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Risk Assets were mostly stronger in August, recovering from weakness in the second half of July caused mostly by a worsening geopolitical position in the Ukraine and the Middle East. Through August, more signs emerged of improving economic activity in the United States although in China and Europe, economic readings were mostly softer than expected. In Australia, economic readings were mixed, although company profit reports had a scattering of better-than-expected reports. After rising strongly in July, the Australian equity market mostly consolidated its July gain in August. The ASX 200 was down, but only by 0.1% over the month. Elsewhere, the US S&P 500 made good ground touching record high territory and was up by 3.8%. European equity markets were stronger too with the Eurostoxx 50 up 1.8%, the British FTSE 100 up by 1.3%, and the German Dax up by 0.7%. Evidence that Japan’s increase in value added tax took a toll on Q2 GDP contributed to the Japanese equity market underperforming in August. The Nikkei fell by 1.3%.

Credit markets started August on a soft note, but then rallied strongly through most of the month. The Australian credit market finished August close to its best level in four years. In interest rate markets more generally, the main influence remains that major central banks are showing no signs of starting to lift their official rates. In the US, the Federal Reserve continued to indicate that its funds, or cash, rate will stay at zero until at least 2015. ECB Governor Draghi gave strong hints of possible quantitative easing at the Jackson Hole central bankers’ conference late in August. The Reserve Bank of Australia again left the cash rate on hold at 2.50% at its early August policy meeting and its quarterly Monetary Policy Statement firmly pointed to rates staying on hold for an extended period. Signs of stable, low official interest rates almost everywhere helped to extend bond market rallies. US 10 year and 30 year treasury yields finished August at respectively 2.34% and 3.08%, 22 basis points (bps) and 24bps lower respectively than at the end of July. The Australian 10 year bond yield rallied almost in line with US treasuries falling by 21bps and finishing August at 3.29%.

On the economic data front, US indicators showed a strong growth rebound in Q2 GDP with 4.2% annualized growth from -2.1% in Q1. July and August monthly readings were mostly stronger too and although indicators of housing activity have been mixed-strength, the leading indicators of housing took a noticeably stronger turn. The August National Association of Homebuilders’ index lifted to 55.0, the best reading since January, while July pending home sales rose by 3.3%, a sign of more home sales in the pipeline. The most impressive sign of strength in the US economy remains employment growth. Non-farm payrolls rose by 209,000 in July marking the sixth consecutive month of 200,000+ gains, the strongest run since 1997. Importantly, the Fed continued to indicate that there was still plenty of room for further growth in payrolls and no need to start normalizing interest rates in the near-term. China’s economic readings in August, in contrast, mostly disappointed, especially the flash reading of the HSBC-Markit manufacturing PMI down to 50.3 in August, barely in expansionary territory. In Europe, economic readings were also disappointingly soft for the most part. Q2 GDP growth came in at only 0.1% quarter-on-quarter (qoq) with annual inflation still languishing at only 0.4% y-o-y in August. The ECB confirmed that more policy easing may be needed. In Australia, economic readings are pointing to weaker GDP growth in Q2 than in Q1. The unemployment rate unexpectedly lifted to 6.4% in July, a 12-year high point and up from 6.0% in June. In contrast to the weak labour market report, consumer and business sentiment both improved in August. The RBA edged lower its forecasts of annual economic growth and annual inflation in its quarterly Monetary Policy Statement; a sign that it could keep the cash rate low for longer.

Looking ahead, economic growth still looks set to improve through the second half of 2014 in the US, but growth in China and Europe look like needing assistance from easier policy settings which will probably be fortcoming. In Australia, the headwind to growth from the Federal Budget announced in May together with signs that annual inflation should edge lower from its relatively elevated reading in Q2 imply that the RBA is very firmly on monetary policy hold. Low interest rates should help to foster greater household spending, but the precise timing of the improvement is tricky. It may be some time before the RBA feels confident enough to start reversing very easy monetary policy. We still expect the next rate move, when it comes, to be a hike, but it looks at this stage that the move could be more than a year away late in 2015.