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The month of July saw US interest rates remain on hold at 5.25%. Behind the backdrop of uncertainty over inflation and interest rates, the MSCI World ex Australia Index (unhedged) fell by -2.4% during the month. The MSCI World ex Australia Index (hedged into the $A) rose by 0.8%. Australian equities as measured by the S&P/ASX 300 fell by 1.69% over the month of July. The Australian economy performed strongly over the month of July. Underlying inflation rose to the top end of the RBA’s target range, driven by strong data for housing finance, consumer sentiment, business conditions and employment. Unemployment remains below 5%, a level which hasn’t been achieved in almost three decades. In response to this the Reserve Bank increased interest rates in Australia by 0.25%, from 5.75% to 6.0%. The domestic share market was weighed down by local and global inflation fears which may lead to further interest rate hikes. The S&P/ASX 200 returned -1.7% with the worst performing sectors, Materials (down 5.1%) and Healthcare (down 3.7%). The best performing sectors were Utilities (up 3.7%) and Telecommunication Services (up 3.2%). In the US, the Federal Reserve (Fed) maintained interest rates at 5.25%, but there appears to be uncertainty surrounding future Fed decisions. The Fed recently increased its forecast for next year for core CPI, prompting further fears of rate rises. Unemployment in the US rose to 4.8%, but remains slightly below the natural rate of just under 5%. The European Central Bank maintained their cash rate at 2.75%, but suggested it will raise rates in early August. Economic data from Europe generally continued to come in on the strong side. The Bank of Japan ended its zero interest rate policy by raising interest rates 0.25%. However, any further rate raises are likely to be very gradual, as key indicators are not overwhelmingly strong. In China, authorities have increased banks’ capital reserve requirements as part of measures to slow growth in response to data indicating strong investment, production growth and money supply growth. The increase in Australian bond yields seen over recent months continued in July. Inflation fears, which were eventually validated, and the subsequent RBA reaction pushed 10 year government bond yields to 5.84%. Overall domestic fixed interest returns were relatively flat for the month, returning 0.08% as measured by the UBSA Composite Bond Index. Internationally, bond yields increased over the month. Returns for global fixed interest were modest, with the Lehman Global Aggregate Index (Hedged) returning 1.2%. The Australian listed property sector produced a solid result over July with the S&P ASX 200 Property Accumulation Index returning 2.7%. In unlisted property, three high profile property portfolios were sold, filtering through to the broader market and boosting capital returns. Rental growth is strengthening across the country, fuelling increased investor demand. Please note that this economic commentary does not constitute advice. Source: Watson Wyatt Investment Consulting Disclaimer |
