary Fund has warned investors that a lack of transparency in some financial institutions means we don’t know whether we are yet to hear more bad news on the sub-prime crisis.

According to the IMF, “most banks in the United States have not yet marked their assets to genuine transaction prices” and only some hedge funds have “come clean” on their exposure to the sub-prime market.

The end product of all that mixed economic news was a relatively modest 0.28% dip in the Dow Jones Index to 12466.16, a 34.95 point drop on yesterday’s close.