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Mutual Daily Mutterings

 

Quote of the day…

 

“I saw this movie about a bus that had to SPEED around a city, keeping its SPEED over fifty, and if its SPEED dropped, it would explode! I think it was called, “The Bus That Couldn’t Slow Down” – Homer Simpson

 

 

 

Dashboard

 

 

 

“Shady Coins…

Source: www.hedgeye.com

 

 

“If I want to hear your opinion, I’ll give it to you…”

Source: www.theweek.com

 

 

Overview…”Hopes and dreams, meet reality…”

 

  • Moves: risk off… stocks , bond yields , curve , credit spreads , volatility and oil ….
  • US stocks paused a two-day losing streak to record a solid rally ahead of tonight’s nonfarm payrolls, with traders pricing in a cooling labour market, which if true could alleviate some inflation concerns…maybe.  As is often the case on the eve of non-from payrolls, US treasuries did very little.  Data was mixed and there were further hawkish Fed comments for traders to digest.  Rising inflationary pressure and likely ECB action in Europe saw bonds on the continent (OATS, BUNDS, and GILTS) all selling off (yields higher, +5 – 10 bps).  Traders are now pricing in +50 bp of tightening by the ECB between now and December, with the first hike (+25 bps) expected in July.  Interesting, the ECB has not hiked by that much since 2000.
  • Fed speak…Vice Chair Lael Brainard said the Fed is unlikely to take a smoko after pulling the trigger in the next two ‘expected’ rate hikes (at +50 bp a pop).  On the talky-talky circuit she was quoted as saying “from where I sit today, market pricing for 50 basis points, potentially in June and July, from the data we have in hand today, seems like a reasonable path. Right now, it’s very hard to see the case for a pause. We’ve still got a lot of work to do to get inflation down to our 2.0% target.”  Fed Atlanta Chief, Raphael Bostic, recently suggested a pause in September might make sense, but he’s an outlier it would seem.
  • In some good news on the inflation front, “OPEC+ agreed to increase the size of its oil-supply hikes by about 50% in July and August, bending to pressure by major consumers including the US to fill the gap created by sanctions on Russian supplies. Lower oil prices could ease inflationary pressures. Yet investors remain on edge as some fear the pace of monetary tightening could throw the economy into a recession.”  (Bloomberg).  The question mark on this for me, is do they have the capacity to produce more?  By all accounts OPEC+ countries are already missing current quotas because of capacity constraints caused by years of under-investment.  Oil rally despite the news.
  • Talking heads…”outside of this recent rally, very little about this market has changed from a technical standpoint and that makes us wary of calling the all-clear.  We believe a slight lean toward defensive sectors and away from the growth-oriented areas of this market still make sense.
  • It’s been a while since we’ve had a meaningful COVID comment…China’s Zero-COVID strategy aside.  According to recent WHO research, it is estimated that two-thirds of the world’s population have significant levels of COVID antibodies, meaning they’ve either been infected or vaccinated.

 

The Long Story….

