Cash.
The Reserve Bank of Australia (RBA) raised the cash rate to 6.0% during the month. The UBS Bank Bill Index returned 0.5% for the month. 

During the month the RBA raised its inflation forecast (from: 2.75%) to 3% for the next three years, at the top of the target range (2-3%). 

During the month Treasurer, Peter Costello, named Deputy Governor, Glen Stevens, to replace the current Governor, Ian MacFarlane, who is due to retire in September after 10 years as head of the RBA. Glen Stevens will begin a seven year term as Governor on September 18. 

Australian bonds.
The UBSA Composite Bond (All Maturities) Index returned 1.1%, its best return since April 2005. Yields fell across most maturities as inflation fears moderated. The Australian bond market tracked international markets as they moved higher. Weaker economic data from the United States dampened the prospect of the global economy overheating. 

Australian bond yields did not fall as much as their US or Japanese peers following the release of strong economic data during the month. Employment statistics, released during the month for July, surged with the Australian economy adding 50,700 jobs (market consensus: 5,000 with the range: -25,000 to +30,000). The unemployment rate is at the lowest level since September 1976. This was the sixth consecutive monthly rise in employment, with job growth over the last three months the strongest since January 2003. Retail sales rose at a rate double what was expected. Record job and salary growth, accompanied by tax cuts continued to underpin the retail sector. 

The 3-year and 10-year bond yields ended the month at 5.8% (-17bps) and 5.7% (-17bps) respectively. 

At the shorter end of the yield curve; 3-month bonds remained unchanged (+6.2%) reflecting that the market is still pricing the probability of another rate rise before the end of the year.

International Bonds.
The Lehman Global Aggregate Index (hedged, A$) returned 1.6%, its best month since August 2004, following a strong month in July (+1.2%). Yields retreated across all major markets as inflation fears moderated. 

The US Federal Reserve left rates unchanged at 5.25% ending a two-year run of successive rate rises. Softer housing data and a more subdued economic outlook led to a rally in bond prices as investors saw an end to successive rate rises. US Consumer Confidence fell more than forecast to a nine month low and the US economy added fewer jobs than expected in July. This led US 3-year and 10-year bond yields to end the month at 4.7% (-21bps) and 4.7% (-25bps) respectively. 

In Europe, the European Central Bank (ECB) and the Bank of England raised rates by 25bps to 3.0% and 4.75% respectively. German unemployment fell to the lowest level in two years and European manufacturing expanded for the 13th successive month. While the European economy grew by 0.9% in the second quarter, the ECB forecast a more moderate outlook as higher taxes in Germany and slower consumer spending were likely to weigh on the economy. European 3-year and 10-year bond yields ended the month at 3.5% (-4bps) and 3.8% (-16bps) respectively. 

In Japan, while consumer prices rose less than expected, the manufacturing sector performed strongly with producer prices rising at the fastest pace in 25 years and Japan’s machinery orders rising more than expected. The performance of the manufacturing sector supported the case for further near-term rate increases. However, Japanese 3-year and 10-year bond yields ended the month at 0.7% (-24bps) and 1.6% (-30bps) respectively.

Australian Listed Property Securities.
The S&P/ASX 300 Property Trust Accumulation Index returned 3.8%, making it the best performing asset class for the month.  

The best performing sectors were Industrial (+6.0%) and Commercial Property (+3.8%). The worst performing sectors were Retail (+1.3%) and International (+1.2%).  

The best performing stock was Grand Hotel Group (+21.6%) following a takeover offer from Malaysian property conglomerate Mulpha. Babcock & Brown Japan Trust (+10.6%) also performed strongly on improved fundamentals in the Japanese real estate market. During the month Babcock & Brown Japan Trust completed an institutional placement to partly fund the acquisition of five properties during the month.  

The earnings season was roughly in line with consensus earnings. The most significant change to last year's earning season is that companies are rarely giving future earnings guidance.

International Listed Property Securities.
The UBS Global Investors Hedged Index (+3.0%) performed strongly over the month.  

The best performing markets were Singapore (+5.4%), Japan (+4.4%) and North America (+3.9%). The worst performing markets were the UK (-0.4%) and Continental Europe (+1.0%) following rate rises by the Bank of England and the ECB.

Australian Shares.
The S&P/ASX 300 Accumulation Index returned 3.3% for the month, its best return since January 2006.  

The best performing sectors were Consumer Staples (+10.6%), Utilities (+5.5%) and Financials ex Property Trusts (+5.1%). The worst performing sectors were Energy (-3.5%), as oil prices moderated, and Healthcare (-0.2%).  

The profit reporting season delivered strong results, with profit growth in aggregate up 30%. The best performing companies were Rio Tinto (profit: +75%), BHP Billiton (profit: +77%), Babcock & Brown (profit: +55%), Lend Lease (profit: +67%), and Wesfarmers (profit: +61%).  

Profit growth, while impressive, failed to exceed market expectations as companies adjusted to a market environment characterised by higher input costs and interest rates. However, while failing to exceed market expectations the profits are still high and continue to support the share market. While the share market has doubled over the last three years the market forward price-to-earnings ratio is at its lowest level since 1996, and at a 15% discount to its long-term average, but at a time of peak cycle earnings. 

In addition to profits, M&A activity continued to underpin the performance of the share market. ABC Learning, after purchasing Hutchisons Child Care Service ($70m) last month, agreed to buy Texas based Children’s Courtyard ($66m) to continue its US expansion. ABC Learning has spent $800m over the last two years buying rival companies in Australia and the US. Coles Myer shares rallied on a takeover bid from a consortium of private equity investors. Fosters also rallied after reports that international brewers InBev and SABMiller were considering takeover bids.

International Shares.
The MSCI World Ex Australia Index (net div) in A$ hedged returned 2.7% in August, performing inline with the unhedged return (+2.9%). During the month large-capitalisation stocks underperformed international small companies (+3.2%).  

The best performing sectors were Information Technology (+7.3%), Utilities (+3.4%) and Consumer Staples (+3.3%). The worst performing sectors were Energy (-3.9%) and Telecommunications (+1.4%). 

The US (S&P 500: +2.1%) was among the weaker performing markets despite strong profit results. During the month impressive profits were recorded by P&G (profit: +36%) on sales at Gillette, Starbucks (profit: +16%), and Sears (profit: +83%).  

Europe (MSCI Europe: +2.1%) registered strong performance. The best performing markets were Germany (DAX: +3.1%) and France (CAC: +3.1%). The UK share market (-0.4%) recorded weaker performance. European company profits continued to underpin the return of the market with the standout performers being HSBC (profit: +15%), Ryanair (profit: +66%), British Airways (profit: +72%), Royal Bank of Scotland (profit: +18%), and UBS (profit: +47%).  

Japan (Nikkei 225: +4.4%) was the best performing developed market as the weaker Yen boosted profits for export-orientated companies such as Yamaha (profit: +19%) and Toyota (profit: +24%). 

Global Emerging Markets
The MSCI EM in $A (with div reinvested) Index returned 2.9%. The best performing regions were Emerging Asia and EMEA (Emerging Europe, Middle East and Africa).