Mutual Daily Mutterings
Quote of the day…
“It’s tough to make predictions, especially about the future”– Yogi Berra
Chart du jour…US 10’s vs ACGB 10’s
Source: Bloomberg, Mutual Limited
Overview…”calm before the storm…”.
- Nothing to see here, move along. Ahead of tonight’s US CPI data, US equities closed only marginally higher (S&P and NASDAQ) or lower (DOW) than where they started the day, although markets are generally within a whisker of all-time highs. In bonds, treasuries rallied a few basis points as investors continued to debate the impact of ‘resurgent’ inflation on monetary policy, although a fall in yields to monthly lows suggest some easing of inflationary concerns on the eve of the latest CPI print.
- Talking heads…“you look across the board and everything is more expensive…it’s something worth watching, but the Fed has continued to say they are going to keep interest rates at bay regardless of the inflation data that comes in. You can only take them for their word and I think that’s what investors are doing”. Poor naïve fool.
- Generally, stocks have traded in a relatively tight range in recent weeks, and in the case of US markets, around record all-time highs. Investors are focused on navigating a sea of divergent winds, with the economic recovery and a dovish Fed blowing one way, and inflation concerns, high valuations and disparities in global Covid vaccine rollouts blowing the other…all quite poetic really. Nevertheless, these themes will likely stay with us over coming months.
- When it comes to tipping the future direction of markets, or risk appetite in general, I tend to put my money on the bond market, which has a better strike rate (historically). So, with consensus expecting US 10-year bond yields to rise by over +35 bps over the second half or the calendar year (from 1.53% to 1.88% by end of Q4’21 for the 10’s), that kind of rise is going to have some meaningful recoil on stocks, i.e. as a headwind for growth and valuations, so risk of downside persists.
- For those looking to make their fortune on crypto’s, Bitcoin and its posse of copycat faux currencies all fell overnight, down -5% -9%. Why? Who knows, perhaps because the sun came up, or some random trader’s favourite barista failed to put enough froth on their orange mocha Frappuccino.
- Offshore Stocks – ahead of inflation data tonight traders largely sat on their hands playing Candy Crush on their iPhones…probably. It was a broad-based ‘not much done’ day, with traded volumes around 25% below recent moving averages. Some 57% of stocks gained, while six out of eleven sectors gained. Leaders were Discretionary (+1.0%), Energy (+0.9%) and REITS (+0.5%), while at the back of the vaccination que we had Utilities (-0.9%), Staples (-0.9%) and Healthcare (-0.4%). E mini’s are doing little. How will markets react to CPI data? While it’s not the Fed’s preferred measure of inflation, markets will be watching it closely for guidance nonetheless. If it’s a beat to the high-side (faster inflation), then that signals a greater probability of the Fed tapering / tightening monetary conditions sooner, which will likely cause risk appetite to wane and stocks to retrace some of their gains. Vice versa if it’s a miss to the down side. Despite the downside risk to a beat, it’s worth noting the S&P 500 is a bee’s bottom hair away from all-time record highs.
- Local stocks – a modest, but relatively broad rally in the ASX 200 yesterday. Just under 60% of stocks advanced on the day, and only three sectors failed to lift. Unfortunately, two of those sectors were Materials (-0.4%) and Financials (-0.04%), which together account for 50% of the index. Add in Staples (-0.2%) and those three sectors accounted for 55% of the fall in the broader index. Leading the charge over the rainbow bridge to greener pastures were Tech (+1.5%), Healthcare (+0.8%) and REITS (+0.8%). Futures are marginally ahead.
- Offshore Credit – not a lot to add here today, seven smaller deals in the US for US$4bn priced. Hardly worth getting out of bed for! Much more active in Europe, €23bn priced with deals 2.6x covered and spread compression of -13 bps. Still constructive despite building headwinds – i.e. rising inflation and yield expectations.
- Local Credit – no follow through on first the NAB Austrac enquiry, or second the S&P ratings affirmation, with major bank senior spreads unchanged. The main event was in the tier 2 space with Macquarie Bank talking a 10-NC-5 A$ deal. Trader talk….”rough calcs would suggest this will land somewhere in the low 150’s”. The broader tier 2 space closed +1 – 2 bps wider yesterdays, although traders advise no real sell volumes of note. Instead “more a combination of recent spread compression, potential switching ahead of the MQGAU deal and the likelihood that dealers will soon look to trim inventory into quarter end”. By my calcs fair value on the MQG deal is +150 – 155 bps, although I initially thought it might launch around +160 bps and tighten on demand, but I’ve encountered some resistance to that view. I still think my initial thoughts on fair value are right (ballpark) and it’ll price toward the low end of the range. We note ANZ has skipped town for their next tier 2, heading to Ol’Blighty. That’s the second major bank in recent weeks to spurn local investors advances in favour of more exotic markets. What, do we smell or something?
- Bonds & Rates – treasuries rallied to their lowest yield in around a month ahead of tonight’s US CPI print – consensus details below. Any miss to the downside will give bond bulls a reprieve, and likely frustrate bond bears, and vice-versa if it exceeds expectations. Current yields are hovering around their post initial Feb-Mar sell-off lows. Locally, ACGB’s rallied a touch as we expected they would, given yesterday’s leads. We’ll likely see little action today, with only consumer confidence data due out.
- Offshore Macro – the big show tonight is US May CPI data, with consensus expecting core CPI to print at +0.4% MoM vs+0.8% MoM for April, while CPI Ex Food & Energy is expected to come in at +0.5% MoM vs +0.9% MoM in April. Annually, core CPI is expected to print at +4.7% YoY vs +4.2% YoY previously, or +3.5% YoY vs +3.0% YoY in April for ex-Food& Energy. US jobless claims is also due out, with consensus expecting a drop to 370K (vs 385K last week), and continuing claims of 3650K vs 3771K prior. Taking a broader look, from Bloomberg….”global GDP will expand +5.6% this year, up from +4.1% forecast in January, the World Bank said, fuelled largely by a +6.8% expansion in the U.S. and +8.5% in China. But developing nations will continue to struggle with the pandemic and its aftermath. Growth in low-income countries is expected to be the second-slowest of the past 20 years at +2.9% — down from the +3.4% forecast in January, held back by lack of access to vaccines. The World Bank also warned of substantial uncertainty beyond 2021”.
- Local Macro – NAB business conditions survey for May out yesterday. Some selected commentary from ANZ…”profitability, trading and employment hit fresh record highs. Importantly, capacity utilisation held close to April’s record high, remaining above 85%. Strong momentum in business investment should continue, following the 3.6% QoQ jump in Q1 (the fastest quarterly rate of growth in over three years). This is very important for the productivity outlook, particularly given the deterioration in business investment pre-pandemic. Confidence dropped by 3.7pts but remained elevated following the record high in April. The survey was conducted from 18-28 May, so the Victorian lockdown announcement on Thurs 27 May came at the very end. Victoria recorded the second-largest fall in confidence in May (-5.2pts) behind Tasmania (-7.1pts) but there were falls across all states including New South Wales (-4.5pts). The magnitude and duration of the current Victorian lockdown on conditions and confidence in the business sector will be dependent on the timing and speed at which restrictions are eased”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907