  • Offshore Stocks – the DOW gained +1.3%, the S&P 500 +1.8% and the NASDAQ +2.7%.  European markets were mixed.  Within the S&P 500 some 86% of stocks gained ground and only one sector soiled the bed, and only marginally so, Energy (-0.3%).  Keeping the sector company at the bottom of the performance table was Utilities (+0.6%) and Healthcare (+0.8%).  Discretionary (+3.0%) was the teacher’s pet, followed by Materials (+2.7%) and Telcos (+2.6%).  The S&P 500 has rallied +7.1% over the past two weeks as traders latch onto hopes the Fed has inflation under control and perhaps Fed member Bostic is right, the Fed will pause their rate hikes in September.  Wishful thinking, again, I think.  Lael Brainard’s comments overnight signal a strong need for inflation to have peaked and shown consistent rates of decline before rate hikes are paused.
  • Some interesting commentary and analysis via Bloomberg around when we’ll likely see a bottom in US stocks, which by extension will impact markets globally.  Actually, more accurately the piece looks at what conditions in past cycles have been prerequisite for markets to have bottomed?  “The equity market has a decent rally today. Unfortunately, it’s unlikely to be marking the bottom of this stock selloff. By my count, the current stock rout marks the 13th time since 1960, when the S&P 500 fell at least 15% from the previous peak. Some of these corrections occurred during a recession but not always. So historically, what are the conditions to mark a trough? They are (i) the markets bottomed about two months before the ISM PMI manufacturing index stopped falling. The average PMI reading at the stock bottom was 48, compared with 56 currently, (ii) Bond yields bull steepened, with the short-term rates falling faster than long-yields. In most cases the Fed had stopped raising rates and started cutting, and (iii) core CPI had peaked about two months before the stock bottom with figures falling sharply afterwards.  So taken together, markets need to see growth slow down enough to allow inflation to peak and the Fed to call an end of the hiking cycle. We are still months, if not quarters away from such a scenario.
  • Local Stocks – down yesterday in stocks with the ASX 200 dusting -0.8%.  Most sectors contributed to the day of modest misery, with just two exceptions: Energy (+3.1%) and Utilities (+1.1%).  Elsewhere, it was a sea of red.  Worst of the worst was Tech (-2.5%) followed by Health Care (-1.8%) and Telcos (-1.6%).  Not a lot to add here today, nothing too insightful or new nuggets of wisdom or foolishness from prior mutterings.  Still range bound and unlikely to break the range until inflation has peaked, or strong conviction it will imminently peak.  Consensus has that as being in Q3…so, hope you’re patient.  Futures are frisky this morning, +1.1%.

 

  • ASX 200 relative strength indicators

Source: Bloomberg

 

 

  • Offshore credit – a modest day of issuance in US IG markets, just US$3bn priced, taking weekly volumes to US^30bn, the high end of the projected US$25bn – US$30bn.  Deals performed well with issuers paying 11 bps of new issue concession on order books that were 2.9x over-subscribed.  “After weeks of elevated volatility spurred issuers to offer investors juicier new issue concessions of 35-40bps cheap to their credit curves at the outset (IPT stage), borrowers are selectively beginning to reduce these discounts – starting deals tighter – in a sign that issuers are beginning to find firmer footing. (Bloomberg).  Spreads in secondary are trending tighter, as highlighted in the following chart.

 

  • Offshore credit indices, cumulative spread change since pre-pandemic vs A$ spreads…note, A$ spreads are much less volatile than offshore markets…

Source: Bloomberg, Mutual Limited

 

 

