Mutual Daily Mutterings
Quote of the day…
“Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac?”…George Carlin
Chart du jour… US inflation vs Crude…
Overview…”July 4th, the day Will Smith saved us from aliens”
- It was a quiet trading week with prices drifting aimlessly rather than moving with any real conviction. Across most markets the five sessions were marked by rebalancing flows and positioning ahead of US non-farm payrolls on Friday night our time. The jobs data smacked it out of the park vs expectations +850K vs +720K, which sent stocks higher (to new highs) amid light pre-holiday volume. Despite the gains, the number of unemployed persons was unchanged at 9.5m, and we got a weaker profile for hours worked. A higher-than-expected unemployment rate (5.9% vs 5.6%) also tempered the rage somewhat, reducing the likelihood that the Fed would be forced to accelerate tapering action, or rate hikes, which resulted in a fall in bond yields and a bull flattening of the curve. Local markets closed on a positive footing, stocks up, bond yields lower.
- This week…we’ll have just four trading days in US markets. Offshore focus on the week will be occupied mostly by the latest FOMC minutes, with particular emphasis on any tapering discussions, and also the US government debt ceiling issue might get some airtime as it looms as a potential source of volatility in coming weeks. Trading volumes are expected to be quiet in US markets as the summer holiday season gets underway, so we’d expect risk assets generally to drift higher globally – all other things being equal. In the last ~30 years, the S&P 500 and Stoxx 600 indexes have recorded average gains of roughly +1.0% in July.
- Talking heads….“vaccination is accelerating globally, major central banks remain extremely accommodative, fiscal support is still present and earnings continue to recover….in such an environment, it is difficult to imagine a very negative scenario for equities.” But, valuations are punchy and realistically strong earnings growth is already priced in, for next year at least, but then earnings growth will taper off (I think). Any miss, or headwind to earnings should see some downside risk. Local reporting season kicks off next month.
- The main focus locally will be tomorrow’s RBA Board Meeting with changes to the bank’s Yield Curve Control and QE program in play. Whether to extend or not will be discussed, with most commentators in the ‘not extend’ camp, although recent COVID lockdowns have sewn some doubt into minds. As for the QE program, the RBA is expected to announce tapering of their buying activities, from $100bn to $50bn (from September).
- Offshore Stocks – a broad-based rally in offshore markets on Friday, buoyed by the strong jobs data. A smidge over 60% of stocks gained within the S&P 500, and only two sectors failed to make gains on the day, Energy (-0.2%) and Financials (-0.2%). Tech (+1.4%) dominated the winner’s circle, followed by Discretionary (+1.1%) and Telcos (+0.9%). The S&P 500 hit new all-time highs, once again, and RSI’s at 71.9 are comfortably in ‘overbought’ territory. Similarly, the NASDAQ, reached new highs and it’s RSI’s are flashing ‘overbought’ (73.6). To round out the main US indices, the DOW is at all-time highs, but RSI’s are still in the ‘directionless’ range, between 30 – 70 at 61.2. E-mini’s are all up, DOW (+0.5%), S&P 500 (+0.7%) and the NASDAQ (+1.1%). US markets closed tonight for the Independence Day Holiday.
- Local stocks – grinding higher, but unlike offshore peer indices, a couple of percent off all-time highs – probably the lockdowns weighing on investor sentiment. On Friday, modest gains with the ASX 200 up +0.6%, but largely flat on the week. Energy (+1.8%), Discretionary (+1.3%) and Industrials (+1.3%) dominated the podium, while at the other end, really only one sector with the participants ribbon, Tech (-0.1%).
- Offshore Credit – looking at high yield for a moment, US junk bonds rallied last week to drive the index yield down to a new record low of 3.72% and risk premium as reflected in the spreads to +265 bps, the lowest since June 2007. Yield-starved investors continue to seek junk bonds, shrugging off inflation woes and fears that the Federal Reserve may begin tapering soon. Like seagulls onto a hot ship, too much capital chasing too few bonds resulting in yields that are too low. In the investment grade space, the grind tighter continues over the week, although in US markets on Friday the corporate index widened +2 bps (flat on the week) vs the financials index, which tightened -2 bps (-3.5bps on the week). In EU IG markets, a modest grind tighter over the week.
- Local Credit – from the traders…”predictably quiet day in local markets (on Friday) as we await US employment data this evening and a pivotal RBA meeting next Tuesday (tomorrow). Flows were light and little to indicate spreads should close mostly unchanged”. No changes to senior or tier 2 spreads of any note. Across the main indices, spreads were half a basis point to a base point tighter on the week, and within a basis point of ten-year tights. The RBA meeting tomorrow is not expected to have any meaningful impact on spreads.
- Bonds & Rates – a decent rally in local bonds on Friday ahead of the RBA meeting this week. The AOFM provided an update on issuance expectations – a summary from CBA…”Firstly, there won’t be any new ACGB lines in the first half of financial year. The AOFM’s recent speech did suggest they would be coyer with their intentions, giving them maximum flexibility, particularly in the challenging health and budget scenario. The next update, in January 2022 will give more details. The shift away from a reliance on syndications is notable but completely understood as the issuance task is lower. Building of existing lines takes precedence and this makes sense against a backdrop where the RBA owns large chunks and this can reduce liquidity.” All eyes on the RBA tomorrow. As per above, no extension of the YCC buying from the Apr-24 to the Nov-24 is expected, and there is a popular view in the market that the RBA’s current QE program will be extended beyond September, but volumes tapered from $100bn to $50bn for the subsequent six-months. The recent virus outbreak might stay the RBA’s hand in moving to a more hawkish stance.
- Offshore Macro – from Bloomberg, some commentary on US labour data “the pace of hiring powered up in June after missing consensus for two months, powered by service industries. Nonfarm payrolls rose by 850K, versus a revised 583K the prior month. The forecast was for an advance to 720K. Still, the jobless rate went counter to expectations, rising to 5.9% from 5.8%. Average earnings growth slowed month on month”. Focus this week will be on the FOMC minutes, while scheduled data is second tier and not likely market moving. Some comments from the CBA team…”US economic data is currently reinforcing US economic outperformance. The global economic upswing has taken longer to gather pace that we expected. In part, this reflects uneven vaccination efforts across countries. The consequence is the US is rebounding faster than many other major economies, including the Eurozone and Japan”.
- Local Macro – May home loan data was released last Friday, showing the value of new home loans (excluding refinancing) had grown strongly, +4.9% MoM vs +1.8% MoM consensus, and up from +3.7% MoM in April. A +13.3% surge in investor lending drove overall growth, the highest since April 2015 and more than double consensus median estimates. New investor loans totalled $9.1bn, representing 28% of total loans written vs 46% in April 2015. For the week ahead, a handful of second tier metrics are scheduled – nothing likely to be market moving. The main event is the RBA meeting tomorrow. It will be interesting to see if the strong lending data comes into play in their tapering discussions…see below for schedule of data:
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907