Market commentary

Employment figures were once again an indicative measure of economic activity in Australia. Domestic employment showed a loss of 8,800 positions in August. In contrast, there was a fall in the unemployment rate from 5.2% to 5.1%, primarily in response to the participation rate dropping to 65.0%; its lowest level since November 2006.

A further sign of softening demand for labour included a 0.4% decline in hours worked. This fall has potential implications for household spending.

Australian shares

Australia’s sharemarket underperformed the world average but still rose by 1.6% over the month. Unsurprisingly, the Index gain was largely attributable to the rise in the materials sector (+7.3%), itself largely due to the surge in metals prices. Five of the other ten major industry sectors experienced negative returns during the month with industrials falling by 0.6%. Those sectors providing earnings certainty fared better with rises in healthcare (+2.1%) and telecommunications (+1.8%).

International markets

International economic indicators were a compendium of mixed signals during
the month. The US and China both experienced an easing in momentum within the industrial sector.

Production in the US declined by 1.2% with reduced output in each of the utilities (-3.6%), mining (-1.8%) and manufacturing (ex motor vehicle) (-0.4%) sectors. The prior month’s result was also revised down from +0.6% to +0.5%.

In spite of this, the housing sector showed signs of recovery with sales
surging 7.8% in August, their strongest monthly gain since May 2010. The downward trend continued in distressed sales, falling a further 2% to 22%. Overall, the median house price rose by nearly 10%, which should bolster the financial position of households and perhaps lead to increased spending. Permits for new home starts were similarly positive, with growth remaining well in excess of 20%.

The Chinese economy showed strong growth in fixed asset investment (+20.2%), however there has been a marked easing over recent months. Australian miners might be concerned by the decline of 3.5% in the Producer Price Index (PPI) due largely to lower metals prices.

Europe posted a 0.6% increase in industrial production for July, despite the region’s persistent financial stress and following a decline of a similar magnitude the previous month. The year-on-year rate of change (-2.3%) showed a deepening deterioration, having slipped from -2.1%, and well down from approximately -1.5% at the start of the year.

Against this backdrop of mixed economic data, investors focused on the monetary stimulus measures being implemented by the central banks. Reflecting this, the MSCI World (ex Australia) Index rose by 2.5% in September, driven by an average gain of 2.2% across the three major US indices. Performance in the other major regions was somewhat mixed, with a strong gain in Germany (+3.5%) partially offset by weakness in France (-1.7%) and lacklustre returns in the UK (+0.5%) and Japan (+0.3%).

Fixed interest

Global fixed interest markets were dominated by the effect of monetary stimulus measures being undertaken in Europe and the US. Early in the month, the European Central Bank (ECB) announced the Outright Monetary Transactions program allowing distressed European nations to formally request ECB support subject to implementing stringent austerity measures.

The planned establishment of the €500 billion European Stability Mechanism (ESM) will replace the €148 billion European Financial Stability Facility which will be phased out next year. Germany’s liability will initially be capped at €190 billion.

The US Federal Reserve announced a third round of quantitative easing and will purchase $40 billion of mortgage backed securities per month, with the aim of increasing “the downward pressure on long-term interest rates more generally but also on mortgage rates specifically”. The program is open ended, with the Federal Reserve determined to “provide support for the housing sector by encouraging home purchases and refinancing”.

Japan too has announced additional monetary stimulus measures to “ensure sustainable growth”. The Bank of Japan will purchase an additional ¥10 trillion of treasury bills and government bonds, increasing the size of its Asset Purchase Program to ¥80 trillion.

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