  • Local Credit – meh, very quiet day.  I was in Sydney sitting on a KangaNews panel, but from what I’ve read in the trader’s EOD commentaries, little was done on the day with no movement in spreads of note.  Major bank 5-year senior is stable at +103 bps, while 3-year paper is around +87 bps.  Because it’s Friday and I’m feeling adventurous, I’m going to suggest 5-year spreads will be somewhere around +90 – 95 bps within the next 30-days and 3-year around +80 – 85 bps.  Call me crazy, but if we have a window where the banks pause on their issuance activities, in A$ at least, in time sentiment will firm up and with cash balances building from maturities, the path of least resistance will be tighter.  Possibly wishful thinking, but prevailing spreads are cheap vs historical ranges and while there are some macro headwinds, banks are well placed to weather them.
  • No change also in the tier 2 space.  CBA’s Apr-27 call is quoted at +227 bps, while the 2026’s are at +211 – 220 bps and 2025’s at +205 – 211 bps.  The recent MacBank deal is at +267 bps in the FRN (to BBSW), while the fixed line is in at +258bps.  Both lines issued at +270 bps to BBSW and ASW respectively.  As with the senior space, traders reporting minimal action on the day.  And as with senior, I see spreads here as attractive and worthy of a nibble.  My view here and in senior are predicated on the view that banks are done for the time being on their A$ issuance.  The potential boogey-man lurking under the bed on this view is ANZ, who have been absent from A$ markets for a while (18 months) and are well behind their usual issuance run rate.  However, they’re also not really lending much either, so they’re not exactly desperate for funding.  Their next A$ maturity is $1.2bn senior Aug-22, with ~$2.0bn maturing between now and calendar year end.
  • Bonds & Rates – a meaningful sell-off in local bonds yesterday, mainly off the back of moves higher in US treasuries (yields).  We’ll probably see a day of pause and reflecting ahead of US labour data tonight, and the RBA next Tuesday.  Views on what direction the RBA will take are pretty universal: to a man, women, child and the neighbour’s miniature toy poodle, the RBA is expected to hike rates for the second time in the current cycle.  However, where there is dissention in the ranks is the scale of the hike.  I’d say two-thirds of market pontificators favour a +25 bp hike (from 0.35% to 0.60%), with just under a third looking for some symmetry and a +40 bp hike (to 0.75%).  Since the last meeting data has generally reflected a buoyant economic backdrop with unemployment at 3.9% and GDP at +3.3% YoY (vs +3.0% YoY cons.).  I can empathise with the argument calling for a +40 bp hike, which is marginally more compelling than the argument for a +25 bp hike, and somewhat predicated on something as vain as symmetry.  BUT, conviction on this call is as strong as my view that the Pies can roll the Hawks this week, which is to say, not very strong at all!
  • From the last meeting’s minutes, some context in the RBA’s thinking around rate hikes…”Members considered three options for the size of the rate increase at the present meeting – raising the cash rate by 15 basis points, 25 basis points or 40 basis points. Members agreed that raising the cash rate by 15 basis points was not the preferred option given that policy was very stimulatory and that it was highly probable that further rate rises would be required. A 15 basis point increase would also be inconsistent with the historical practice of changing the cash rate in increments of at least 25 basis points. An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates. However, members agreed that the preferred option was 25 basis points. A move of this size would help signal that the Board was now returning to normal operating procedures after the extraordinary period of the pandemic. Given that the Board meets monthly, it would have the opportunity to review the setting of interest rates again within a relatively short period of time, based on additional information.”
  • Little direction for local markets coming out of US treasuries overnight, although European markets are signalling a sell-off is possible.  I suspect US treasuries will have more influence given historical relationships.  Despite last night’s relative calm, yields have trended higher of late, fuelled by hawkish Fed comments, which have essentially squashed any hope of a rate hike pause in September, which had been posited by a lone member recently.  Tonight, we have US labour data, including non-farm payrolls and average hourly earnings.  A gain anywhere around the consensus projection of 323K jobs will feed the Fed rate hike beast, which will likely exert upward pressure on front end yields.  Further out the curve, bonds can benefit from speculation that higher rates will curb both inflation and yields, i.e. bonds rally (yields fall). As to how far hikes will go, markets are pricing a terminal rate around 2.875% – 3.375%, which in a historical context is not that high, in isolation, but if you overlay that with prevailing inflation, then signs are worrying for the trajectory of US economic growth.  One model referenced in Bloomberg is signalling probability of a recession in the US in the next 12-months is now north of 60%…for what it’s worth.

 

  • Markets are pricing in a more aggressive RBA rate hike cycle…

Source: Bloomberg, Mutual Limited

 

 

  • A$ Fixed Income Markets…

Source: Bloomberg

 

 

  • Local Macro – in local markets and time-zones, there is a public holiday in Hong Kong and China and no major data today in AU with only home finance for April which should soften slightly.  Consensus is expecting owner-occupied home loan values to have dropped -3.5% MoM vs +0.9% MoM in March, while home loan values in general (including investor loans) are forecast to be down -0.5% MoM vs +1.6% MoM in the prior month.
  • Offshore Macro –  “Hiring slowdown. US companies added 128K positions in May (vs 300K cons.), the ADP report showed, trailing forecasts and highlighting struggles to recruit workers despite a near-record level of openings. Initial jobless claims fell to 200K last week from a revised 211K. Up next: non-farm payrolls probably rose by 323,000 last month, well below April’s pace, while the unemployment rate is seen dipping to 3.5% from 3.6%.” (Bloomberg).  From the team at BAML “Our team is above consensus at 375k jobs, but there is downside risk after these leading indicators. However, the unemployment rate and wages are likely to reflect a very tight labour market with both BofA and consensus looking for unemployment rate to fall to a new post-Covid low (3.5% vs 3.6% last) and wages to be up a healthy 0.4%mm.

 

  • Charts:

Source: Bloomberg, Mutual Limited

 

 

 

Click here find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%