The leadership challenge against Malcolm Turnbull and the subsequent elevation of Scott Morrison to the position of Prime Minister dominated the headlines in August. However, its impact on financial markets was largely confined to the Australian dollar which fell against other currencies as investors focused on the policy uncertainty brought about by political instability. While there was a slight recovery following the resolution of the challenge, the dollar has not returned to previous levels.
Equities markets were more concerned with the August reporting season with listed companies announcing their profit results and providing guidance on their prospects for the period ahead. While the reported profit results were largely in line with expectations, there were some significant share price falls where companies disappointed. For example, Flight Centre, Origin Energy and Ansell all suffered double digit price declines in August.
In economic news, Australia’s gross domestic product (GDP) and inflation figures were released. The Australian economy grew by 0.9% in the June quarter following a 1.1% increase in the previous quarter. As a result, the economy has grown by 3.4% over the past four quarters. Household private consumption expenditure increased 0.7% to be 3.0% above year ago levels. While the result is relatively strong, spending has been partly financed by a fall in the household saving ratio to 1%, suggesting it may not be sustained. This is the lowest saving rate since 2007 and compares to the 8%-plus saving rate seen in recent years.
Inflation figures were also released earlier in the quarter. A 0.4% increase in consumer prices in the quarter means that inflation is now running at 2.1%. While this puts inflation inside the Reserve Bank’s (RBA) 2-3% target range, there is little to suggest the RBA is concerned about the inflation trajectory or that the probability of a domestic rate hike has increased. This partly reflects that other inflation measures that arguably provide a better measure of underlying inflation trends remain below the target range. Furthermore, wages growth remains relatively subdued at around 2.0%.
US economic data remains relatively robust with US GDP growing at an annualised rate of 4.2% in the June quarter following a 2.2% result in the first quarter. This has reinforced expectations the US Federal Reserve (the Fed) will increase the fed funds rate by another 25 basis points at its September meeting. This would take the fed funds rate to 2.0-2.25%, still below the long-term average of around 3.25%.
At the same time, the US Core Private Consumption Expenditure Price Index, which is the Fed’s preferred measure of inflation, increased by 1.9% compared to a year ago providing some comfort that inflation pressures are not overly problematic. In contrast, the standard consumer price index showed a 2.9% year-on-year increase in July, in large part due to higher oil prices. Nevertheless, wage and inflation momentum in the US suggests that further gradual tightening of US monetary policy is likely into 2019.