The value of the Australian Dollar broadly decreased against major foreign currencies, increasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted negative returns as yields generally rose across all durations.

The annual Jackson Hole Economic Policy Symposium was held from 25-27 August, with Chairman of the Federal Reserve (“Fed”), Jerome Powell, making a highly anticipated speech. Although the symposium did not contain any direct policy changes, the tone and messaging from Powell’s speech was viewed by market participants as a strong indicator of forward guidance from the Fed. Whilst some were speculating that the Fed would “pivot” to a more dovish position (i.e. indicate the Fed will not hike interest rates significantly further), Powell’s comments made it clear that the Fed will continue to focus on reducing inflation and restoring price stability. Powell said “while higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain”. Powell cited examples of policy error from history and finished by saying “we will keep at it until we’re confident the job is done”. The S&P 500 Index fell 3.4% by market close on the day the speech was made.

The Board of the Reserve Bank of Australia (RBA) met on 2 August to assess monetary policy and discuss economic and financial market developments. The minutes of the RBA meeting noted Australia’s terms-of-trade was likely at a record high in the June 2022 quarter which in turn helped boost national income and consumption [1]. The minutes also stated “Members noted that inflation was expected to peak later in 2022 and then decline back to the top of the 2 to 3 per cent target range by the end of 2024. The expected moderation in inflation reflected the ongoing resolution of global supply-side problems, the stabilisation of commodity prices and the impact of rising interest rates in Australia and overseas. Medium-term inflation expectations in Australia remained well anchored, and members agreed that it was important that this remains the case.” and on several occasions acknowledged the risks were “skewed to the downside” with careful monitoring being needed. The policy decision was to raise the cash target rate by a further 0.5% to 1.85%. This was the third consecutive 50 basis point increase and the largest six-month move in almost thirty years.

On 24 August Ukraine celebrated its Independence Day, however, this also marked 6 months since the beginning of the Russian invasion of the country at large. In addition to the Crimean Peninsula, which has been occupied since 2014, Russian forces continued to make very slow progress in South-Eastern Ukraine. Recent military activity that has generated concern on a larger scale is the shelling that’s come close to the Zaporizhzhia nuclear power plant, Europe’s largest nuclear power plant (that is significantly larger than the infamous Chernobyl power plant). While both sides have said they want to avoid a nuclear disaster, both Ukraine and Russia have blamed the other side for the shelling. The International Atomic Energy Agency has requested safe access to assess the situation, however, to date an inspection has not occurred. 

Reported global COVID-19 case numbers exceeded 608 million at the end of August 2022, with cumulative global fatalities exceeding 6.4 million at the end of the month [2]. Australia has seen cases of new infection decrease steadily throughout August. Due to the lagged nature of deaths from COVID-19 Australia has seen fatalities broadly increase over the month with the seven-day rolling average remaining above 50 for the entire month. The Chinese government maintained its zero-COVID-19 policy throughout the month of August with tight regional lockdowns being enforced to stop the spread.

Equities

Major developed foreign equity markets produced mixed returns in the month of August. Developed markets (excluding Australia) returned -3.6% on a currency-hedged basis (and -2.5% in Australian dollar terms, reflecting the fall in the value of the Australian dollar). The best performing of the major foreign markets was the Japanese (Nikkei 225 Index) returning 1.1%. 

The Australian stock market (S&P/ASX 200 Index) generated a return of 1.2% during August, with only 5 sectors (out of 11) contributing positive returns. Energy and Materials were the top performing sectors, with returns of 7.4% and 3.9% respectively. Real Estate, Consumer Staples and Utilities were the worst performing sectors returning -3.9%, -2.6% and -1.6% respectively.

From a foreign developed market perspective, only 1 sector produced a positive return. Energy was the standout performer 2.8%. Information Technology and Health Care were the worst performing sectors returning -5.7% and -5.4% respectively.

Bonds

The Australian government bond yield curve shifted upwards significantly in August. The upwards shift resulted in negative Australian fixed interest returns for the month of -2.5% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve flattened somewhat in August as the two-year yield increased by 0.56% and the ten-year yield increased by 0.54%. As noted above, the cash rate set by the RBA increased by 0.5%, from 1.35% to 1.85% on 2 August.

Over the month of August, major developed global government bond yields broadly increased resulting in negative returns, with the Bloomberg Barclays Global Aggregate Index returning -3.9%. Notably, United Kingdom Government yields rose the furthest over both durations, increasing 1.31% over two-years and 0.94% over ten-years. The spread between the United States’ ten- and two-year yields remained deeply negative and was -0.34% at the end of August. A sustained “inverted” yield curve in the United States is often taken as a strong sign that the bond market expects a recession within the next couple of years.

Currencies

The Australian Dollar was mixed against all major foreign currencies in August. The Australian Dollar increased in value against the United Kingdom’s Pound and Japanese Yen by 2.6% and 2.1% respectively. The Australian Dollar fell 2.0% against the United States Dollar and finished the month at 0.6842 US Dollars, down 1.4 US cents over the month. 

Commodities

The price of WTI oil and Brent oil was volatile of the month and finished 9.2% and 12.3% down respectively, as recession fears grow. The S&P GSCI Commodities index decreased by 3.9% for the month of August, with the price of natural gas futures notably increasing 10.9% (having experienced a highly volatile environment in prior months). Of the precious metals, the price of gold decreased 3.1% and the price of silver decreased 11.6% in August. 

Performance of key markets over relevant time periods to 31 August 2022

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	1.2%	7.0%	-3.4%
International Shares	MSCI World Ex Aust Unhedged A$	-2.5%	3.7%	-9.6%
International Shares	MSCI World Ex Aust Hedged A$	-3.6%	4.1%	-12.8%
US Shares	S&P 500 Index	-4.1%	4.8%	-11.2%
UK Shares	FTSE 100 Index	-1.1%	2.6%	6.2%
Japanese Shares	Nikkei 225 Index	1.1%	6.5%	2.0%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-3.5%	8.0%	-11.1%
Australian Fixed Interest	Bloomberg AusBond Composite Index	-2.5%	0.7%	-11.5%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2%	0.3%	0.4%
Currency	AUD/USD	-2.0%	-0.9%	-6.5%

*Percentage changes in returns are for periods over the month of August (Month), financial year to date 30 June 2022 to 31 August 2022 and the prior 12 months 31 August 2021 to 31 August 2022 (Prior 12m). Past performance is not an indication of future performance.

[1] https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-08-02.html
[2] https://www.worldometers.info/coronavirus/

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