Mutual Daily Mutterings
Quote of the day…
“Please Note: We’ve moved a few books around. Travel is now in the Fantasy section, SciFi in Current Affairs and Epidemiology is in Self Help.” – sign out the front of a book store somewhere
Chart du jour… cash rate vs CPI
Overview…”a moment of silence for the end of A$ QE…”
- And, I’m back. I hope you all had good breaks. Unfortunately, my break was marred by a week of COVID isolation as a ‘former’ friend failed to disclose that they had been feeling poorly with ‘flu like symptoms’…so obtuse! They had COVID and shared the love. Fortunately, it proved a very mild dose – I’ve had worse colds – and the rest of the household dodged it.
- To the markets…and she was a gentle mistress on my first day back from leave, little action in offshore stocks, drifting between modest gains and losses, which followed on from a modest up day locally yesterday. Stocks in the US did slip initially on slightly weaker ISM data. In the end, reasonable gains recorded across the main indices. Little action in treasuries overnight, creeping a smidge higher, and a modest bear steepener. Generally taking a breather after yields rose +30 – 40 bps through January.
- Investors continue to digest data (US ISM & PMI. EU PMI’s) and additional Fed rate hike comments. The point of debate mainly around whether Powell with use both barrels at the March meeting (+50 bps), or just the one (+25 bps), and then how many hikes this year. Phillie Fed President, Patrick Harker, voiced his support for four +25 bps Fed rate hikes this calendar year, kicking off next month. In a bid perhaps to temper some of the more hawkish price action of late, he won’t, throw his support behind a +50 bps move unless inflation surges, which is not a consensus expectation. Atlanta Fed President, Raphael Bostic also flagged his flexibility on the pace of hikes…. “I plan to be observant and adaptable.“
- Still on monetary policy, but closer to home, yesterday’s RBA statement was relatively benign, in that there were no real surprises. The only point of excitement being the announced cessation of bond purchasing, which was expected, although the timing was a touch sooner than consensus. The board continued with its ‘patient’ rhetoric around the timing and path of rate hikes. Markets aren’t buying this patience guff, however, with 3 – 4 rate hikes priced in for 2022. Street strategists are of the view the RBA will be forced (by data) to adjust their thinking and bring forward the commencement of the next rate hiking cycle. Ahead, RBA Guvna Lowe speaks at the National Press Club, with his speech titled “The Year Ahead”
The Long Story….
- Offshore Stocks – not a lot to discuss on daily price activity, all tightly contained with winners and losers evenly balanced….is what I wrote an hour before markets closed. By day’s end, winners outweighed losers by 69% to 31%. US Q4’21 reporting season is underway, with just over a third of the S&P 500 reported. As expected, given the pandemic hit Q4’20 period, growth data appears robust with aggregate sales up +18.0% on the pcp, and aggregate earnings up +34.1%. No sector has been left behind, all rebounding strongly. Gains have been broad also with 84% of companies reporting earnings growth, while 86% have reported sales growth. Obviously, this pace of growth is unsustainable and we’ll see moderating growth in coming quarters, with Q1’22 growth expected to be in the high-single digit range. Aggregate sales and earnings have also beaten consensus expectations, +3.2% and +5.2% respectively. I nicked this snippet from Bloomberg…”a month into 2022, Ed Yardeni has become the first well-known Wall Street strategist to cut his outlook on the market after the January rout. A lack of clarity from the Federal Reserve about the pace of rate hikes is behind the move, says the president of Yardeni Research, who was once an economist at the Fed. He cut his 2022 year-end forecast for the S&P 500 to 4,800 from 5,200 (vs a 4,515 close last night, implying modest gains of +6.3% for the year). The new target implies the 500-member index will finish the year unchanged from where it peaked in early January.”
- Local Stocks – modest gains yesterday in the ASX 200, led by Financials (+1.2%), which accounted for around two-thirds of the index’s gains. Materials (-1.2%) were a drag, the only drag in fact. BHP (-3.1%) and RIO (-2.4%) were the primary culprits. The index is down -7.7% from YTD peaks (4th January) with investor sentiment scarred by the near and present danger of rising interest rates as central banks look to contain inflation and normalise their monetary settings. This fall has seen the index plunge through its 50D, 100D and 200D moving averages, with each measure converging (all between 7,321 – 7,343). Momentum indicators (RSI) punched through 30 during last week’s rout, but have increased back to 36 (below), although the bounce is hardly convincing. The ASX 200 has also failed to catch the ‘buy the dip bid’ that seems evident in offshore markets over the past week. The S&P 500, DOW and NASDAQ are +3.1% – 5.7% higher vs this time last week, while the local index is up only +0.6%. Forward PE’s are at 16.5x, within striking distance of pre-pandemic averages (16.1x, 2014 – 2019), but with rate hikes looming (if markets are to be believed), there is risk stocks will ‘cheapen’ further.
