Mutual Daily Mutterings
Quote of the day…
“No matter how old you are, if a little kid hands you a toy phone… you answer it”…Dave Chappelle
Chart du jour…AU 3s10s
Source: Bloomberg, Mutual Limited
“Blue Origin, Green Finnish…”
Overview…”feathering the brakes..”
- European stocks dropped a decent amount overnight and US stocks snapped a seven-session heater. Crude oil fell as much as -3.0% after OPEC+ discussions were scrapped amid squabbling amongst members – energy stocks were consequently pummelled. US treasury yields fell to levels not seen since February after the June ISM services report missed expectations (60.1 vs 63.5) and its employment component moved into contraction territory. Local markets yesterday saw stocks lower, yields higher and credit stuck in the middle with you.
- In addition to the weaker ISM print, some vaccine news out of Israel has also been tabled as a driver of strength in treasuries. Specifically, news out of Israel (one of the most advanced countries in COVID vaccination rates) around the efficacy of the Pfizer vaccines. Government data has shown a drop in Pfizer’s vaccine efficacy, from 64% of people between June 6 and early July, down from a previous 94% – a drop that was observed as the Delta variant spread and coincided with lifting restrictions. Still on the pandemic, the US is moving to ease even more restrictions despite pockets of the country with low vaccination rates.
- With apologies to the Ghostbusters, “the RBA came, the RBA saw, the RBA kicked its…,” no, not really, they didn’t. Given all the hype, the RBA meeting ended up a bit of a fizzer. Not so much a tantrum as a result, but definitely a quivering of the bottom lip. No change to cash rates (no surprise) and the yield curve control buying was not extended beyond the Apr-24 bonds (also no surprise). Tapering expectations were generally met, with a modest drop in buying from $5bn to $4bn a week from the end of the current program (September). The pace of purchases will be reviewed in November subject to data, so not overly definitive. ACGB’s sold off (yields higher) and the curve bear flattened.
- The RBA’s view on the domestic economy remained constructive – it’s running well, the labour market is ahead of expectations, inflation is still likely transitory, but there are also some expected hiccups along the recovery journey with the COVID pandemic and its variants lingering – but they’ve proven temporary, with a strong bounce back post each lockdown.
- Offshore Stocks – the first trading session for US markets post the Independence Day long weekend, which typically marks the start of the summer vacation season. Not all parts of the markets were feeling summery, the NASDAQ was, up +0.2%, while the DOW (-0.6%) and S&P 500 (-0.2%) were sporting some sun-burn. Over two-thirds of stocks (S&P 500) fell and only a handful of sectors were able to put up a fight and gain ground, namely REITS (+0.9%), Discretionary (+0.8%), and Utilities (+0.4%). Quite a few sectors were running around without the factor +40, including Energy (-3.2%), Financials (-1.6%), and Materials (-1.4%). Heading into the long weekend, the S&P 500 RSI’s were flashing overbought (>70), so on that basis a pull-back was on the cards…if you’re a believer in such signals, for me, yes and no. E-mini’s have continued the pain, with the S&P 500 mini’s down -0.3% as I type.
- Local stocks – local equity markets didn’t like the mildly hawkish tone in the RBA’s voice, selling off -0.7% on the day. Over three-quarters of the ASX 200 closed lower and only one sector fired a shot by gaining, Energy (+1.5%), a move that will no doubt be smacked back over the bowler’s head today given the fall in oil prices overnight (Brent down -3.0%, WTI down -2.6%). At the bottom of the pile, Telco’s (-2.0%) failed to call a friend, while Healthcare (-1.9%) and Tech (-1.8%) were under the weather and having systems issues respectively. With weaker leads, futures are in the red for a moderately soft open.
- Offshore Credit – Canadian and Japanese banks kicked off the holiday-shortened week overnight with US$6.7bn in US IG primary market activity, contending with weaker equities while the yield curve bull flattened. Issuers paid about 5 bps in new issue concessions driven by order books that were 2.3x covered. There were no signs of material order book attrition with final indications of interest dipping just 10% from peaks.
