Mutual Daily Mutterings
Quote of the day…
“My 4-year old son gave me a hand made card for Fathers Day. Maybe for Christmas I’ll draw him a picture of some toys”…Jim Gaffigan
Chart du jour…COVID cases…US accelerating
“Happy Labor Fathers Day…”
Overview…”jobs miss, earnings beat…”
- Last week’s price action was all about Friday’s US non-farm payrolls report, which turned out to be a massive miss – although the unemployment rate improved, as did hourly earnings, cancelling each other out. The S&P 500 fell at first, but then climbed back to modest gains on thin pre-holiday volume (it’s Labor Day weekend), while treasury yields ended the week barely changed versus where they started. And, if bonds know best (and, it’s a rule of thumb that they generally do), then perhaps investors should shrug off the payrolls data point as an anomaly. It’s worth noting also, that even oil prices ended the week basically flat as well. Credit spread movements were also modest in either direction.
- The US non-farm payrolls print was the weakest reading since the beginning of the year, suggesting the surge in Delta infections has impacted return to work plans for both employers and workers, and could also add some complications to the Fed’s tapering plans, which are expected to kick off by year end. Street analysts are already pushing back their tapering announcement expectations by a couple of months, but generally they’re still expected a 2021 commencement.
- As for the pandemic, I thought I’d provide some numbers on where we’re at. The US has the highest number of cases, 40.8m or 18.5% of global cases (220m) and 665K deaths, of 14.5% of total (4.5m). This equates to 2,000 deaths per million of population, which ranks them 20th in the world. For context, we’ve had 61K cases, and 1,039 deaths for 40 per million people. According to Johns Hopkins, the ‘normal’ flu kills between 290K and 650K annually. Just for some context.
- Talking heads….”the spread of the delta variant is slowing the reopening process and has caused us to mark down growth globally….,” and this “from a slide in China services to a plunge in US job gains, the delta variant is putting a dent in the global recovery. Looking forward, even as China exits its latest outbreak, a broadening crackdown on entrepreneurs – part of President Xi’s “common prosperity” agenda – adds uncertainty to the global outlook.”. A raft of central banks are set to meet this week, including the ECB, which has also flagged the time is approaching to withdraw stimulus. The RBA also meets, tomorrow.
- Offshore Stocks – US stock markets displayed a muted reaction to the non-farm payrolls miss (more detail below), probably reflecting the old (even though it’s not that old) mantra that bad news is good news, i.e. decelerating jobs growth may stall the Fed’s taper timing a little longer, keeping monetary policy settings at DefCon 1 (the most severe). For what it’s worth, the US Financial Condition Index is running at 1.36, with anything above 0.0 indicating accommodative financial conditions. And for context, the index is a fraction off its 5-year high of 1.41 (July 2021), and the pandemic low was -6.3, which it set very briefly, at the worst of the market sell-off before the Fed came bounding over the horizon on its gleaming white stallion, named “Monetary Accommodation.” It’s running in the 5th at Randwick this weekend. Returning to markets, around two-thirds of stocks in the S&P 500 retreated on Friday, on thin volumes. Tech (+0.4%) led the pack, followed by Telcos (+0.1%) and Healthcare (+0.1%), while at the other end of the tables, Utilities (-0.8%), Materials (-0.7%) and Industrials (-0.6%) declined most. Range trading until the Fed provides some clarity around its tapering plans. Normally I’d day macro will be driving the bus for the near term, but even that doesn’t seem to be moving the dial that much.
- Local stocks – modest gains on Friday (+0.5%), which was enough to drag the ASX 200 across the line into ‘modest’ weekly gains. On the day, just over two-thirds of the ASX 200 stocks advanced, while all but two sectors also gained. Materials (+1.2%), Utilities (+0.8%) and Energy (+0.8%) were the top of the leader board, but Materials and Financials (+0.4%) did most of the heavy lifting given their dominance of the index (weighting wise). Only Tech (-0.8%) and Staples (-0.1%) failed to lift. Futures are pointing to modest losses on the open today (-0.3%). Stocks are still looking too rich for mine, and exposed to a pull-back given there is little room for error or much of a buffer to absorb any setbacks or shocks. However, continued monetary policy support is a big fat Band-Aid keeping things together for the time being.
