Mutual Daily Mutterings
Quote of the day…
“Light travels faster than sound. This is why some people appear bright until you hear them speak”…Alan Dundes
Chart du jour…Aust. GDP
“Bear Market Mirage…”
- Very modest moves in either direction across markets on mixed macro data. Stocks inched higher, with new records set for the S&P 500 and NASDAQ, again, while the DOW softened a touch. Mega-tech stocks were in demand as data suggests a slowdown in the labour market recovery in the US. European equities were a touch more buoyant, as investors wager the global economic rebound will persist even as central bankers contemplate scaling back stimulus – or so the narrative goes. Bond yields did very little, a basis point move here and there in either direction. Oil pared losses as stockpiles fell, but OPEC+ agreed to stick to their existing plan for gradual production hikes, which could pressure crude prices.
- Weaker than expected US labour data (ADP) dampened risk appetite, and while US ISM data indicated continued growth, the detail was mixed – “the headline and new orders surprised to the upside while the prices component was weaker than expected and the employment index declined” (NAB).
- Talking heads…”the private payrolls numbers have been all over the map during the pandemic, and often not the strongest indicator of how the rest of the jobs report will play out…and….with so much pressure on improvement in the labour-market front coming from the Fed, this could send a signal that jobs growth is stagnating. That’s likely a good thing for the markets though, as it means easy-money policy continues.”
- Noise around a potential pull-back in stocks is building, although there are plenty of pundits clinging on for further gains, I note this nugget “the unbelievable landscape for strong earnings and fiscal stimulus means stock can run higher and longer”…possible, maybe even probable, but I’m dubious. I flag Citigroup’s bearish view on the S&P 500, predicting 4000 by year end (-11.6% vs last close) and 4350 at June 2022 (-3.8% vs last close), where they cite stretched valuations and planned tax rises that will hurt corporate profits. Word!
- Short of a rogue asteroid creating an extinction event, I suspect today will be relatively dull in markets.
- Offshore Stocks – not much really done overnight, I suspect markets are looking for some further guidance on the macro backdrop. US Non-Farm Labour print later this week (Friday night) will likely be the next road-marker to test prevailing resilience. As for last night, the S&P 500 closed a hair’s width on the positive side of the ledger, +0.03% with uppers and downers equally weighted at the stock level. Six sectors gained ground, led by REITS (+1.7%), Utilities (+1.3%), and Telcos (+0.5%). The remaining five sectors closed in the red, with Energy (-1.5%) particularly red, followed by Financials (-0.6%) and Industrials (-0.4%).
- Local stocks – a soft open for the ASX 200, down -0.8% at its worst early, but as the day progressed US futures firmed and the local market went with them (right hand chart below). In the end, a modest down day, just -0.1%, and a shallow one at that with an equal number of stocks up as down. Energy (+1.3%) led from the front, followed by Financials (+0.9%) and Telcos (+0.8%). The downers on the day were Staples (-1.5%), Discretionary (-1.2%) and Materials (-0.8%). Futures are pointing to modest losses on the open, -0.2%.
- Offshore Credit – primary picked up again, but mainly with European markets more active than US markets. Spreads stable across cash and CDS.
- Local Credit – traders…”primary once again set the focus for secondary with the new Pacific National 10 year the standout performer. Away from this, flow was constructively two-way although we did see better buying in SSA’s as the sell-off in rates brought outright buyers to the fore”. No change to major bank senior curves, with the NAB Aug-26 at +39 bps and the Jan-25’s at +25.5 bps. A little friskier in tier 2 space, majors, with the spreads (to call) -1 – 2 bps tighter. Traders…”dealer inventory has settled at healthier levels and in the absence of primary, spreads feel as if they have the propensity to continue grinding tighter.” CBA’s Aug-26 call is quoted at +127 bps, while NAB’s Nov-26 is at +129 bps. The 2025 calls are around +116 – 119 bps and the 2024 calls are at +92.5 bps.
- Bonds & Rates – ACGB yields opened yesterday with a rocket up the backside, up +6 – 7 bps across the back half of the curve pretty quickly and then carried on with it once GDP data were released (details below). The current QE program (bond buying) is set to expire next week (Monday) with around $100bn of buying largely in the tin under the current program (QE2). The RBA meets next Tuesday, and we’ll be waiting to see if they proceed with their tapering plans – reducing buying from $5bn a week to $4bn a week. Still adding liquidity to the system, just at a slower pace. My gut feel is they won’t deviate from the prevailing plan on the basis there is an ‘agreement’ (for what it’s worth) between the federal and state governments to open up once vaccination rates hit 80%, allowing economic activity to normalise (potentially). Not a lot happening in US treasuries overnight, so minimal leads for local bonds. I note some commentary from JPMorgan, who state US 10-year treasuries have scope to rise to 1.90% in coming months (vs 1.29% last close), a level it hasn’t exceeded since January last year. They cited the aggressive rally that created extreme overbought conditions as one of the reasons for their predictions. In the words of Pepper Brooks – “it’s a bold strategy, Cotton. Let’s see if it pays off for ‘em”
- Offshore Macro – at first glance there were relatively few signs of growth worry from the US ISM overnight…”the headline figure beat (59.9 vs 58.5 expected), with new orders surging to 66.7, way higher than the expected 61.0. However, employment dropped to 49.0, its lowest reading since November, perhaps indicating that there just might be some substance behind the sluggish job gains suggested by the ADP (also out last night). Prices paid were lower than expected at 79.4, though naturally remain elevated. All told, taken at face value the survey is more positive for growth than it is for employment — and clearly it’s the latter that matters for policy. It’s hard to know much of this is driven by delta-variant considerations and the like, as it is hard to square strong order demand and anecdotal labour shortages with sluggish hiring” (Bloomberg). The ADP report indicated that American companies added fewer jobs than expected for a second month in August, reflecting persistent hiring challenges. Friday’s US Non-Farm Payrolls is looming as a potentially market moving print. A sense of fragility is creeping into markets, and with evidence of peak growth behind us, there are concerns (in my mind at least) that stocks are vulnerable for a correction. Especially given record absolute levels and elevated valuations.
- Local Macro – house price data and Q2 GDP data out yesterday…for the former…pilfering from NAB “Australian dwelling price rose +1.5% MoM and +18.4% YoY in August. That is the slowest monthly gain since January, suggesting some slowing in the pace of price increases, though monthly growth remains very high relative to history. Compared to pre-pandemic April 2020 levels (the month before prices fell marginally in 2020), prices are up some 16% nationwide. The slowing in price growth over recent months may indicate affordability constraints starting to be met with recent consumer surveys seeing a sharp drop in the question around “is it a good time to buy a dwelling”. Earlier in the year we noted interest rate cuts since 2019 had increased theoretical purchasing power by 23%. Since the end of 2019 dwelling prices are up 19.3%, while the six-month annualized is running at 26.6%.” Q2 GDP printed on the high side of consensus expectations, +0.7% QoQ (vs +0.4% QoQ cons) and +9.6% YoY (vs +9.1% YoY cons.) Given how different Q3 has been (lockdowns), these numbers are somewhat academic…from CBA “of course the picture looks very different now as the delta variant changed everything. NSW has not come out of the lockdown it entered on 26 June and Victoria is also in an extended lockdown. It is not just about lockdowns. The reopening will also look very different as COVID cases rise and Australia adapts to ‘living with COVID’. As such, yesterday’s national accounts are largely academic and are of little matter to financial markets.”
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Scott Rundell, Chief Investment Officer
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