Mutual Daily Mutterings
Quote of the day…
“My opinions may have changed, but not the fact that I’m right” – Ashleigh Brilliant..…
Chart du jour…AU Credit trading volumes
Source: ANZ, Mutual Limited
- On a slow news day, a very modest risk on session in offshore markets with stocks advancing a smidge, losing momentum into the close as Fed officials indicated tapering discussions were just around the corner. Bonds shrugged off any imminent tapering concerns with yields dropping a touch, closing 1 – 2 bps lower. Overall risk sentiment remains finely balanced. It’s a tussle between economic optimism and inflation concerns with traders looking for the next catalyst to drive market direction.
- Fed speak…Philadelphia Fed President Harker stated overnight that it may be time to “think about thinking about” tapering, but at the same time said “we have to be careful in removing accommodation so that we don’t create any kind of ‘taper tantrum”. Harker is a non-voter this year, so he has no say in actual policy settings. Richmond Fed President Barkin said he was watching for signs of wage pressures. Talking heads…“it seems like they’re starting to lay the ground work for tapering, so I think investors are just in a holding pattern right now.”
- Talking heads…this time from Larry Fink, CEO of Blackrock, one of the largest fund managers in the world who is suggesting the Fed needs to get its skates on and begin draining the punch bowl before the party gets too out of hand (my interpretation). His concern being investors may be underestimating the potential for a spike in inflation… “most people haven’t had a forty-plus year career, and they’ve only seen declining inflation over the last 30-plus years…so this is going to be a pretty big shock”. For some local context, inflation hasn’t exceeded the RBA’s 2% – 3% target for more than ten years, and in my working life, 1993 to now, local CPI has averaged 2.4% (peak of 6.1%).
- The next potential catalyst for markets to digest is US labour data. ADP forecasts suggest private employers added +650K positions in May (vs +742K in April). Then we have jobless claims, which are forecast to decline again, falling to 388K from 406K the previous week. Continuing claims are seen dipping to 3.62m from 3.64m. Tomorrow night we have the big Mac-Daddy of US labour data, the Non-Farm Payrolls (+655K cons vs 266K last) and unemployment rate (5.9% cons vs 6.1% last).
- Offshore Stocks – European markets were a tad more emphatic directionally vs the US , but it’s all relative – EU markets up +0.3% vs +0.1% for the DOW and SPX. Within the SPX 52% of stocks gained ground, while at the sector level, it was six up, five down. In the winner’s circle, we had Energy (+1.7%) again leading the field, followed by REITS (+1.4%), and Tech (+0.6%). At the bottom of the field, Materials (-0.9%), Discretionary (-0.4%) and Industrials (-0.3%) all lowered their colours. Value stocks (+0.35%) outperformed growth stocks (-0.43%), which was a theme echoed across markets globally (MSCI).
- Local stocks – new all-time highs for the ASX 200 yesterday, 7218, with the index now +3.0% above the 50 day moving average. Relative strength indicators are into the mid to low 60 range, recall >70 is categorised as ‘overbought’. The index faltered a touch post the release of better-than-expected GDP data (details below), but once markets had some time to digest the underlying data, the index put its skates on. Energy (+4.1) was the stand out on the day, rallying strongly on oil prices strength, while REITS (+2.0%) and Materials (+1.9%) also had strong sessions. The latter buoyed by rampant iron ore prices (up +7.5% MTD already) despite China’s attempt to jawbone prices lower. Only two sectors failed to launch, Tech (-1.1%) and Healthcare (-0.5%).
- Offshore Credit – US IG primary markets bounced back overnight with US$11.3bn across seven deals pricing, led by financials. This takes week to date issuance to US$15.9bn, just shy of the US$20bn – US$25bn predicted by people in the know last week. The tone in secondary remains constructive, which cash spreads continuing to grind tighter, which is not surprising on a slow news day, gravity takes hold. EU IG Primary also reasonably active, with €7.1bn priced, with coverage ratio of 3.1x and spread compression of -20 bps, and improvement on yesterday’s -13 bps. Nothing to report on the CDS front, negligible movement, again normal for a slow news day.
- Local Credit – trader talk…”further consolidation across the senior curve. No selling seen yesterday nor would we expect any until the point that a major bank breaks cover with A$ issuance. With the 3-year point currently anchored in the mid-20s and a growing expectation that a 5yr will land in the low 50’s, we think that 3s5s curve (+25 bps ‘ish) looks pretty appealing for potential buyers of a new 5yr.” While no movement in senior paper, the grind tighter in tier 2 continues. The NAB Nov-26 calls tightened -1.5 bps into +128.5 bps, ANZ Feb-+26 call tightened – 3 bps into +124 bps and the WBC Jan-26 call tightened -2.5 bps into +124.5 bps. The 2025 calls tightened -2 – 3 bps to +118 – 20 bps…crunchy, crunchy, crunchy.
- Bonds & Rates – a modest rally in offshore bonds despite snippets of taper talk amongst Fed officials. US Treasury 10-year yields closed at 1.54% (-2 bps), which is toward the bottom end of the recent (Apr – May) trading range, 1.55% – 1.74%. The 2s10s curve has flattened -14 bps over the past month or so as markets wait for evidence that inflation is truly (potentially) out of its cage. Local bonds did very little yesterday, largely ignoring the better-than-expected GDP print, and like the US counterpart, 10-year yields at 1.69% are towards the bottom of recent trading ranges, and the 3s10’s curve has flattened -20 bps from recent (March) highs. Consensus expectations are for 10-year yields to 1.78% by the end of June, which would deliver a capital loss of -1.4% from now to then (if one were to buy the Jun-31 maturing ACGB today).
- Macro – local GDP data out yesterday, with a surprise to the upside (deets in the table below). The economy grew +1.8% in Q1’2021, ahead of consensus (+1.5%). Annual growth lifted from -1.0% at the end of Q4’2020 to +1.1% and activity is now +0.8% above pre covid levels as at the end of 2019. The notable feature of the data, and the recovery, was the pivot from consumption to investment. Going forward, the poo-storm us Melbournites are subject to at the moment highlights the potential risk to growth. I’ve seen some estimates of the impact our latest lockdown is having on the local economy, and it’s around $1bn a week. No idea on how that number was reached, but it’s a number, and a meaningful number. And, yesterday we learned our parole request has been denied and we’re in solitary confinement for another week.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907