Persistently high energy and commodities prices have fuelled continued fears of a rise in inflation, which have subdued global investments markets during the month. In the US, inflation seems to be under control, with core inflation up just 0.1% for the month, while industrial production showed a reasonable gain after adjusting for the hurricane effect. For the month of October, the MSCI World ex Australia Index (hedged into $A) fell 1.7%. The MSCI World ex Australia Index (unhedged) fell 0.2% over the same period and outperformed its hedged counterpart. The S&P/ASX 300 underperformed the overseas markets and fell 3.8% in October.
September quarter CPI data released during the month showed the underlying rate of inflation (which takes out the effects of more volatile goods i.e. petrol and food) to be 2.4% year-on-year in Australia despite higher fuel prices causing the headline rate of inflation to come in at 3.0%, which is at the upper range of the Reserve Bank of Australia’s (RBA) tolerance range. At its monthly meeting the RBA left interest rates unchanged (at 5.5%) for the seventh consecutive month. Looking at other economic indicators, total dwelling construction permits declined in June, July and August for a cumulative fall of 18.0%.
The unemployment rate edged up to 5.1% after three months at a low of 5.0%, which despite the rise, is still low relative to other developed economies. The National Australia Bank’s business conditions and business confidence surveys also rose in September. Within the Australian market, the S&P/ASX 300 fell 3.8% in October, as investors were concerned over the number of foreign central banks continuing to raise interest rates. Investor focus also turned to increasing earnings risk and profit taking following the strong returns achieved during the September quarter. The best performing sector for the month was Telecommunications, followed by Information Technology, while the worst performing sectors were Energy and Industrials. |
Internationally, concerns over rising inflation and interest rates lead to falls in the global markets. However, the US economy beat expectations on GDP growth and grew at a rate of 3.8% year-to-year. This is despite the hurricane activity, which has contributed to a decline in industrial production, retail sales and consumer sentiment. Several shifts in market sentiment have occurred in the US over the past few weeks as investors have grappled to understand what higher fuel costs and the effects of two hurricanes mean for future growth and inflation. In other parts of the world, the Chinese economy continues to grow strongly, with third quarter GDP growth at 9.4%.
Germany’s business confidence levels have reached a five year high as exports continue to benefit from a decline in the Euro. In light of fears of rising inflation, central banks in New Zealand, South Korea, Thailand, Indonesia, the Philippines and India all raised interest rates in October. There have also been signs that the Japanese economy is waking up from its decade long slumber with land prices starting to plateau, and in some places such as Tokyo, even starting to rise in value after a prolonged period of depreciation.
Australian fixed interest returned 0.2% as measured by the UBSA Composite All Maturities Bond Index during the month as both short and long dated Commonwealth bond yields rose. Global government bonds yields rose over the month as a fall in oil prices impacted positively on global growth perspectives. The increase in yields lead to a negative return of 0.5% for global fixed interest markets, as measured by the Lehman Global Aggregate Bond Index (hedged in $A). The Australian listed property sector posted negative returns during October, with the S&P /ASX 300 Listed Property Index falling 1.9%. Unlisted property, as measured by the Mercer Unlisted Property Index rose 0.5% over the month.
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