Mutual Daily Mutterings
Quote of the day…
“I think the saddest day of my life was when I realised I could beat my dad at most things, and Bart experienced that at the age of four”.…Homer Simpson
Chart du jour…weekly change in rate hike pricing….
- Last night’s decision making by central bank officials, Bank of England specifically, and subsequent market reaction was such that one is left scratching one’s dishevelled head with a profound look of confusion and disbelief on their face. Or, I just had a bad sleep and am only operating on three cylinders. A bit from column A, and a bit from column B. The most ‘exciting’ thing last night was, despite all expectations to the contrary, the BOE left official rates unchanged, whereas market expectations were strongly weighted toward a rate hike.
- BOE “officials put their credibility on the line by prioritizing slowing growth concerns over rising inflation. Governor Bailey called the decision a “close call,” and said surging prices will mean rates will have to rise in the “coming months.” But he pushed back against market pricing for a series of hikes to 1% next year”. On the macro front, the bank cut next year’s growth forecast to +5.0% from +6.0%, and expects inflation to hit +5.0% in April 2022. Talking heads….”global central banks seem to be pushing back on market expectations for aggressive policy action.” Risk of policy error is rising, especially if inflation is entrenched.
- Following the BOE shocker, US traders pared their bets on the pace of tightening by the Fed, which saw yields tumble and stocks gain ground to close at new record highs across the S&P 500 and NASDAQ. Again the ‘don’t fight the Fed’ mantra is bouncing around the cavernous inner workings of my melon. Stronger earnings did their bit, boosting confidence despite momentum indicators markets are overbought…and don’t get me started on valuations.
- Talking heads…”we thought that the extent of market pricing for Fed hikes really around the middle of next year was awfully full, and that should come down….it has come down, especially with the Bank of England guidance that we have received.” Market pricing has the Fed hiking rates twice by the end of 2022, while for the RBA, markets are looking at three hikes at least.
- Offshore Stocks – yet another record close for the S&P 500 and the NASDAQ yesterday, while the DOW’s heavy weighting to old-school sectors such as Materials and Financials saw it dip into the red. Focusing on the S&P 500, momentum indicators are flashing well and truly ‘overbought. The S&P 500’s RSI is at 74.4, on the cusp of 12-month highs. Daily performance was dominated by Discretionary (+1.6%), Tech (+1.3%) and Telcos (+0.3%), while the ‘losers’ on the day were Financials (-1.7%), REITS (-1.2%) and Healthcare (-1.2%). US reporting season is now over 80% in the tin (S&P 500) with aggregates sales up +18.5% on the pcp and earnings up +40.7% on the pcp. Only Discretionary has failed to advance its aggregate earnings (-2.5%). The gains run deep across sales and earnings, with 87% and 81% of companies respectively reporting gains. Against expectations sales are ahead by +2.7% and +9.8% for earnings. Talking heads…the optimist…”so far this week we’ve gotten pretty good news on the labour-market front…and with the Fed starting to take a step back from their accommodative stance, in aggregate, this could stand as another proof point of solid gains when it comes our economic recovery.”
- Local stocks – a reasonably broad-based, albeit modest rally in local markets yesterday. Nothing per se that I can see to drive the move – i.e. no real change to the narrative or the soup of headwinds and tailwinds influencing investor sentiment. Nevertheless, the market rose with around two-thirds of stocks advancing, and only three sectors sporting daily losses: Energy (-2.0%), Discretionary (-0.5%), and Utilities (-0.4%). Tech (+1.2%) won line honours on the day, followed by Financials (+1.0%) and Telcos (+0.8%), while on a handicap basis the rebound in bank stocks drove two-thirds of the broader index’s gains. Futures are pointing to modest gains on the open.
- Local Credit – a dull day yesterday…trader talk…”a low volume day with the secondary market showing signs of fatigue after a volatile few weeks. Whilst the RBA and FOMC meetings have helped restore stability it seems credit investors are happy to wait on the sidelines for the time being. Closing secondary cash spreads mostly unchanged.” Nothing to add on tier 2 either, spreads closing unchanged.” We continue to feel a major bank senior deal is unlikely before year end, but of course one cannot be discounted. We met (virtually) with ANZ yesterday and while they divulged nothing specific on their funding plans, we came away with the impression that they were more than sufficiently funded and unlikely to print anything locally. The other majors are likely in the same camp. Now, Murphy’s Law dictates a new deal will be announced imminently. One potential swing factor in major bank funding needs (or that of any bank) is the pace of deposit drawdowns. With Fiscal stimulus payments chocking up savings accounts and lockdown’s limiting household’s abilities to splash the cash, wholesale funding needs have been modest. As we head out of lockdown, and into the heavy spending Christmas period, how quickly these excess savings are deployed will be an important indicator of when banks may be required to tap wholesale markets on the shoulder.
- Bonds & Rates – rates did as we expected they would yesterday, they follow offshore leads and drifted higher. And given leads again this morning, we’ll probably see momentum swing the other way, and then some. The BOE’s surprise lethargy in hiking rates overnight gave bonds a boost with a meaningful drop in yields globally. And, despite the Fed announcing the scale of its tapering plans, US ten-year treasury yields dropped -8 bps. Markets are obviously content with the Fed still drip-feeding cash into the system at a decent clip, for at least the next six-months (likely) and believing Powell’s rhetoric that rate hikes are a way’s off in the future, not important to this month’s performance measures. Elsewhere, GILTS (UK) fell -14 bps, and OATS (France) fell-6 bps, as did BUNDS (Germany).
- Macro – nothing of significance locally, while offshore tonight we have US labour data. Market consensus has +450K jobs added through October, well up on September’s +194K. The unemployment rate is forecast to drop from 4.8% to 4.7%, while the participation rate is forecast to rise to 61.8% from 61.6%. Wages earned is expected to grow +0.4% MoM (vs +0.6% MoM in September), or +4.9% YoY vs +4.6% YoY at the end of September. Lastly, hours worked is expected to remain flat. A meaningful beat to the upside might see yields higher as it would heighten rate hike expectations given employment is one of the Fed’s twin focuses (inflation obviously the other).
Have a good weekend.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907