Mutual Daily Mutterings
Quote of the day…
“It’s strange, isn’t it. You stand in the middle of a library and yell aaaaagghhhh’ and everyone just stares at you. But you do the same thing on an aeroplane, and everyone joins in”– Tommy Cooper…
Chart du jour…US CPI vs US GDP
Source: Bloomberg, Mutual Limited
Overview…”in the Fed we trust…”.
- The main event was the much-anticipated US CPI print, which came out ahead of consensus estimates. CPI surged the most in 13 years, up +5.0% from a year ago (vs +4.7% consensus). Prices climbed +0.6% (vs +0.5% consensus) from the prior month and core CPI jumped +0.7% (vs +0.5% consensus). Despite the ‘beat’ to the high side, and the risk this posed to the Fed policy settings – optically at least, US equities climbed to record highs and US treasury yields extended recent declines to sit at their lowest level since March. Commodities advanced and the AUS strengthened.
- The CPI report comes amid the ongoing debate about whether the Fed can keep the party going, i.e. ultra-easy monetary policy, which in conjunction with extraordinary fiscal stimulus has driven asset valuations to nose bleed levels since the COVID pandemic unfurled its evil talons. Highly stimulatory policy settings and an economy that is strengthening and recovering strongly out of the pandemic. What could go wrong? The jury remains out on whether sustained inflation will eventuate, however recent market behaviour suggests those in the transitory camp might be taking the chocolates. More on this later.
- Talking heads…”the frothiness in CPI continues for now but between base effects and pent-up demand pressures, it is probably not giving a definite answer to the great inflation debate, and you need to read the bond market tea leaves….the 10-year Treasury yield is back at levels last seen in early March, signalling that the bond market is falling in line with the Fed’s thinking that inflation is transitory and does not warrant tapering of monetary stimulus any time soon.”
- US CPI wasn’t the only show in town overnight, the ECB met, and it was largely a non-event. The bank refrained from tapering, but also from providing any guidance beyond the next 3 months. Very much an ‘eat-sleep-copy-paste-repeat’ from the last meeting. From BoA…”the forecast change creates questions though, and that confusion adds to the potential for market jitters in the summer”.
- Offshore Stocks – markets are firmly of the view, for now, that the Fed’s got this. Fair enough, I guess tactically at least, some inflationary risk clean air. Cyclically, I’m less certain. Regardless, on the night seven of the eleven S&P 500 industry groups climbed, with Health-care (+1.7%) leading the charge, followed by REITS (+1.0%), and Industrials (+0.8%). Sectors dragging the chain included Financial (-1.1%), with large banks among the biggest laggards in the broader index – reflecting the expectation that yields will stay lower for a little longer. E-mini’s are in positive territory in after-market trading.
- Local stocks – modest, but relatively broad-based gains across the ASX 200 yesterday, with 62% of stocks advancing. REITS (+2.3%), Tech (+2.0%), and Utilities (+1.0%) were teacher’s pets with only one sector, Energy (-1.0%) in the naughty corner -although Financials didn’t do much either, -0.01%…marginal. The index closed at new historical highs, 7302, and given the offshore leads will likely test new highs again today. Relative strength indicators are running hot’ish.
- Offshore Credit – nothing to report – likely primary issuance constrained on expectations CPI could be disruptive to investor sentiment.
- Local Credit – a few deals priced yesterday, including a Bendigo & Adelaide Bank A$ 5-year, which priced at +65 bps after initial guidance of +65 – 67 bps. With a final book ‘in excess’ of $300m, BEN priced $225m. A fixed line was initially offered, but let go by the wayside for lack of meaningful interest. Trader talk…”the (BEN) deal was met with an underwhelming response as investors are most likely keeping powder dry for post TFF opportunities. Solid day in secondary (~$100m flow) with a skew towards better client buying, of note we saw ongoing buy cares from offshore balance sheet accounts in longer dated fixed paper.” Major bank senior unchanged on the day, while major bank tier 2 drifted a touch wider, +1.0 – 1.5 bps…traders ”spreads eek wider following the rally of recent weeks, spouts of profit taking seen and dealers likely conscious of inventory levels moving into quarter end.”
- Bonds & Rates – bond markets are drinking the Fed’s Kool-Aid with a solid -5 bps rally in the US 10 year yields down to levels not seen since early March. The rally has now reached -30 bps (since March) as markets adjust their inflation thinking – ok, maybe it’s not back to the roaring 1920’s kind of economic Armageddon – and consequently likely Fed reaction vis a vis policy settings. Nevertheless, some degree of rate market normalisation has been priced in with yields +92 bps from post pandemic lows. Extending the gaze back a bit further, yields are now back again to levels seen on the eve of the pandemic market conniption, i.e. Feb-20 levels. ACGB’s have followed a similar pattern, with an appropriate spread to treasuries. Expect another rally today in local bonds, I’m thinking 1.45% ish for 10-year yields.
- Macro – again, US CPI was the main act last night, with specifics tabled below. I won’t re-hash the specifics, but I will point to some research put out by David Rosenberg, which supports the transitory school of thought. The main risk to the sustained inflation risk camp that Rosenberg focuses on is the fiscal cliff that will come in time – the US government can’t keep paying people to not work, or build new bridges and roads etc. Fiscal discipline has to come into it at some stage. But, per some data he published recently, 17 million, or 1-in-8 Americans are currently receiving some form of benefit from the government at the moment. Or, looking at it differently, 35% of household income “comes from Uncle Sam’s wallet”…just like having teenagers! Further, much of the growth in prices is coming through services, and as Rosenberg puts it…”I don’t know if I would call it “pent-up demand,” since that is a nebulous concept when it comes to services since what we lost here in the pandemic is lost forever, but it’s plain that after an epic plunge in service sector spending, we are going to see a huge bounce”. No local data of significance today, while yesterday we have inflation expectations, which rose to +4.4% from 3.5%.
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Scott Rundell, Chief Investment Officer
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