August saw the RBA raise the cash rate by another 0.5% which was widely anticipated to 1.85%. Yields rallied in Australia and worldwide later in the month on the back of increasingly hawkish central bank commentary and persistently strong economic data. The 3Y AU Government bond closed the month at 3.2%, while the 10Y (+53 bps) and 30Y (+38 bps) yields closed higher at 3.6% and 3.8%, respectively.
Markets were beginning to think inflation was starting to moderate, and central banks may have to reverse course in August, which guided equity markets higher during the first half of the month. This came crashing down after a hawkish speech from the US Fed chair at Jackson Hole, causing markets to sell off around the world after a strong start. The ASX 200 closed the month at basically flat 6,986 points. The Nasdaq 100 gave back -5.2%, and the Nasdaq Composite fell by -4.6%. The S&P 500 shed -4.2%, and the Dow Jones was softer by -4.1%. The Russell 2000 was one of the relative best performers on the month, losing only -2.2%.The Australian July Unemployment reading (released in August) came in at 3.5%, slightly lower than the previous month (3.6%). However, the data seemed somewhat skewed due to a dramatic fall in the participation rate (-41,000 jobs) due to COVID illness and school holiday timing. Rising labour costs continue to be a talking point, with wages rising by +0.7% over the quarter and currently sitting at 2.6% annualised.
The July reading of the NAB Business Conditions survey remained high, with capacity utilisation and overall business conditions significantly above long-term averages. Consumer sentiment, however, has fallen to pandemic lows with the rising cost of living starting to hit home. Retail Sales data came in at 1.3% for the month, showing that spending patterns still haven't slowed. Australian interest rate futures are now pricing a cash rate of 3.2% by the end of 2022 and a 3.85% cash rate by the middle of 2023. 90-day bank bill yields sitting at 2.45% (+34 bps), while the 6-month bank bills have a yield of 3.0%.
August 2022 Summary
- The US Dollar now trades at a 20-year high
- US yield curve has remained inverted in August
- Stock markets sold off late in the month after a strong start
- US CPI sits at an annualised rate of 8.5%, after a 9.1% peak in June
- Central Banks are willing to risk a hard recession to tame inflation
After bottoming in June, Equity prices steadily increased throughout July and early August. This was in part due to the misperception that inflation had peaked. From the low in June to the high in Mid August, the S&P 500 Index saw returns of over +17% and the Nasdaq 100 Index did even better, with 21% growth during that time. However, this rally came to an end on August 26th with its untimely demise attributed to Federal Reserve Chairman Powell's hawkish speech given at the Jackson Hole Economic Symposium later that day.
The Federal Reserve will continue to employ tight monetary policy "for some time" to bring down inflation, according to Chair Powell. He also warned that switching course too soon may result in similar levels of inflation experienced four decades ago when inflation reached above 14% in 1980. The Chair added, "While higher interest rates, slower economic growth, and softer labour market circumstances will reduce price inflation, they will also cause pain for households and companies. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
US Government Bonds
The current yield on the benchmark US 10Y Government bond is 3.12%, down from its June peak of 3.49%. The US 30Y yield traded back above 3% early last month and remained higher at 3.22%. Yields on shorter-term US 2Y touched 3.50% after Powell's comments at Jackson Hole, which matched the highest rate since the GFC in 2008. The US 2Y yield is currently higher than the US 10Y yield, meaning that the yield curve remains inverted, which has been a signal for a recession in the past.
Volatility Index
Volatility measured by the VIX index lifted after Fed Chair Powell's speech at Jackson hole late in the month of August to close around the 26 level. The VIX index, often referred to as the "Fear and Greed Index", was below 20 around the middle of the month. A lower VIX index is typically supportive of risk appetite.
Petrol Prices
The average cost of a gallon of regular gasoline in the US is now at $3.83, down 9% on the prior month or 0.37 cents, according to AAA data. Oil prices traded lower in the month of August, falling 7.4%. West Texas Intermediate (WTI) touched a high of $123.50 in March this year, which was 14-year highs (now -25% from that point).
The US Dollar
Hot inflation and the rising rate environment have continued to give wings to the US Dollar rally. The Greenback, which is the world's reserve currency, traded to 20-year highs above $109 during the month. The US Dollar Index is +13% since the start of 2022.
Bitcoin
Since the all-time highs in November 2021, Bitcoin is down over -70%. The virtual currency traded up +3% during the start of August before reversing with the risk-off swing to close the month -15%.
The Months Ahead
The Equity market rally spurred by the peak inflation theory reversed at the end of the month. Fed Chair Powell's aggressively hawkish speech on inflation, markets and jobs caught the market by surprise, and the sellers were in control to close out the month. The next set of important economic data out of the US will come later in September, with the interest rate decision on the 21st and the CPI reading on the 13th.