Mutual Daily Mutterings
Quote of the day…
“You moon the wrong person at an office party and suddenly you’re not ‘professional’ any more.…” – Jeff Foxworthy
Chart du jour: US inflation expectations…
Source: Bloomberg, Mutual Limited
“Blind Man’s Bluff…”
Overview…”inflation returns to the narrative”
- US stocks were taken to the cleaners over the second half of the Northern Hemisphere trading session particularly tech stocks, while European markets were broadly, but moderately, mixed. Bonds behaved in a similar fashion with US treasuries yields rising a few basis points, while EU bonds were mixed – some up, some down. If we didn’t know anything else other than the fact that stocks were down, and mainly tech stocks, and bond yields were up, then the narrative was almost always going to be rising inflation fears – and that’s what we’re reading across the wires…”surging commodity prices stoked concern about whether inflation will derail a growth rebound in the world’s largest economy and spoil a record stock rally”.
- Copper hit new record highs, while iron ore futures jumped +10%. Oil was up and down after cyber-attacks on key US pipeline infrastructure caused some closure. This rise in commodity prices is fuelling the inflation juices in markets, and recent reporting season commentary is also adding some combustibles to the growing bonfire – specifically companies noting rising raw material costs and the ability and willingness to pass these costs on to end users. The next couple of quarters will be crucial in the inflation debate. Markets are punting on a Q2 spike, reflecting base effects (Q2’20 being the peak of pandemic lock-downs), which is in line with central banks also. Beyond Q2, there are two very broad schools of thought. The global central bank community, most notably the Fed (and RBA for ours), is working on the assumption the spike in inflation will be transitory. The other school of thought, which is being somewhat priced by bond markets, is that the rise in inflation will be sustained and more aggressive than central banks expected, necessitating an earlier tightening in official monetary policies (including QE programs).
- So, the reputation of the Fed (and peer central banks) is on the line. Will inflation be truly transitory, as they predict, or will there be more to it. April US CPI data is out tomorrow night, with consensus at +3.6% YoY (vs +2.6% YoY in March), or just +0.2% MoM (vs +0.6% in March).
- Offshore Stocks – tech stocks took it in the neck with a rusty back-hoe, with the NASDAQ down -2.6%, while the traditionally old school DOW generally held its own, down only -0.10%. Reflecting how pervasive tech stocks have become across US markets, within the S&P500, only 55% of stocks closed lower on the day, and the sector performance (directionally at least) was reasonably balanced, five sectors up, six sectors down. As is generally the case when inflation concerns bubble to the surface, value stocks trumped growth stocks. At the top of the leader board we had Utilities (+1.0%), Staples (+0.8%) and REITS (+0.4%), while at the other end, sitting with the fat wheezy kids with a note from matron, were Tech (-2.5%), Discretionary (-2.0%) and Telcos (-1.9%).
- Local stocks – a pretty buoyant session yesterday with the ASX 200 flashing a new, all-time, ding-dong, thank your mother for the rabbits high! The ASX 200 closed at 7172, 10 points or +0.14% from pre-pandemic highs (7162 on 20-Feb-20). The ASX 200 is now +57.8% above pandemic lows. Yesterday’s gains were driven by Materials (+3.4%) and Financials (+0.6%), contributing almost 60% of the daily gains. Only Utilities (-0.1%) failed to post gains on the day. The performance across Materials wasn’t surprising given growth in commodities, with iron ore breaking through to new historical highs, fuelled by strong Chinese steel production. Fortescue (+7.9%), Rio Tinto (+4.6%) and BHP (+3.1%) all closing strongly higher – by our calculations, Twiggy Forrester’s stake in Fortescue earned him a lazy $1bn in additional wealth. I just don’t know how he survives! The ASX 200’s RSI (relative strength indicator) is flashing 68.3, and is again approaching ‘overbought’ levels (70.0), although that doesn’t necessarily mean we’ll see a meaningful correction. Having said that, with weak offshore leads and futures down -0.76%, it’s safe to say the ASX 200 won’t be giving us new highs today.
- Offshore Credit – strong issuance in US markets with a noticeable trend that is seeing companies issue debt despite not needing it, case in point is Amazon overnight, who marketed the second largest bond deal of the year, US$18.5bn across eight tranches. They don’t need the cash, but when debt is so cheap, why the hell not? Other examples include Apple, which has more than US$200bn of cash, yet they issued US$14bn of bonds earlier in the year. The list goes on. US IG companies can now borrow at an average cost of funding of 2.13%, with spreads (to treasuries) around three-year lows. Admittedly that’s up +39 bps since December, before the sell-off in treasuries, but it’s still well below the 3.16% average over the past ten-years – and also lower than the market’s current 10-year forecast for inflation, 2.53%.
- Local Credit – not a lot happening, same-same, no change to trading themes and broader market backdrop – trading was light to start the week. Major bank senior spreads remain unchanged, as were tier 2, although a very modest bid tone was identified by street traders following the recent spate of selling – probably some realisation that perhaps new supply isn’t imminent. Looking at the offshore credit commentary, a similar profile is evident in local markets, although Australian companies are being more prudent and not rushing out to borrow. As a proxy for Australian cost of IG debt, the AusBond Credit Index (Fixed) is currently yielding 1.29%, and as with US markets, these rates are off their lows (+31 bps since Jan-21), but still well below the five-year average (2.45%). Also well below the 5-year and 10-year inflation expectations of 2.07% and 2.24% respectively.
- Bonds & Rates – new highs in bond market inflation expectations overnight with the five-year breakeven rate up +3.4 bps to 2.73%, a new 13-year high. Nominal rates on the other hand were kept relatively well contained, with the five-year yield at 0.76%, or -1 bps on the day. The narrative on this has been constant, inflation expectations are being fuelled by improving growth prospects, fiscal stimulus (infrastructure spending) and other pandemic-related stimulus measures (loose monetary policy).
- Macro – Australian quarterly retail sales data was released yesterday, with trade volumes falling -0.5% QoQ in March, a little more than consensus (-0.4% QoQ) and a sharp fall relative to the +2.4% QoQ reported for the December quarter. From detail from NAB…”while retail volumes will detract from Q1 GDP growth, yesterday’s report also suggests there has been an ongoing rebound in services with cafes, restaurants & takeaway lifting +5.8% QoQ. Excluding cafes and restaurants, the fall in retail volumes would have been a sharper -1.5% QoQ. Note retail sales comprise about a third of total consumption and are heavily weighted towards goods consumption with very few indicators for services consumption”. Further, the ABS notes “the quarterly volume fall was driven by households spending patterns gradually returning to those seen before COVID-19” with notable sizeable falls in food retailing (-2.7% QoQ) and household goods (-1.6% QoQ). And, let’s not forget the odd snap lockdown through the March quarter, which had an impact. The Federal budget is released tonight, which will likely include additional stimulatory measures. Expect street analysis to be out by the wee-hours tomorrow morning…certainly wasn’t my favourite time of the year, at the office until 1am, while dining on cold pizza and BBQ chicken.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907