Mutual Daily Mutterings
Quote of the day…
“I’m sick of following my dreams. I’m just going to ask them where they’re goin’, and hook up with them later” – Mitch Hedberg
“The Little Fed That Could…”
“Sing if for us Kenny…”Highway To The Danger Zone…”
Overview…”Still too hot…”
- Moves: risk off… stocks ↓, bond yields ↑, curve ↓, credit spreads ↓, volatility ↑ and oil ↓….
- It was one of those good data is bad news for markets sessions last night. US labour and manufacturing data hinted at still robust economic activity, which markets interpreted as meaning the Fed will need to go hard or go home on policy tightening in order to cool inflation. This in turn presents a threat to longer term growth, which underpinned rising yields and a modest bear flattening of the curve. It was a similar story in Europe, with a jump in consumer prices underpinning a growing call for the ECB to step up and lift rates. Stocks retreated, while in credit we saw modest widening of CDS and cash spreads modestly mixed.
- Markets also took to heart some dark warnings from JPM CEO, Jamie Dimon. He warned investors…“right now it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle it. That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.” Cheerful chap, isn’t he? The bank is consequently putting up the storm shutters and being conservative with its balance sheet. They’re not on their Pat Malone here, banks globally and locally are being more cautious. Several of the major banks locally announced new debt-to-income caps in their underwriting policies in a bid to attract better quality loans.
- Talking heads…”we now find ourselves in a little bit more no man’s land. We are in this kind of a bear market environment yet we haven’t seen recession manifest in a macro data yet. So, we still think there is a path for the US economy to have a soft rather than a hard landing.” And, “Big picture, the market has priced in an economic slowdown but not a recession. The timing and magnitude of any Fed pivot is the biggest factor in determining whether the rally can continue deep into the second half of the year. Another hurdle for the market is that earnings estimates appear vulnerable to further downward revisions.”
- “China ordered its policy banks to set up an 800 billion yuan ($120 billion) line of credit for infrastructure projects as it leans on construction to prop up its economy. The funding, announced after a State Council meeting chaired by Li Keqiang, comes after a recent push by Beijing for faster implementation of stimulus in response to data showing activity contracting and joblessness rising.” (Bloomberg)
The Long Story….
- Offshore Stocks – a sea of modest reds across the screens this morning. It was a warm red, rather than a bloody crimson with investors a little more cautious as data continues to point to inflation overheating. Volumes were elevated at 2x daily averages – likely beginning of month adjustments. Within the S&P 500 four out of every five stocks retreated and only one sector gained ground, Energy (+1.8%). Worst of the worse was Financials (-1.7%), likely impacted by Jamie Dimon’s doomsday prediction and JPM’s conservative approach to balance sheet usage. Healthcare (-1.4%) and Staples (-1.3%) completed the podium of losers. The recent weakness in US stocks, which is reflective of rising inflation concerns and monetary policy tightening, is also evidenced in declining margin debt usage, which is also weighing on market performance – charts below:
Source: FINRA, Bloomberg, Mutual Limited
Source: FINRA, Bloomberg, Mutual Limited
- Local Stocks – a modest advance for the ASX 200 yesterday, mainly on the back of better-than-expected GDP data, although it was hardly a convincing rally with only a smidge over half of stocks advancing. The main driver of gains in the day was Financials (+1.2%), reversing some of the prior day’s losses. Without Financials on the day, the ASX 200 would have been underwater. Telcos (+1.9%) and Industrials (+1.2%) played their part. At the kiddie table at the back of the room we had Utilities (-5.3%), Tech (-1.5%) and REITS (-0.5%), although it was Materials (-0.4%) that exerted most downward pressure on the broader index. The ASX 200 is back above its 50D moving average, but seemingly stuck in a 6850 – 7500 trading range, and currently slap-bang in the middle of said range. Accordingly, where to from here is anyone’s guess. The RBA meeting next week is the next likely catalyst to potentially, maybe, perhaps force the index outside this range, or at the least to its outer bounds. Futures are down -0.8%.
- ASX 200 relative strength indicators…
- Offshore credit – an active session in US IG markets with just under US$15bn priced from nine borrowers – mainly banks. Issuers offered just shy of 10bps in concessions (vs 11 bps YTD average driven by final order books that were 2.7x oversubscribed on average (a smidge below YTD averages, 2.8x); demand dropped 19% from the peak on average. CDS spread drifted a touch wider, while cash spreads were modestly mixed.
- Offshore credit indices, weighted average spreads compared to the A$ FRN index…
Source: Bloomberg, Mutual Limited
- Local Credit – spreads finally look to be consolidating, dare I say it, even performing. A few weeks ago I nailed my view to the mast that spreads had peaked around +95 – 100 bps in major bank senior, 5-year. Hindsight suggests I was 5 bps off the mark, which is an acceptable level in my opinion. Despite my assertions here, traders are quoting most lines at unchanged on the day and noting that it was generally a quiet day flow wise. Traders…”closing the curve unchanged with flows light. Some buying from domestic real money in the sub 2year point which was pleasing to see, but given the inventory overhang in the street this buying was met with some aggressive pricing. We retain the view that spreads are a hold here and intend to retain relatively light positioning across at the longer end of the FRN curve, particularly given primary levels being achieved offshore (recent 5yr NAB USD priced ~bbsw+142 ish equivalent, trading 6-7 tighter post break).”
