Mutual Daily Mutterings
Quote of the day…
“Uuuuuuuuuurrr Ahhhhhhrrrrrr Uhrrr Ahhhhrrrrr Aaaarhg…” – Chewbacca
Chart du jour: 2/3’s done…
Source: Bloomberg, Mutual Limited
“Happy Star Wars Day…”
- Overview – another ‘meh’ day with a range of modest influences culminating in aggregate for not much of anything. I speak good, yes? Suddenly I’m channelling Yoda! In a second attempt to clearly speak the language of my birth, markets were generally ‘up’ on the day (stocks), while bond yields eased back a touch. Oil and gold both rose over +1.0%. Some US data (ISM) disappointed, but that was largely offset by some soothing words from the Fed’s ‘keep it easy at all costs’ crew. So, the prevailing themes persist, and we’re just kicking back and waiting for formal conformation (data). The most prominent and far reaching of these themes is that inflation will grow beyond central bank target ranges (i.e. average of +2.0% for the Fed, and +2.0% – 3.0% for the RBA). Regarding the Fed’s position on the inflation narrative, they reiterated their willingness to let things run a little hot for a period of time, a period that has not been specified. Note, “running hot” is not a term I’ve heard the Fed use, rather it’s market lingo. Fed Chair Powell acknowledged overnight that the economic recovery was, or is, “making real progress”, but at the same time the gains have been uneven “following a downturn that cut hard along lines of race and income.” Fellow Fed Boy Band member, New York President John Williams, also noted that current conditions are “not nearly enough” to move the dial in the monetary policy stance….”we still have a long way to go to achieve a robust and full economic recovery.” US 10Y break-even rates are sitting around 2.43%, implying markets expect inflation to average 2.43% between now and 2031…some 43 bps above the Fed’s target average. Moving on from inflation talk, positive signs in the US that they have finally taken the pandemic by the throat with the rate of weekly cases down to the slowest rate since the pandemic kicked off. The US still holds the record for most cases reported, 32.4 million, with 577K deaths for a mortality rate of 1.7%. India is shooting up the charts with 19.9 million cases and 218K deaths (1.1%), while Brazil is in third spot with 14.7m cases, but 407K deaths, and 2.8% mortality rate. RBA today, no changes to policy expected.
- Offshore Stocks – modest gains across the board (i.e. globally), although US tech came under some modest selling pressure (NASDAQ down -0.48%). In the US, around two-thirds of the S&P 500 gained, with the number of sectors up (6), and magnitude of gains, exceeding sectors down (5). The winner’s circle was dominated by Energy (+2.91%), followed by Materials (+1.53%), Healthcare (+1.17%) and Industrials (+1.03%). Dragging their feet at the bottom of the tables was Discretionary (-0.66%), REITS (-0.48%) and Telcos (-0.39%). For those who dig the technicals, relative strength indicators are running moderately hot, sitting around 63.3. S&P 500 Bollinger Bands also indicating a slightly hot’ish market – the index is half way between its 20-day moving average and upper Bollinger Band. Futures (E-mini’s) are marginally ahead.
- Local stocks – in aggregate the ASX 200 did little on the day, closing with its nose just ahead, giving back most of its early gains, +0.6% in early trading, and briefly dipping into very modest loss territory. Two-thirds of stocks closed down and only three-sectors were able to claw out some gains. Strong results from first half results from Westpac (+5.00%) lifted the Financials (+1.42%) index, which in turn offset most of the losses elsewhere. Telcos (+1.21%) also did their bit to staunch the bleeding, as did REITS (+0.73%). Tech (-1.94%) was the villain on the day, with accomplices in Energy (-1.04%) and Materials (-1.01%). Futures are up, +0.20%.
- Offshore Credit – with a lower than forecast volumes last week, investors were like seagulls on hot chip overnight across US IG markets, six deals launched for US$9.4bn priced…absence makes the heart grow fonder as the old saying goes. This was particularly the case in the corporate space after banks dominated the dance floor over the past week or so. Final books were almost 4.0x oversubscribed, with bonds pricing flat to inside issuers’ existing curves. Spread compression from launch to final pricing was -26 bps vs YTD average of -24 bps. Despite the buying fervour in primary, IG indices, across US IG Corporate and Financials were +3 – 7 bps wider, while high yield spreads were +56 bps wider. EU IG indices were wider also, but less so than their US peers, +1 bps.
- Local Credit – a less than vigorous start to the month in Aussie credit, I think the correct term is “sluggish”. Nevertheless, traders reporting better real-money buying in domestic financials, mainly in the fixed space. Spread moves however were negligible. In the major bank senior space, very, very little done, with this segment of the markets becalmed, with no likelihood of change until we see some primary action, which we should be edging toward (on the assumption the TFF expires as scheduled and credit growth begins to re-engage). Major bank spreads unchanged across senior and tier 2. On the latter, traders reporting “spreads continue to feel somewhat heavy as the street digests the selling seen late last week. Flow was light.”
- Bonds & Rates – softer US ISM data and soothing monetary policy comments from key Fed members saw bond yields drift lower. Nevertheless, there is a strong expectation that over the second half of the year, US 10Y yields will edge higher, reaching 2.00% before year end (vs 1.61% close last night). Within that environment, ACGB’s will have no choice but to follow a similar path, 1.90% – 2.10% by year end, give or take a month here or there. ACGB’s 10-year index yields closed at 1.76%, although the Jun-31 bond is yielding 1.69%, so an increase in yields to 1.90% – 2.10% area, would see capital values on the Jun-31 bonds fall by between -1.90% and -3.10%.
- Macro – from NAB’s morning note…”on the data front, the US ISM report reflected slower growth and higher inflation with the detail pointing to supply chain issues – companies continue to struggle to meet increasing rates of demand due to coronavirus impacts limiting availability of parts and materials. Order backlogs are at their highest level in more than forty years”. The supply chain issues are not new, they’ve been on the radar for a while now, and represent one of the variables fuelling the inflation debate. Having said all that, while the ISM missed estimates, it is still at very high levels…just not record high levels. A selection of second tier data prints today in local markets, including trade balances with imports forecast (consensus) to be up +8.0% MoM and exports up +4.0% MoM. Home loan values (no consensus) are also scheduled, which last month (March) recorded a -0.4% drop. I’d suggest flat to marginally up this month (April). Lastly, at 2:30pm we have the RBA’s policy decision, which without a shadow of a doubt will be no change.
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Scott Rundell, Chief Investment Officer
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