- Offshore Credit – primary activity muted ahead of the US long weekend. The action in secondary was also relatively benign on the day, although EU Financials have been drifting wider of later, noticeably underperforming other categories. US Corporates also wider since the end of June (‘Sydney Lockdown’), mainly on supply as corporates hit primary markets with force toward the end of July ahead of rising Fed tapering expectations.
(Source: Bloomberg, Mutual Limited)
- Local Credit – traders comments….”a predictably quiet end to the week as we await a seminal US employment report. Local credit responded well to the primary that we received this week with no discernible widening on secondary curves. We anticipate more to come with the expectation that investor appetite remains robust.” No change to senior spreads on the day or week. The Aug-26 is at +39 bps and the Jan-25’s at +25.5 bps. In the major bank tier 2 space, from the traders…”spreads unchanged Friday but tighter on the week. We saw two-way flow but all small in size. Supply, and lots of it, remains the danger to spreads here but with the majors having achieved ~85% of what was required of them by APRA by 2024 we think any forthcoming supply will be orderly and unlikely to disrupt secondary curves unduly. At this point we would comment on how the T2 market (A$ in particular) has matured with an increased investor base across all geographies, my point being that we no longer see the seismic impact of primary issuance on secondary curves.” I don’t see any imminent widening threat to bank spreads other than a potential spike in primary, which is not a realistic likelihood given bank funding positions generally. That is, they have an abundance of liquidity curtesy of strong deposit growth and the now expired TFF.
- Bonds & Rates – modest moves on the day and week in local bonds, range trading. From offshore, there is talk amongst the analyst community that the jobs report has upped the odds for stimulus (fiscal) and pushing a potential Fed taper date further down the road. For the week ahead investors will listen with interest to a bevy of Fed speakers for any indication of where the Fed’s thinking is at. The Fed’s self-imposed pre-meeting blackout period then starts on Sept. 11. US 10-years have ranged between 1.19% and 1.38% over the past month, closing at 1.32%. The week ahead is holiday shortened with a handful of auctions, which could see yields retest 30-day highs (i.e. 1.37% – 1.39%).
- Offshore Macro – wow, what a miss. Straight through to the keeper, or catcher to keep it Amurican! Consensus estimates were for non-farm payrolls to come in at +733K new jobs, but instead only +235K were added (compared to an upwardly revised +1.05m in July). It wasn’t all doom and gloom, the unemployment rate declined from 5.4% to 5.2% and the underemployment number fell from 9.2% to 8.8%. Hourly earnings also rose, and exceeded consensus, up +0.6% MoM (vs +0.3% MoM cons. & +0.4% MoM last), or up +4.3% YoY (vs +3.9% YoY cons. & +4.0% YoY last).
- Local Macro – the main event this week is the RBA policy meeting (Tuesday), where the bank’s prevailing tapering plans may be up for discussion. There are calls from some market analysts for the RBA to halt plans to pare back their buying plans (from $5bn to $4bn a week) be halted given the lingering lockdown situation. My gut feel is they’ll maintain the course given yields remain accommodative, although I acknowledge curves have steepened 10 – 15 bps over the last couple of weeks.
- The week ahead – pilfered from NAB’s morning note….”while the economic calendar may be light for both Australia and offshore the focus this week turns to central banks. In Australia the RBA meets on Tuesday where NAB expects the Bank will continue with its scheduled taper to $4bn of bond purchases a week, down from $5bn. On the global calendar, the ECB meets and following recent ECB commentary, the expectation will be for some guidance/colour around tapering of the emergency purchase program. In the US there is a plethora of Fed speakers, including Williams, Kaplan, Daly and Mester. As for supply, the AOFM will tender $1bn of Nov 32 and $1bn of Sep 26. The US Treasury will auction 3-year, 10-year and 30-year bonds”.
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Scott Rundell, Chief Investment Officer
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