Mutual Daily Mutterings
Quote of the day…
“Nothing in this world is at it seems. Except, possibly, porridge…” – Stephen Fry
Chart du jour: Ethereum vs US 10-Year Yields…
Source: Bloomberg, Mutual Limited
“Yellen speaks the unspeakable…”
- Overview – Treasury Secretary Yellen mentioned the war overnight (rate hikes), possibly jeopardising her invite to the next ‘former Fed Chairperson’s’ reunion shindig by saying rates may have to rise modestly to prevent the economy from overheating. Oooh, no she didn’t! Oh yes, she did. Consequently, stock markets threw their collective toys from the cot, especially tech, while bond yields actually did very little, – probably reflecting that Yellen’s comments are pretty self-evident, and bond markets have already begun pricing in rate hikes sooner rather than later. Also, she didn’t actually mention a time frame, so…possibly an over-reaction by stocks. Nevertheless, Yellen’s remarks add to an already heated debate on whether US fiscal stimulus measures could trigger a surge in inflation, upsetting a stock market that is showing signs of nervousness over elevated valuations. The ‘inflation risk and whether it is real’ debate is not new, it’s been ‘raging’ for a while now, probably since the world accepted that a vaccine for COVID was effective and set to be rolled out, while at the same time the US government began to open up the big fat fiscal cheque-book…. so around November last year. Also, coincidentally, around the same time the US Presidency switched from the orange and bombastic to the borderline senile and doddering. On inflation, I found this quote yesterday from Paul Singer, a US hedge fund manager and from what I’ve read over the past year, kind of a smart guy…”inflation is nonlinear, because in the early stages, inertia keeps velocity in check. However, as human perceptions and forward beliefs become more attuned to the notion that inflation is coming, self-reinforcement causes rapidly increasing acceleration of both velocity and inflation. A critical mass of self-reinforcing inflationary expectations creates the launching pad for inflation, as people rationally spend money as quickly as possible. Policymakers always think they can control inflation before it surges beyond their control. History indicates otherwise.” I think there’s something in that for everyone. Locally yesterday we had the RBA meeting, which was largely a non-event, with stocks up modestly, and bond yields doing very little – the ten’s were have a basis point higher at 1.758%.
- Offshore Stocks – the S&P 500 pared losses amid a rebound in commodity, financial and industrial shares, while the NASDAQ underperformed as ‘mega-caps’ Apple, Tesla, and Amazon took a reasonably meaningful beating. At its worst for the day the index was in arrears by -1.30%, while the NASDAQ was down -2.3% at one stage. The ever plucky and old-fashioned DOW kept its nose clean, and just above water. European stocks were worst hit, down -2.00% – 2.50% across various key indices. Within the S&P 500, just over half of stocks (52%) closed down on the day and across the sectors, six-down, and consequently five-up. Off those up, Materials (+1.04%) led the way, followed by Financials (+0.76%) and Industrials (+0.41%). The bad-boys and girls at the back of the bus were Tech (-1.89%), Discretionary (-1.24%) and Staples (-0.93%).
- Local stocks – modest gains yesterday with the ASX 200 up +0.56%, with some 55% of stocks gaining on the day. Only two sectors were unable to get out of the starting gates, and only one of them with any meaningful lethargy, Tech (-1.97%). The other was Healthcare (-0.03%), and only just. At the other end of the tables were Materials (+2.21%), Energy (+1.71%), and Staples (+0.74%). Reflecting weaker offshore leads, local futures are in the red, -0.35%.
- Offshore Credit – modest day in US IG primary with seven deals for US$4.6bn printed, taking weekly volumes to US$14bn, already surpassing last week’s volumes. Deal metrics remain constructive, with minimal spread concessions, while books were 2.7x covered, and spread compression from launch to final pricing was -28 bps, slightly better than YTD average. Secondary spreads, in aggregate, were neither here nor there, no meaningful changes. Another modest day in EU IG also, just €3.8bn priced, and secondary spreads reflecting US IG themes.
- Local Credit – from the traders, slightly edited in order to make me feel like I added value…”RBA the focus for most. Credit markets remain driven by primary activity, or as was the case yesterday: the prospect of primary. May will see a further $7bn of maturities across the financial sector with the likelihood that local investors will have their appetite for TLAC tested once again. This hasn’t gone down too well in recent memory and we think this could provoke renewed interest for senior issuance from ADIs.” In the major bank senior space, spreads largely moribund, although two-year paper was a little frisky, tightening a basis point, ooh, so scandalous, into +15 bps. Talk about frisky, tier 2 was pumping…traders…”a very messy day as dealers tried to shed risk ahead of imminent new issuance. The street is long with an evident unwillingness to get longer. Supply, if and when it does materialise may have a calming effect on secondary spreads which were marched +2-3 bps wider again yesterday.” The 2026 callable paper is now pricing +137 – 139 bps after being range bound around +130 – 132 bps a week or two ago.
- Bonds & Rates – again, probably the hardest decision made at the RBA Board meeting yesterday was whether to have the smoked salmon and dill finger sandwiches, or damn the diet and go straight for a plate of the mini-party-pies. I know which way I’d be leaning. In the end, no change to any of the official rates, which would have surprised no one. Cash left at 0.10%, yield curve control unchanged at 0.10% for the 3-year part of the curve, and the TFF left at 0.10%. The latter is on schedule to expire at the end of June, and no extension is currently being considered. The Board recognised the continued strong post-pandemic recovery, but again, the evenness of the recovery was questioned. In the eyes of the board, inflation remains a transitory force, and rate hikes are not expected to be on the table until 2024. Bond buying programs, and whether they will be extended were not yesterday’s business – later. The RBA advised they would consider whether to extend their YCC program from the April 2024 bond to the November 2024 bond at the July meeting. Ahead of Friday’s Statement of Monetary Policy release, the Board updated its macro forecasts. GDP is expected to grow at +4.5% through 2021 and +3.5% in 2022, while inflation will end the year around +1.5% and then trend toward +2.0% by 2023, still well outside targets (+2.0% – 3.0%). Unemployment is expected to get to as low as +4.5% through 2022.
- Macro – value of home loan lending out yesterday, ANZ commentary here “the March jump in investor lending (+12.7% MoM) has pushed annual growth in investor lending up to +54.3% YoY, almost as high as owner-occupier annual growth (+55.6% YoY). While owner-occupiers led the recent housing lending boom, it is now clear that low interest rates, the rapid labour market recovery and perhaps hopes for an eventual recovery in population growth are bringing investors back. Investors now make up 25.6% of new lending, a nine-month high. This is occurring despite persistently high rental vacancy rates, particularly in Melbourne. Strong investor lending may eventually pique the attention of regulators, along with recent up-ticks in higher debt-to-income loans and more low-deposit loans”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907