US forecasts more moderate growth

US Federal Reserve Chairman, Ben Bernanke, indicated that the "anticipated moderation in economic growth now seems to be under way". Economic data released during the month reinforced this picture with slower GDP growth (2.5% annualised, consensus: 3.0%) and weaker employment data (June: +121k, consensus: +175k).

Slow economic growth will place a ceiling on any further rate rises if inflation dissipates. This sent equity and bond markets higher.

International fixed interest markets have best month since August 2004 as market goes into ‘hibernation'

International fixed interest markets delivered an exceptional month as yields retreated on the weaker economic growth forecast, tempering inflation prospects. This led PIMCO's Bill Gross, manager of the world's largest bond fund, to say that "the bond bear market is beginning to go into hibernation, which is the same thing as saying the bear market is over".

Australian fixed interest and equity markets retreat in anticipation of further rate rises

The highest inflation figure since 1994 sent the Australian fixed interest market into a tailspin as yields advanced, in anticipation of further rate rises, and equity investors shifted towards more defensive asset classes.

Recent inflation is largely due to external factors such as high energy costs, strong global growth, and lower exchange rates than have been experienced over recent quarters. Inflation is not being driven by strength in the domestic economy; in fact, Australia's GDP growth rate has been weakening until recently, and remains below the global average.

Australian property continues its impressive performance

Investors rotated towards listed property trusts due to their perceived ‘quality' as an inflation hedge. For the three months to 31 July, Australian property outperformed the broader share market by 8.1%.