The Australian share market recovered some of its recent losses in the month of July, gaining 6.3% for the month, with the All-Ordinaries index closing at 7,173.8 points. The Australian Dollar firmed 1.3%, with 1 Australian Dollar currently buying 69.9 United States cents.
The Reserve Bank of Australia (RBA) once again increased the official Cash Rate by 0.50% per annum in the month, following on from the 0.25% per annum increase in May and the 0.50% per annum increase in June. The Cash Rate now stands at 1.35% per annum.
Global share markets were generally higher in July, with the United States Dow Jones index gaining 6.8%, the London FTSE gaining 3.5%, the Japan Nikkei 225 gaining 5.3%, and the Hong Kong Hang Seng Index once again the outlier, falling 7.8% for the month.
Despite inflation in the United States coming in at an annualised 9.1% in the month, and inflation in Australia coming in at an annualised 6.1%, there are some early indications that interest rates will not need to move as high as first feared to rein in inflation.
The chart below shows the 10-year Australian government bond yield over the last year.
Source: Tradingeconomics.com
As evidenced in the above chart, in June when the share market was selling down sharply, the yield on a 10-year Australian government bond broke through 4.0% per annum. Since then, the yield has fallen sharply to 3.1% reflective of market expectations that interest rates will not need to be as high as feared in June.
As I wrote in my last month’s newsletter, I was of the opinion that part of the United States inflation must be “transitory” and that inflation will come under control. While not reflected yet in the “backward looking” inflation results just yet, it appears the “forward looking” bond market is forming the same view.
While central banks will most likely continue to increase rates over the coming months, it is highly possible that they will pull-back on continued increases earlier than many have predicted – which would be welcome news for share market investors.
For more information, please contact Ryan Love on 1300 856 338.
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.