Mutual Daily Mutterings
Quote of the day…
“Every two years the American politics industry fills the airwaves with the most virulent, scurrilous, wall-to-wall character assassination of nearly every political practitioner in the country – and then declares itself puzzled that America has lost trust in its politicians” – Charles Krauthammer
Chart du jour … US CPI vs shipping costs…
“Modern Education Standards…”
Overview…”words vs data…”
- A solid bounce in stocks across the board as the recent bond sell-off eased somewhat, although it could be short lived with tonight’s US CPI figure expected to hit 40-year highs. European stocks were up from the get go with several key indices back in the black YTD, while US bourse have some lost ground to cover before they start popping the bubbly. Still, some respite in the wake of markets being whipsawed YTD on concerns surrounding tightening monetary policy.,
- Investors witnessed a modest rally in treasuries overnight with US 10-year yields hitting session lows of 1.91% after an auction of the same maturity notes. In the end, they closed off lows, but still lower on the day. The curve bull flattened as the front of the curve drifted higher on CPI risk. Soothing words from French central bankers that perhaps markets were getting ahead of themselves pushed EU yields lower (↓5 – 10 bps).
- Talking heads…“improving economic data will support risk assets unless the Fed needs to reset the outlook for financial conditions lower….until it is clear financial conditions need to tighten further, we favour cyclicals relative to defensives, especially as the economic headwinds of omicron fade and demand growth firms.”
- Talking heads…”investors certainly appear encouraged by the fact that the falling-knife period looks to be in the rear-view mirror and we’re now seeing signs of stabilization…of course, that could change quickly if the inflation outlook worsens, and we won’t have to wait long for the next hurdle on that front, with the U.S. CPI data being keenly anticipated.” Careful of those splinters old-boy…
- Markets vs Fed speak…bets on the pace of rate hikes have increased since the January Fed meeting, shifting to roughly five this year versus the three officials previously forecasted in December. Cleveland President Loretta Mester said overnight she anticipated it will be appropriate for policy makers to raise rates at a faster pace, reiterating a January comment that she supported a first hike in March. Apparently, “every option is on the table.” The big question is do they go big off the bat and hike by 50 bps in March, of just dip the toe for 25 bps? The latter is consensus, but there are some outliers. Consensus expect the Fed Funds Rate to be 1.00% the end of 2022 and 2.00% by the end of 2023.
The Long Story….
- Offshore Stocks – it was one way traffic overnight with 85% of the S&P 500 advancing, let by Tech (+2.3%) as the dominating influence, accounting for just under half of gains. REITS (+2.4%) took line honours, followed closely by Telcos (+2.4%). No sector failed to make gains, although Staples needn’t have bothered getting out of bed, unchanged on the day. Reporting season has been buoyant with around two-thirds of the S&P 500 now reported. Some 84% of companies have reported sales growth, with aggregate growth of +16.4%. It’s a similarly strong result in earnings, 79% gaining with aggregate growth of +27.3%. Base effects and post pandemic recovery benefits all contributing to gains. But, it’s not sustainable. Consensus estimates are factoring in +9.4% Q2’22’ growth and +5.9% growth in aggregate earnings…still solid numbers, but moderating. Upcoming monetary policy decisions will likely play a key role in determining how these growth expectations pan out over the near to medium term.
- Local Stocks – a solid day in local markets yesterday with a +1.1% gain, underpinned by strong gains in Financials (+2.6%) on the back of CBA’s strong interest results. CBA gained +5.6% post results, with that positive momentum dragging peer banks up also, WBC (+2.4%), NAB (+2.4%), BEN (+2.3%), and ANZ (+1.7%). Embattled Magellan (MFG) had another solid day, up +5.6% as investors perhaps thinking the stock had been punished enough. AMP rose +4.7% as the group bats its eye-lids and flirts with some global funds on the potential acquisition of AMP Capital. All up 87% of stocks in the index got their skates on and advanced. Outside of Financials, Tech (+4.2%) has a strong day, as did Staples (+1.5%). Materials (-0.6%) and Energy (-0.4%) were the only sectors failing to gain ground. Futures are signalling more gains today.
- Offshore credit – a very modest tightening in spreads, basking in some of the equity’s glow. Nothing significant to touch on, the narrative remains the same. Risk to drift wider.
|EU Cash vs CDS…
Source: Bloomberg, Mutual Limited
|US Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Local Credit – traders…”spreads largely unchanged across the complex with A$ cash holding firm despite weakness in offshore markets. Flows are light and led by the offshore investor base, with local accounts seemingly keeping powder dry for primary supply.” Major bank senior and tier 2 all closed largely unchanged. I touched on performance of broader cash markets vs CDS yesterday, with the former outperforming the latter. Major bank CDS is only +2 – 4 bps wider YTD, trading in a range of 31 – 38 bps (5-years). WBC is the outlier, in the naught corner with AUSTRAC, which has them at +4 bps YTD, while the other three are around +2 – 3 bps. WBC is trading at 38 bps in CDS. Cash spreads are less discerning as it relates to WBC vs the others, there is little difference in 5-year senior paper. CBA’s Jan-27 is at +64 bps, while WBC’s Jan-27 is also at +64 bps. Both issued at +70 bps. Note, CDS is quoted in US$, so an adjustment is required for the basis, which is around +8 bps at the moment for 5 years, so that’s +39 – 45 bps for CDS vs +64 bps for cash. Relative to the broader iTraxx, major bank CDS is trading at 50 bps inside the index, the widest since around 2017 (excluding the pandemic market conniption in March 2020.
AU Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – local bonds whipped around a bit, moving from modest losses (↑ yields) to even more modest gains (↓ yields). By days end, a smidge ahead (↓ yields). Overnight, a solid rally in European yields as some central banks warned markets to not get too far ahead of themselves on tightening expectations, while elsewhere with the ECB, some officials are reportedly losing faith in the bank’s inflation forecasting…said “people familiar” with the matter. Of course, key ECB economists poo-poo’d any suggestions they don’t have a clue on inflation, insisting their modelling is too legit to quit…aka sound. In treasuries, a reasonable rally ahead of tonight’s CPI. Goldman Sachs raised its year-end Treasury yield forecasts, citing “the economic backdrop and the Fed’s hawkish turn.” They have upped this year’s 10-year outlook to 2.25% from 2.00% (vs 2.15% consensus), and the end-2023 target to 2.45% from 2.30% (vs 2.44% consensus). The largest changes are to short-dated tenors: the bank now expecting 2-year yields to rise to 1.90% by year end (vs 1.43% consensus) and 2.45% by the end of 2023 (vs 1.88% consensus), which means the 2s10s curve would be flat by the end of next year. Not good for growth expectations!
- Macro – main event is tonight with US CPI. Consensus has US inflation coming in at +7.2% YoY in January, accelerating from December’s +7.0% YoY pace, though consumer prices are seen dipping to +0.4% MoM from +0.6% MoM. An above-forecast number will put pressure on the Fed to tighten by 50 bps next month, something officials have so far resisted, but which futures markets are predicting has a one in three chance of happening. The last time inflation was remotely close to a 7.2% print was 1982. In fact, the average CPI print since then has been +2.8%, and the periods where inflation has exceeded say +4.0% are rare, maybe 10% of the time. The last time US CPI was north of +7.0%, treasury yields were in the mid-teens…given the sheer volume of outstanding debt in the world, imagine the financial Armageddon if rates retested such levels.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907