The value of the Australian Dollar decreased against most 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.

Inflation figures in major developed countries and regions published in December (relating to the month of November) continued to be well above Central Bank targets. November’s year on year Consumer Price Indices rose 7.1% in the United States, 10.1% in the European Union, 10.7% in the United Kingdom, and 3.8% in Japan. The United States’ inflation rate continues to fall, roughly 2.0% down from its peak year-on-year reading in June. However, the Chairman of the Federal Reserve, Jerome Powell, continued with hawkish rhetoric and increased the cash rate target by 0.5% in December, bringing the upper bound to 4.5%. The Euro Area and United Kingdom have been on a similar inflation trajectory, with inflation climbing into double digits but then decreasing slightly by approximately 0.5% from October to November. The European Central Bank and the Bank of England both hiked their cash rates by 0.5% in December as a result of multi-decade high inflation reports. Inflation is more modest in Japan than the rest of the developed world, though it has been increasing steadily to levels not seen since the 1990’s. Whilst the Bank of Japan left its cash rate unchanged in December, the Bank of Japan did make a change to their Yield Curve Control (YCC) policy by allowing the ten-year government bond yield to rise to 0.5%. 

Locally, the year-on-year October CPI indicator was 6.9%, down from 7.3% in September. As this was the latest available CPI reading, the minutes of the RBA Board meeting held on 6 December noted that “the monthly Consumer Price Index (CPI) indicator for October showed that inflation had remained high and broadly based, although the annual rate of inflation had declined a little. The various indicators of activity suggested the economy had grown solidly in the September quarter, supported by household consumption, and demand appeared to have held up into the December quarter”. The RBA Board increased the cash target rate by 0.25%, bringing the upper bound to 3.1%, stating “members emphasised that the Board’s priority is to re-establish low inflation and return inflation to the 2 to 3 per cent target range over time … the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”.

The biggest impact on growth in the global economy in December was the relaxation of China’s zero-COVID-19 policy. Partly the result of widespread mass protests in November, the Chinese Government announced a relaxation from its micromanagement approach on 7 December and loosened travel restrictions and the requirement to isolate in a managed facility for those with mild symptoms (with some further policy easing being left to local governments). Although reported cases have been skewed due to a change in reporting standards, it is believed that infection cases have increased rapidly as hospitals and pharmacies struggle to cope. China’s Purchasing Managers Index (PMI) dropped 6.6% year-on-year in December as the transition to “opening up” proved difficult. 

On 21 December, President of Ukraine, Volodymyr Zelensky, addressed the United States Congress in person stating, “your money is not charity, it’s an investment in the global security and democracy that we handle in the most responsible way”. The speech was well received and a request for a further $50 billion in aid was approved after a slight delay in the Senate. President Zelensky reiterated to French President Emmanuel Macron his terms for peace talks with Russia, which offer little compromise. 

Equities

Major developed foreign equity markets produced negative returns in December. Developed markets (excluding Australia) returned -5.5% on a currency-hedged basis (and -5.2% in Australian dollar terms, reflecting the modest rise in the value of the Australian dollar). The best performing of the major foreign markets was the United Kingdom’s stock market (FTSE 100 Index) returning -1.5%. 

The Australian stock market (S&P/ASX 200 Index) generated a return of -3.2% during December, with all 11 sectors experiencing negative returns. Materials was the best performing sector returning -0.9% and Consumer Discretionary was the worst performing sector returning -7.0%.

From a foreign developed market perspective, similarly, all sectors also produced negative returns. Utilities was the best performer returning -0.7%, whilst Consumer Discretionary was the worst performing sector returning -9.7%.

Bonds

The Australian government bond yield curve shifted upwards in December, resulting in Australian fixed interest returns for the month of -2.1% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve steepened in December as the two-year yield increased by 0.29% and the ten-year yield increased by 0.52%. As noted above, the cash rate set by the RBA increased by 0.25%, from 2.85% to 3.10% on 6 December.

Over December, major developed global government bond yields broadly increased, resulting in negative returns, with the Bloomberg Barclays Global Aggregate Index returning -1.3%. Notably, the European Government yields increased 0.64% over ten-year maturities, the most of the major developed government bond markets. Over the two-year term, European government yields also rose the most, by 0.64%, as inflation continues to climb in that region.

Currencies

The Australian Dollar fell against most major foreign currencies in December but was relatively flat against the United States Dollar and British Pound. The Australian Dollar decreased 4.6% against the Japanese Yen and 2.4% against the Euro. The Australian Dollar finished the month at 0.6813 US Dollars, up 0.25 US cents over the month.

Commodities

Commodity prices continued to be volatile over December. The S&P GSCI Commodities index decreased by 1.8%, with the price of natural gas futures notably falling 35.4%. The price of WTI oil and Brent oil finished relatively flat over the month. Of the precious metals, the price of gold increased 3.1% and the price of silver increased by 7.9% in November. 

Performance of key markets over relevant time periods to 31 December 2022:

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-3.2%	9.8%	-1.1%
International Shares	MSCI World Ex Aust Unhedged A$	-5.5%	4.3%	-12.5%
International Shares	MSCI World Ex Aust Hedged A$	-5.2%	1.6%	-18.1%
US Shares	S&P 500 Index	-5.8%	2.3%	-18.1%
UK Shares	FTSE 100 Index	-1.5%	5.7%	4.7%
Japanese Shares	Nikkei 225 Index	-6.5%	0.0%	-7.3%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-4.1%	4.0%	-20.5%
Australian Fixed Interest	Bloomberg AusBond Composite Index	-2.1%	-0.3%	-9.7%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.2%	1.2%	1.3%
Currency	AUD/USD	0.4%	-1.3%	-6.2%

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

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