The Australian market remained flat during the month with the ASX 200 reporting 0.00% and International markets as represented by the MSCI net declined -1.24% in Australian Dollar terms.

In the US, the Fed’s comments around inflation were a bit more dovish and its indication that it will begin allowing its balance sheet to rundown “relatively soon” left a bit of wiggle room as to timing. Our assessment is that with continuing solid US economic data the Fed is on track to announce the start of allowing its balance sheet to decline in September and will then hike rates again in December. A bout of uncertainty about whether Congress will raise the debt ceiling and continuing low inflation could delay this, but strong economic data is consistent with gradual Fed tightening. 
 
And US data is good, with the past week seeing a rise in the Markit manufacturing conditions index, higher consumer confidence, continuing gains in home prices, a moderate rising trend in capital goods orders, a smaller goods trade deficit, ultra-low jobless claims and a bounce back in June quarter GDP growth to a 2.6% pace. Inflationary pressures remain soft though with another soft reading on employment costs. 
 
US June quarter earnings results remain strong. Of the 288 S&P 500 companies to have reported so far 78% have beaten earnings expectations and 73% have beaten on revenue. Earnings could end up coming in around 12% yoy.
 
Eurozone business conditions PMIs remain strong and economic confidence is at a ten-year high.
 
Japan’s manufacturing conditions PMI fell a bit in July but remains solid, small business confidence rose, employment data was strong and household spending was much stronger than expected but core inflation remains stuck at zero.

While it didn’t attract much attention, the IMF held stable its global growth forecasts for 2017 at 3.5% and 2018 at 3.6% following its latest review. This confirms a break with the last four years where forecasts were continuously revised down. The conclusion that can be drawn from all of the above is that we are starting to see a synchronisation of world growth for the first time since the GFC.

Australian inflation remained low in the June quarter with both headline and underlying measures running below the RBA's 2-3% target. While government related prices in areas like utilities, health and education are seeing strong increases, private sector pricing power remains very weak. With growth running below trend, significant spare labour market capacity and now a rising A$ bearing down on import prices it’s likely that underlying inflation will remain below target for longer. So we remain of the view that the cash rate will be on hold for a lengthy period - at least out to late next year. In this regard a speech by RBA Governor Lowe added to the Deputy Governor a week ago in pushing back against expectations for an early rate hike in Australia. The Governor provided no sense of urgency to raise rates and reiterated that just because foreign central banks raise rates doesn't mean Australia will.

The August profit reporting season started this week with around 15 major companies reporting including Resmed, Rio, Suncorp and Downer. 2016-17 profits for the market as a whole are likely to have increased by around 18%, driven by a huge 135% gain in resources profits on the back of the rebound in commodity prices. Profit growth for the rest of the market is likely to be around 5.5% led by retailers, utilities, healthcare stocks and financials. As always in a low interest rate world dividends will be a key focus.

Shares remain vulnerable to a short term setback as we go through the weaker seasonal months out to October with risks around President Trump, North Korea, Chinese growth, central banks and the Australian economy all providing potential triggers. However, with valuations remaining okay – particularly outside of the US, global monetary conditions remaining easy & profits improving on the back of stronger global growth, we continue to see the broad 6-12 month trend in shares remaining up. 
Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.
 
The A$ has pushed higher on the back of US$ weakness, higher commodity prices and technical pressure. While further short term upside is possible, our view remains that the downtrend in the A$ from 2011 will ultimately resume as the interest rate differential in favour of Australia is likely to continue to narrow (as the Fed hikes rates and the RBA holds).