- Local Credit – credit markets were largely sidelined as all grey matter was focused on dissecting the RBA statement and subsequent speech from Governor Lowe. No change to major bank senior spreads, with traders reporting two-way flows, but with light volumes and they’re losing inventory – noting there is $4.5bn of maturities next week that will need to be put to work. With up to three-year funding covered by the TFF, and any primary likely to be in the 5-year bucket, I’d say recycled maturities will be looking for a home amongst the 2024 – 2025 maturities. Dare I say it, we could see some grinding tighter in the Jan-25’s? They’re currently sitting at +32 bps, with perhaps a +28 – 29 bps print in the next week or two? Just putting it out there. In tier 2 space, two way flows also, but again light volumes. Only one tier 2 line budged yesterday according to traders, the CBA Serp-25 call, -1 bps to +116 bps.
- Bonds & Rates & the RBA – the much-anticipated RBA July meeting came and went with relatively modest fanfare, very few surprises. The stance remains broadly dovish, but a modestly hawkish twist was noted as tapering plans were tabled. The official cash rate was left unchanged at 0.10%, and the bank “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.” In his speech later in the day, Governor Lowe stated while he “can’t rule it out completely [i.e. a 2023 hike]…it doesn’t seem particularly likely…and for an earlier than 2024 hike to occur it would require…strong, unequivocal evidence the pick-up in the economy is translating into wages growth and inflation is sustainably higher ”. Nevertheless, he said the decision to hike, when and if it comes, will be made based on data, not a date. And inflation needs to be sustainable, which is translated as a couple of quarters and the expectation it would continue.
- The Bank elected not to extend their yield curve target from the Apr-24 bond to the Nov-24 bond, but that was very much expected. Yield target was unchanged at 0.10% A small tapering to the bond buying program was tabled with RBA to “continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4bn a week until at least mid-November” down from $5bn. “The Board is responding to the stronger-than-expected economic recovery and the improved outlook by adjusting the weekly amount purchased. It will conduct a further review in November, allowing the Board to respond to the state of the economy at that time.” With house prices rising and investor lending firing up again, focus on prudential standards will intensified, and macro-prudential measures are loaded and ready to fire should they be deemed necessary.
- Market reaction was to be expected given the slight hawkish tilt, with the bulk of action in the front half of the curve. Three-year yields increased +8 bps to 0.46%, a meaningful move on any given day, but realistically levels are back to where they were a little over a week ago. The strong rally in the 3’s into the RBA meeting was a bit of a head scratcher – not sure why these moves given consensus expectations around tapering etc. The 10’s sold off a touch, but remain toward the low end of their three-month trading range. Upside pressure on yields will persist for the foreseeable future. US treasuries bull flattened overnight on weaker than expected ISM data, with the 10’s -7 bps lower at 1.35%, levels not seen since February. Treasuries have outperformed local bonds over the past week, but for the past three months the spread in the 10’s has been relatively stable at +10 – 20 bps, with current levels toward the bottom of that range.
- Offshore Macro – the US ISM services index pulled back 3.9 points in June following a record-high reading in the prior month. Consensus was expected 63.5, but they got 60.1. While the rate of expansion remains strong, supply and demand imbalances are intensifying just as manufacturing pressures begin to turn the corner. Attention will now turn to tomorrow morning’s FOMC June meeting minutes (4am Sydney time). Minutes are expected to reinforce the FOMC’s hawkish shift and any additional information on when the FOMC could taper its asset purchases and/or a change in the FOMC’s inflation outlook could be a boost to US interest rates.
- Local Macro & the RBA – per the RBA meeting statement, the recovery in the local economy has proven stronger than earlier expected, which is forecast to continue. The labour market continues to recover, faster than initially expected – although some labour shortages were noted, particularly in areas affected by border closures (international more so than state). Despite tight labour market conditions, inflation and wages growth remain muted. While a pick-up in near term inflation and wages growth is expected, the RBA still expect any pick up to be gradual and modest. While the lingering virus, and sporadic lockdowns, represents a headwind, the economy has thus far proven itself resilient and able to bounces back quickly after restrictions are eased. With rising housing prices and low interest rates, underwriting standards will be closely monitored.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907