Mutual Daily Mutterings
Quote of the day…
”I’m an environmentalist. Most of my jokes are recycled” – David Letterman
- Moves: risk on … stocks ↑, bond yields ↑, credit spreads ↓, volatility ↓ and oil ↓….
- Global stocks ended the week with a collective spring in their step, while in bonds the inversion of the US yield curve became more pronounced. US jobs data came out stronger than expected, fuelling concerns the Fed may need to pump the monetary policy breaks harder. Credit spreads continue to tighten, with any war-related widening now evaporated. Although YTD spread levels are still significantly elevated vs 2021 averages.
- After the US announced a material release of strategic reserves last week, oil continued to fall, with Brent back around US$104/bbl (-13.5% on the week). Although, some in the oil world warn prices have fallen to levels that the supply risks of Russian exports or the ability of China to contain the spread of COVID.
- Fed speak….”FOMC officials should raise interest rates to more neutral levels, said the Fed’s John Williams, but to do so in steps as economic uncertainty remains “extraordinarily high.” He didn’t mention the size of future increases he favoured, but San Francisco Fed President Mary Daly said the case for a half-point hike at May’s meeting has strengthened. Ark’s Cathie Wood chimed in, tweeting that raising rates would be a mistake.” (Bloomberg). Of course Cathie Wood has a vested interest in keeping rates low, her tech-heavy ETF’s have been haemorrhaging FUM for months now.
- Still on the Fed..”Fed minutes will offer clues on the balance-sheet runoff mid-week. Discussions may show policy makers are close to finalizing a plan and suggest an announcement in May, Bloomberg Economics said. It sees the most likely scenario as a reduction with terminal caps of $80 billion to $100 billion a month. The central bank allowed caps of $50 billion last time.” (Bloomberg).
- On the war, European leaders are preparing harsher sanctions on Russia following signs of mounting war crimes, including Russian troops executing civilians in Ukraine towns.
- Week ahead…light (ish) on local data, but the RBA Board meets tomorrow. No change in official rates expected or priced in, but attention will focus on any change in language around policy patience. Markets are now pricing a peak in cash rates at 3.0% by the end of 2023.
The Long Story….
- Offshore Stocks – modest gains across Northern Hemisphere markets on Friday, with all indices around +0.3% to +0.4% higher on the day, although on the week stocks were mixed. European markets were stronger on the week, +1.0% to +2.0%, while in US markets, the DOW closed down a smidge (-0.1%) and the S&P 500 only just scraping its way through to a weekly gain (+0.1%). The S&P 500 saw mixed performance across sectors. REITS (+4.4%), Utilities (+3.7%) and Staples (+2.3%) led on the week, while Financials (-3.3%), Energy (-2.4%) – given oil was down -12.3% on the week, and Industrials (-1.5%) were softer on the week.
- Talking head sound-bytes…“with cash and bonds offering negative real yields, investors are still inclined to buy the dips in global equities, despite deteriorating fundamentals…” and “bull markets don’t go quietly. After all, they’ve come back from many other crises over the past few years. Old habits die hard too — ‘buy the dip’ might be mocked quite a bit, but it is a sound strategy.” And lastly, “the first quarter was a challenging quarter for stocks, but more so for bonds. If you’re an absolute investor, you need to put money somewhere, and stocks to my mind look at lot safer than other asset classes.”
- Local Stocks – not a lot done in ASX 200 last week. Very modest declines on Friday (-0.1%), which just moderated what was a reasonably robust week. The index gained +1.2% on the week, underpinned by strong gains in Materials (+3.7%), Tech (+1.2%) and Staples (+1.1%). Only three sectors flagged, Energy (-1.3%), Discretionary (-0.6%) and Telcos (-0.4%). Relative strength indicators are still within spitting distance of ‘overbought’ territory, although there is a school of thought that stocks will benefit from the poor returns being generated and expected going for in bonds. Investors need to invest somewhere and stocks are seen as better than bonds at the moment. Remember also, don’t forget above credit!
- ASX 200 Relative Strength Indicators…
- Offshore credit – March was the fourth largest month for US IG issuance on record, blasting estimates well out of the water, US$230bn vs US$135bn expected. Street estimates are not expecting this pace to be sustained with just US$25bn expected this week and US$90bn – US$100bn for the month. No rationale provided on why April’s forecast might be any better than March, which proved completely wrong, so take it all with a big, blood-pressure bursting grain of salt. One positive development from recent rate rises, the % of the EU IG market that is in negative yield territory has fallen from 17% at the end of December to 1% now. Now, yes, the path to a universe of largely positively yielding bonds would have been painful, but here and now, it’s more constructive from a return perspective….i.e. more attractive entry levels for credit investors. Credit spreads continued to grind tighter last week (below), although as the default cycle turns, as forecast by S&P, we’ll likely see upward pressure on spreads at some stage.
