Risk assets were stronger mostly through October assisted by a temporary resolution of the US budget/ government debt ceiling standoff, a strong start to the US Q3 company earnings reporting season and on the other side of the world, stronger economic readings in China. Increasing market recognition that the US Federal Reserve was likely to delay tapering its $US85 billion asset buying program until 2014 also lifted sentiment towards risk assets. Major sharemarkets mostly rose in October with the US S&P 500 up by 4.5%, the European Eurostoxx 50 up by 6.0% and the British FTSE up by 4.2%. Japan’s Nikkei was an exception, falling by 0.9% over the month. The Australian sharemarket rose over the month with the ASX 200 up by 4.0% and making a new 5-year high and with the accumulation index, including dividend payments, pushing further into record high territory.

Credit markets were softer early in October weighed down by the US political impasse approaching the government debt ceiling. As it became clearer that a resolution would be found credit rallied strongly alongside sharemarkets. Longer term interest rates were comparatively stable over the month with US 10 year and 30 year treasury yields finishing October at respectively 2.60% and 3.71% almost identical to where they ended in September. Similarly, the Australian 10 year bond yield was little changed over the month finishing at 4.02% from 4.04% at the end of September. Early in the month, the RBA left its cash rate unchanged at 2.50% and in the accompanying statement made it clear that no change to the cash rate was likely over the next few months as they assess incoming data.

On the economic data front, US indicators remained mixed in October. Leading indicators of housing activity and consumer spending took a softer turn, while manufacturing PMI readings were mostly stronger. US employment data took a softer turn with September payrolls up by 148,000 but well short of the 250,000+ style readings needed to show that the US is in a sustainable economic recovery. In contrast, economic readings in China and Europe were mostly stronger in October. Australian economic readings were mixed although retail sales in August showed their best monthly gain in six months and the unemployment rate unexpectedly fell in September to 5.6% from 5.8% in August. Q3 inflation was also higher than expected with the headline CPI lifting by 1.2% in the quarter, although the 2.2% y-o-y annual inflation remains comfortably inside the RBA’s 2-3% inflation target band.

Looking ahead, slowly improving global economic growth combined with little pressure on the developed world’s major central banks to reduce very accommodative monetary policy settings implies a still favourable setting for risk assets in our view. In Australia, domestic spending outside the mining sector appears to be on the cusp of an improvement, already evident in housing activity. It is unlikely in our view that the RBA will lower the 2.50% cash rate any further in this cycle. More likely the market will start to focus on when the next monetary policy tightening cycle will start. At this stage, we are penciling in the first 25bp cash rate hike for August 2014.