- Local Credit – resilience is the word of the day in local credit markets. Despite offshore spreads being +9 – 16bps wider YTD, A$ spreads are only +1 bps wider (AusBond Index). I doubt yesterday’s RBA statement will have any meaningful impact on spreads, and we saw no movement of note on the day. In the major bank space, senior 5Y (CBA Jan-27) spreads were unchanged at +68 bps (priced at +70 bps). The rest of the curve also closed unchanged, with 4Y at +58 bps, 3Y at +44bps, 2Y at +31 bps, and 1Y at +148 bps. In the tier 2 space, also unchanged on the day, with traders noting “a reprieve from the selling seen in recent days, though this may be temporary. The street doesn’t have a great deal of appetite to absorb further sell flow here and with the Asian buy base out we think spreads are likely to loiter at current levels.” The 2026 major bank tier 2 cohort is pricing around +139 – 143 bps, which is around +5 – 6 bps wider YTD. Tier 2 paper is more susceptible to broader risk off sentiment. Elsewhere along the curve, 2025 callable paper is +133 – 136 bps, while the 2024’s are at +97.5 bps.
- Bonds & Rates – my last daily was published on 16 December. ACGB 3-year yields were 0.97%, some 36 bps back from yesterday’s close. The average yield over the holiday season was 1.15%, peaking at 1.47% as markets priced in a more hawkish Fed and expectations the RBA will be pressured to hike rates sooner than they currently forecast. Yesterday’s RBA statement did little to alter that view (more below). Further out the curve, ACGB 10-year yields were 1.57% back in mid-December, closing at 1.91% yesterday. The holiday season average was 1.80%, peaking at 2.02%. ACGB 10-years yields are +10 bps to US treasuries, a smidge wide of the 12-month average (8.6 bps) – 5-year average being -9 bps inside. Year-end market forecast for ACGB 10-year yields is 2.25%, some +34 bps from current levels. Forecast cash rate by year end is 0.30%, so one hike expected, although market pricing has cash rates north of 1.0% by year end, so four hikes.
- Offshore Macro – If there is a slowdown gripping the U.S. economy, it doesn’t appear to be an abrupt halt. The ISM report came in pretty much bang on economists’ forecasts at 57.6, though both prices paid (76.1 vs 67 forecast) and employment (54.5 vs 53 forecast) were higher than expected. New orders were pretty much in line at 57.9. In truth, the ISM whisper number was probably quite a bit lower given some recent other surveys. Separately, the JOLTS survey showed that the appetite for labour remains ravenous, with job openings rising to 10.925 million, well above the expected 10.3 million and not far from the all-time high of 11.098 million set in July. The quit rate slipped slightly to 3.2% in December, but remains extremely elevated relative to all pre-2021 history. It’s hard to know if omicron impacted that or not. Regardless, there is no sign of the sort of abrupt deceleration that might bring about a friendlier Fed, so it is small wonder to see financial assets take a hit after these releases, particularly given the late-January bounce (Bloomberg)
- Local Macro – the main focus yesterday was the RBA’s February meeting, which was benign, little change to previous narratives. The board is happy to remain ‘patient’ on rates, with official rates left unchanged, although they did formally announce cessation of their bond buying program – two weeks sooner than expected, but not a material impact. The RBA’s balance sheet has tripled through the pandemic to $640bn. The board will consider the issue of reinvestment of the proceeds of future bond maturities at its May meeting. Fundamentally, the key focus remains on the path of inflation and wages growth, while the pandemic and the duration of supply-chain disruptions remain core uncertainties. Since January month end, pricing for formal rate hikes in coming months has increased, with markets pricing the first hike by May / June. Major bank strategists are generally calling rate hikes to commence around August or September this year, up to ~0.75% by November, then through to ~2.0% by the end of 2023.
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Scott Rundell, Chief Investment Officer
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