- Offshore Credit Indices – Spread Changes WoW & YTD…
- Local Credit – traders “most will be glad to see the end of March, a month that saw a comprehensive reprice across asset classes. Evidence that spreads may have bottomed out, though any improvement in risk sentiment brings the prospect of primary supply with buyers likely to dictate pricing. We expect ongoing rates market volatility with the prospect of unforeseen risk events. This combination typically keeps credit investors sidelines, especially from secondary markets.” Yeah, I can’t really argue with that logic.
- Major bank senior squeezed tighter on the day in 5-years (-2 bps to +84 bps), but was unchanged elsewhere along the curve. Per broker marks, 5-year paper was -4 bps on the week and +11 bps on the month. At +84 bps, 5-year paper is now inside long run averages (+86 bps). Across the month it was the 3-year part of the curve that wore the most pain, +18 bps to +66 bps and then 2-year, +16 bps to +50 bps. Traders comments on these moves…”curve starting to look very flat which is mostly indicative of the inventory overhang at the very front end. No softening in BBSW on Friday, but with levels here we have not seen any material selling, accounts seemingly happy to carry and roll.”
- Major bank senior 5-year generic spread…
Source: Westpac, Mutual Limited
- Bonds & Rates – a modest bull-flattening (very modest) on Friday, and one over the week also. Three-year yields dropped a couple of basis points to 2.385%, while ten-year yields dropped -7.5 bps to 2.835%. The 3s10s curve is down to +45 bps, about -15 bps flatter on the month, with the 3s doing the bulk of the work. The main focus for the week, the early part at least, is tomorrow’s RBA Board meeting. No rate hike expected, which is reflected in market pricing below. Today, whether local markets sit’s pat ahead of the RBA tomorrow or follow offshore leads is a bit of a head-scratcher for me. US treasuries surged (yields) on Friday, at the front end at least with 2-years +12 bps to 2.46%, and with 10-years up +4 bps to 2.38%, the curve is comfortably inverted. The surge came on the back of strong jobs data, fuelling concerns the Fed will have to pump the monetary breaks harder.
- Pumping the breaks can take one of two options, or likely both, namely hiking rates and reducing the Fed’s balance sheet. In this regard, CBA commented…”the FOMC stopped expanding the balance sheet in March. The next step is to shrink the balance sheet. Shrinking the balance sheet is another way, in addition to increasing the Funds rate, to tighten monetary policy. At his press conference after the FOMC’s policy meeting in mid-March, chair Powell said the meeting minutes would provide a detailed discussion on shrinking the balance sheet. The minutes are released on Thursday (Australian time). Most of the balance sheet compromises the System Open Market Account (SOMA). The SOMA holds the assets bought as part of quantitative easing. We expect the FOMC will shrink the balance sheet by around $US1¾tn between May 2022 and Q3 2023. However, the FOMC will take conditions in the short-term money market to guide when they have reduced reserves sufficiently.”
- RBA Rate Hike Pricing…
- Macro – AUSTRALIA FEB. HOME-LOAN VALUES FALL 3.7% MoM vs EST. 1.5% Driven by owner occupiers, but follows a 2.6% rise to a record high last month. AUSTRALIAN FEB. OWNER-OCCUPIED HOME LOAN VALUES FALL 4.7% MoM – first fall since Oct 21. AUSTRALIAN FEB. INVESTOR LOAN VALUES FALL 1.8% MoM ABS: “The value of new owner-occupier loan commitments was 1.0% lower than February 2021, but owner-occupier lending was 55% higher than February 2020.” (BAML).
- “Non-farm payrolls data indicates growth in the US labour may be starting to slow. Non-farm payrolls increased 431K in March, following a strong upward revision to the February data to 750K. The unemployment rate fell slightly to 3.6% while average hourly earnings increased 0.4% m/m to bring annual growth to 5.6%. Hourly earnings for February were revised back to 0.1%, which along with the March figure, indicates the heat may be coming off the US labour market.” (ANZ)
- The week ahead….“key on the Australian calendar this week is the RBA Board meeting on Tuesday. The data calendar is light with trade balance and the monthly inflation gauge. While the RBA is not expected to change policy at this meeting, with the risks of another strong upside surprise to Q1 CPI (NAB is pencilling in Q1 trimmed mean print of 1.2% vs the RBS’s Feb forecast of 0.8%) and with gains in the unemployment rate continuing to come in earlier than the RBA’s forecasts, the focus will be on whether the RBA alters its language around ‘patience’ and the balance of risks around moving too early or too late.” (NAB)
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907