- In the tier 2 space, traders referred to it as “a day of consolidation” with no meaningful flows of note. Prevailing spreads are attractive with the CBA Apr-27 at +227 bps (vs +190 bps at issuance), while the 2026 calls are at +211 – 220 bps and the 20205 calls at +201 – 205 bps. All unchanged on the day. We’re constructive on spreads in general here, but also recognise that risk sentiment remains somewhat fragile, which is causing some hesitation amongst investors. Liquidity conditions remain poor also, which is an impediment to near term performance. Notwithstanding, the recent MacBank tier 2 deal continues to perform well in secondary, especially the fixed line, which we saw priced in the chats around +258 bps yesterday, -12 bps inside where it issued. The floating rate line has performed also, but with less break neck speed, +268 bps.
- Strategically credit spreads and yields on credit products are attractive. Unfortunately there are some tactical headwinds or uncertainties that are preventing that potential performance we all know is there, waiting for that opportunity to fly….to quote Marky Mark aka Mark Wahlberg…”I’m a peacock Captain! You gotta let me fly!” We expect the technical backdrop to stabilise, although we’re looking at ANZ as a potential fly in the ointment as they’ve been absent from A$ funding markets for 18 months and are well behind normal issuance run rates. Having said that, they haven’t exactly been setting the world on fire with their lending volumes. Either way, if we can have some clean air on the issuance front, spreads should begin to perform as confidence returns.
- Bonds & Rates – a better than expected GDP print gave bond yields a tap on the backside, given them free-reign to go a little higher, +5 – 7 bps on the day. While the economy isn’t red-hot, it is showing good signs of resilience, which will likely give the RBA confidence to hike by +40 bps at next week’s policy meeting, which is a popular view amongst the major bank rate’s strategists. Looking through street estimates, while a hike next week is almost universally accepted as a given – although 2 out or 32 say no hike – the actual weight of opinion is for a +25 bp rate hike (19/32). The +40 bp rate hike is supported by 9/32. I’m torn to be honest, I have empathy for both views, but with a slight bias to a +40 bp move.
- Last night’s price action in US provides a potential preview for Friday’s payroll numbers, and it could be a horror movie. ISM manufacturing and JOLTS are tadpoles in a market sense compared to the big fish, US non-farm payrolls. Notwithstanding, last night’s data saw the 2s10s yield curve fall as much as -16 bps and the 5s10s curve inverted. The relative solid economic data was a red rag to the traders, who saw it as a signal the Fed would need to put their big-person pants on and be more aggressive. In turn, the ultimately damage done to the economy from said aggressive tightening would be more significant. A contributing factor to market reaction last night is lower than usual liquidity with UK markets shut for a couple of days celebrating ol’Mag’s birthday.
- A$ Fixed Income Markets…
- Local Macro – GDP data out yesterday, which surprised to the upside, up +0.8% QoQ (vs +0.7% cons.) and +3.3% YoY (vs +3.0% cons.), evidencing some resilience in the old battler. Some commentary on the details from WBC…“a key driver of growth was household consumption which increased by 1.5% including a 4.3% lift in discretionary spending as the economy reopened despite disruptions from the Omicron variant and floods. Highlights were: recreation and culture (+4.8%); hotels, cafes, and restaurants (+5.3%); and transport services (+60%). Vehicle purchases also increased by 13% with some easing of supply constraints. Discretionary spending now exceeds the pre-pandemic level for the first time. Essential spending declined by 0.2% due to falls in food (more eating out) and health as Omicron affected visits to doctors and elective surgery. With household gross disposable income increasing by only 0.6% this solid lift in household spending was partly funded by a further fall in the household savings rate from 13.4% to a still elevated 11.4%. We expect that savings rate to gradually fall back to the equilibrium level of around 6% over the remainder of the year supporting above trend growth in household spending.”
- House price data out yesterday also, which highlighted that as many have predicted, prices have begun to come off…”there was a significant shift in price momentum in Sydney and Melbourne in May. Sydney dwelling prices fell by 1.0% in the month, compared to 0.2% falls the prior two months. It was the fourth consecutive monthly fall. House prices ( 1.1%/mth) fell faster than unit prices ( 0.7%) in Sydney with the top quartile of properties by value experiencing the largest falls at 1.5%/mth compared to the lowest quartile at 0.2%.” Shouldn’t be a surprise, and we’ll see more of this over the year with some respected strategists predicting peak to trough falls of ~15%. Not too alarming given prices are up +30% over the past two years. Although, that’s small solace for someone who purchased in the past 6 – 12 months. ‘Crashing’ house prices are a threat to financial stability, an impactful event should it happen, but this needs to be weighed against the likelihood of it happening. Some market pundits and the popular press (clickbait) have been calling a crash in Aussie housing since I was in nappies, over 45 plus years. To date, the worst we’ve had is down 5% – 10% during times like the GFC.
- Offshore Macro – “After a series of weaker regional PMI reports, the US ISM print surprised to the upside. The headline number was boosted by new orders (which reached a three-month high), production and inventories (which is at a six month high). While the ISM report suggests that manufacturing is holding up well, the recent declines in China Caixin PMIs ( ISM tends to lag by three months) point to some weakening in US manufacturing activity in the coming months.” (NAB)
Source: Bloomberg, Mutual Limited
Click here find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907