The Australian share market posted a small gain in the month of August, increasing by 0.7%, with the All-Ordinaries index closing at 7,226.1 points. The Australian Dollar fell by 2.2% in the month, with 1 Australian Dollar currently buying 68.4 United States cents.
The Reserve Bank of Australia (RBA) continued to increase the official Cash Rate, with a further 0.50% per annum increase in August, following on from the 0.25% per annum increase in May and 0.50% per annum increases in June and July. The RBA Cash Rate now stands at 1.85% per annum.
Global share markets were mixed in August, with the United States Dow Jones Index falling 4.1%, the London FTSE falling 1.9%, the Japan Nikkei 225 gaining 1.0%, and the Hong Kong Hang Seng Index falling 1.0% for the month.
The month of August was just further evidence that share market returns are currently being dictated by interest rate expectations.
Late in the month, following a speech by United States Federal Reserve Chair Jerome Powell, the United States share market experienced a sharp decline – with the Dow Jones Index falling by more than 7% from the mid-month high as shown in the chart below.
Source: Yahoo Finance
Mr Powell’s speech was short and focused. In essence, the United States Federal Reserve Chair is committed to bringing down United States inflation to 2%, suggesting getting inflation down to where it needs to be “will take some time” and will likely require a “sustained period of below trend economic growth” brought about by achieving and maintaining a “restrictive policy stance for some time”.
As I have written in previous monthly newsletters, I do consider a large part of the recent spike in global inflation to be transitory – fuelled by a combination of increased consumer spending as economies come out of COVID-19 lockdowns, staffing and supply chain issues for businesses (as community COVID-19 infections rose post-lockdown), closed-borders creating less immigration and labour market shortages, and the economic sanctions imposed on Russia following its invasion of Ukraine earlier this year.
The increasing of interest rates is the key lever that central banks have available to curtail inflation. This is because by increasing interest rates, you expect to reduce consumer spending (and therefore the demand for goods and services reduces). However, if some of the inflationary impacts noted above do prove to be transitory – this will no doubt be a win for share market returns over the medium term (given the positive correlation between share market returns and interest rate expectations in recent times).
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation, and investment objectives.