Mutual Daily Mutterings
Quote of the day…
“I knew I’d chosen the wrong airline when I noticed the sick bag had the Lord’s Prayer on it.”– Les Dawson
“No power in Powell’s words…”
- Overview – risk off as bond vigilantes were left unimpressed, and if honest with themselves, probably unsurprised by Fed Chair Powell’s comments overnight. He was dovish, but not dovish enough, he was also somewhat dismissive of inflationary risk, which probably erked markets. Powell stated that the recent run-up in bond yields “was something that was notable and caught my attention” and he “would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.”. US stocks (S&P 500) saw their YTD gains erased and 10-year treasury yields topped 1.5%. Employment remains the Fed’s focus and in the mind of the board, any rise in inflation will be transitory – further, they’re a long way from their targets, so no formal tightening on the near-term horizon. Talking heads…. “we are again seeing a market that is taking control of monetary policy from the Fed…long rates are rising right now because Powell is again very dovish. The more dovish they get in the face of market expectations of higher inflation, the more financial tightening we’ll see.” And countering this pessimistic view, the optimist…”as long as the back-up in bond yields reflects stronger growth expectations (versus tighter monetary policy), then the long-term bull market will not be at risk…the latest normalization in bond yields should be viewed as an encouraging sign that growth is healing, while the prospect for a hawkish turn from the Federal Reserve is clearly not in the cards today.” Gold was under pressure again, while oil rose following the recent OPEC meetings.
- Offshore Stocks – mixed across European markets, but moves in either direction were modest. Asian markets were hit hard, down -2% – 3%, while US markets spent much of the trading session up marginally, but then weakened as bond yields took off on Powell’s comments. Four stocks were down for every one up in the S&P 500 with Tech (-2.3%), Materials (-2.3%) ad Discretionary (-2.2%) all taken behind the woodshed for some cognitive adjustment (i.e. a beating). Energy (+1.8%) was the only sector to really put up a fight, aided by the favourable supply outcome of the OPEC meeting. Financials tried, +0.2%, but was largely ineffectual. E-mini’s comfortably in the red also.
- Local Stocks – another slightly challenging day on the tools for local stocks, although we did performance better than regional peers with the NIKKEI down -2.1%, the Hang Seng down -2.2%, and Shanghai down -3.2%. In our backyard, Healthcare (-3.5%), Materials (-2.7%) and Staples (-1.6%) did the bulk of the damage to the broader index. On the day two-thirds of stocks were sporting bloody noses of varying degrees, some gushers, some just a droplet or two. Financials (+1.1%) and REITS (+0.6%) were the only two sectors to put up a fight. Futures are pointing to a weak open in local markets, -0.3%.
- Offshore Credit – an abatement in the pace of issuance over the week, with seven deals and US$9bn priced, taking WTD issuance to a frothy US$65bn, double predictions. On average, spread compression from launch to final pricing was around -25 bps, so constructive. The heavy week of issuance has weighed marginally on secondary spreads, +1 – 2 bps wider on the day, but tighter over the week. Busier in EU IG, with 11 deals and just under €13bn priced, including five ESG / Green bonds, adding to recent growth in the area. Secondary spread largely unchanged. In CDS, CDX (+1.7 bps) underperformed MAIN (-0.5 bps).
- Local Credit – from the horse trader’s mouth “a lacklustre day in domestic credit markets as renewed rates volatility kept investors on the sidelines. Volumes were light with most unwilling to establish new risk positions. This volatility needs to abate before we foresee the meaningful secondary market turnover”. Consequently, the major bank senior curve closed unchanged. And, while we’re on the majors, Citi hosted a panel yesterday with guest speakers from the banks. Obviously with the TFF expiring in the next couple of months, the question of whether we’ll see any supply over the second half of the year. In a word, unlikely. Credit growth vs deposit growth vs TFF already drawn = no need to issue in senior any time this year. But hope springs eternal. It’s another story in tier 2, with an obvious need given regulatory TLAC requirements. In secondary, “ongoing bid side interest remains at the forefront for this asset class with the charge led by a number of domestic accounts”. Nevertheless, the major bank tier 2 complex closed unchanged with muted volumes.
- Bonds & Rates – US treasury yields, say the 10’s, hit new 12-month highs overnight, +7bps to 1.55% with growing view amongst bond strategists that 2.0% is just around the corner. Other flip side: The Treasury selloff is bound to run out of steam as the effects of fiscal stimulus wear off, driving 10-year rates back down to 1.0% by year-end according to other voices in the field of pontificating on such things. Current consensus estimates, per Bloomberg, have the median 10-year yield rate ranging between 1.16% at the end of Q1’21, up to 1.60% by the end of Q2’22. Markets are about a year ahead of schedule it would seem. Having said that, Powell stressed that yields were not a primary focus, financial conditions were. In this regard, he described them as “highly accommodative and that’s appropriate given the ground the economy has to cover.” Further, “if conditions do change materially, the committee is prepared to use the tools that is has to foster the achievement of its goals.” Now if the bears are right and US 10’s go into overdrive and hit 2.0%, then you can expect, with a reasonable degree of confidence, that ACGB’s will hit, say 2.25% – 2.50%. The local 10’s closed at 1.78% yesterday, up +10 bps, which takes the spread to treasuries to +23 bps, a three-year high.
- Macro – US non-farm payrolls out tonight, with signs the labour market rebound” may be gaining steam”. Consensus has non-farm payrolls coming in at +195K after January’s disappointing +49K print, while the unemployment rate is expected to stay unchanged at 6.3%. Last nights initial jobless claims increased to 745K, a smidge under consensus (+750K), after a revised decline to 736K in the prior week. Continuing claims slipped to 4.3 million from 4.4 million, also a touch below expectations. A positive for those in the “inflation won’t be a problem camp”, unit labour costs came in at 6.0%, well down on consensus (6.6%) and down on the prior reading (6.8%). January Durable Goods Orders were bang on consensus, +3.4%, flat to December.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907