Mutual Daily Mutterings
Quote of the day…
“There is no vaccine against stupidity”… Albert Einstein
Chart du jour… US inflation vs Crude…
- Stocks and commodities were moderately up across the board overnight. Credit remains reasonably constructive, although EU primary metrics were sluggish. The S&P 500 hit new all-time highs as it notched up its sixth-straight session of gains. The recent risk-flutter on the back of the Fed’s hawkish tilt seems a distant memory as investors eye the benefits of reflation, while any concerns about lingering ‘bad’ inflation are soooo last week darling! Tonight’s US payrolls data looms as a potential calming breeze to knock some froth off frothy valuations. Energy stocks rose on firmer oil prices as OPEC talks broke down, leaving in doubt expected production increases. Commodity prices elsewhere also climbed. Despite the apparent buoyance across risk assets, bond investors aren’t buying the hype with treasury yields largely unchanged on the session, and break-evens are below their mid-May peak
- US ISM data out last night, manufacturing expanded at a solid clip, albeit at a slightly slower pace in June vs May. Nevertheless, providing evidence that the US economy grew for a 13th consecutive month. On the inflation front, the ISM Prices Index reached 92.1% (vs 88.0% consensus), up 410 bps from the prior month’s reading and the highest print since mid-1979. Markets hardly blinked at the data…blind optimism to the fore.
- Talking heads…”with economic and earnings growth prospects robust, policy accommodative, and valuations still appealing relative to bonds, we believe the current environment is supportive of further equity gains,”…hmm, we’ll see.
- While markets shrugged off the weaker than expected jobless claims data last night, it’s unlikely they’ll be as forgiving if tonight’s payrolls miss to the downside, especially given likely thin volumes ahead of the holiday weekend (4th of July). There is decent inverse correlation between jobless claims and payrolls, which suggests consensus at +700K jobs added is at risk of being disappointed – and some forecasters are punting on an even more optimistic +800K print. So, it seems the odds may be stacked towards a downside miss, which could bruise risk into the weekend.
- Offshore Stocks – a broad based rally in offshore markets overnight as investors chose to view data through rose coloured lenses. While by no means negative data, all exhibited evidence of improving economic conditions, labour market improvement and growth in manufacturing, but they also point to rising inflationary pressures. Across the S&P 500 four stocks rose for every one to fall and only one sector, Staples (-0.3%), failed to fire. And, there was an observable rotation from growth to value stocks. At the top of the pile, Energy (+1.7%) dominated on rising oil prices, in turn boosted by failed OPEC talks. Utilities (+1.1%) and Healthcare (+0.9%) rounded out the podium. Volumes were around average, although tonight they’ll likely be subdued as traders leave the office early to beat the holiday weekend traffic. Relative strength indicators are pushing toward ‘overbought’ territory again, 67.9, and e-mini’s are up.
- Local stocks – a moderately tough day on the tools to start the new financial year with the ASX 200 dropping -0.7%. Just over two-thirds of stocks fell on the day. Only one sector was able to get out the gate, Materials (+0.1%), and only just. Discretionary (-1.3%), Staples (-1.2%), and Industrials (-1.0%) optically were the main culprits, at least directionally, although Financials (-0.9%) did the most damage to the broader index – accounting for just under half of the ASX 200 losses. Futures are pointing to modestly positive gains on the open.
- Offshore Credit – on the eve of the July 4th weekend, and the unofficial start to the summer vacation season in the US, very quiet, which was to be expected. Secondary spreads did little, and CDS spreads the same. EU IG markets active, just. A total of €4.3bn printed across a handful of deals, but cover was relatively weak by recent averages, just 1.4x (vs 2.5x average). Spread compression also very modest at -6bps (vs 15 – 20 bps average). I wouldn’t read too much into this just yet, just a bad day at the crease, and Europe is heading into it’s own annual holiday lull.
- Local Credit – paraphrasing the traders here…yesterday saw a welcomed bounce in AU credit following the malaise that has characterised the prior week. Spreads tighter in domestic financials and tier 2 paper on the back of an uptick in flow and inter-broker activity, corporates were also constructive with clients looking to add risk and some new well received supply. Volumes and sentiment benefited from the start of the new month / quarter, with the street looking to re-stock. Traders also noted buying activity in the major bank curve, which they speculate was driven by last minute TFF drawdowns being put to work. Major bank senior tightened a basis point in three-year paper, to +23bps, while the Jan-25’s were unchanged at +32 bps. Tier 2 also caught a bid, a basis point tighter across the board for the majors. The 2026 callable cohort is pricing around +125 bps – 127 bps (-1 bps), the 2025 cohort at +117 bps – 121 bps (-1 bps), while the 2024 cohort is unchanged at +100 bps. Given these levels, the 2025 cohort offers some value at face value, +17 – 21 bps for the year (or so) longer duration (to call).
- Bonds & Rates – not a lot to say, very little action in bonds yesterday in local markets and, well not much overnight either.
- Macro – US payrolls tonight…pilfering from the old firm again (CBA)…”we are forecasting a solid 700K increase in employment and for the unemployment rate to fall to 5.7%. Our forecasts are slightly less optimistic than consensus (+720K and 5.6%)”. As per above comments, there is reasonable risk of a miss to the downside for a third consecutive month. CBA again …”three weaker than expected payroll’s releases can cause market participants to reconsider the strength of the US economic recovery. We note the ISM manufacturing employment sub component slipped back below 50 pts in June”. Today, locally… Australian housing lending data: which is expected to reflect modest growth in total housing lending excluding refinancing, +1.8% MoM (vs +3.7% MoM prior), with investor lending +6.0% MoM (vs +2.1% MoM prior), and owner-occupied up +4.5% MoM (+4.3% MoM).
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907