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Mutual Daily Mutterings

Quote of the day…

 

“No amount of evidence will ever persuade an idiot”.…Mark Twain

 

 

 

 

 

 

Chart du jour…global credit spreads – EU HY under pressure..

 

 

 

“He Won’t Get Far On Foot…

Source: www.hedgeye.com

 

 

Overviewpayrolls fall short”

  • The main event on Friday, in offshore markets, was the significant miss in US payrolls (+194K vs +500K) – although average hourly earnings and the unemployment rate came out better than expected.  Stocks opened on a firmer footing initially, just, but then the payroll’s miss dented sentiment and markets trended lower.  Despite the weaker payrolls, bond yields continued their recent march higher with ten-year treasuries at four-month highs and breaking through consensus end of year median estimates (1.59%). Inflationary concerns continue to bite.  Oil was a smidge firmer on the day, and stronger again on the week.  Credit spreads drifted higher.
  • Overall, the current global macro backdrop (slower growth momentum and rising inflation pressures) combined with scope for further upward adjustment to US interest rate expectations will continue to be a headwind for risk assets.  Further, the ISM Services survey highlighted managers’ concerns about logistics and prices for materials. That has led to higher yields as traders looked ahead to a possible Fed tapering next month.  Within this backdrop, key data prints this week for US markets (and global) will be Wednesday’s CPI print (+5.3% YoY consensus) and Thursday’s PPI (+8.7% YoY consensus).  Both measures are currently sitting at 30-year highs with the main debate being whether these levels are transitory, as the Fed and RBA et al espouse, or they represent the new strategic norms.
  • In addition to the latest inflation data, US reporting season (Q3) kicks off, which could produce market moving results and / or commentary.  The big banks’ are first with JP Morgan on Wednesday (US time).  Bank of America, Wells Fargo, Morgan Stanley, and Citigroup all report Thursday, while Goldman Sachs brings up the rear on Friday.
  • The RBA’s October Financial Stability Review (FSR) was published on Friday.  The report showed heightened concerns around high and rising household indebtedness.  But it looks pretty clear that the RBA will seek to have any of these concerns addressed through more macro prudential policies from APRA rather than tighter monetary policy.

Details….

  • Offshore Stocks – a choppy day in offshore stocks with the S&P 500 spending roughly half the day in positive territory (maxed at +0.2%), and then the other half, you guessed it, in negative territory (maxed at -0.3%).  By day’s end the index closed a touch lower (-0.2%), but still +0.8% up on the week.  A touch under two -thirds of stocks closed lower and only two sectors were able to drag themselves across the line in positive territory on Friday, Energy (+3.1%) and Financials (+0.5%).  REITS (-1.1%), Utilities (-0.7%) and Materials (-0.6%) were the worst of the worst on the day.  I’m still wary of offshore stocks given elevated valuations and many of the headwinds plaguing investor sentiment.  The main concern is the eventual withdrawal of monetary support, firstly with tapering, and then in time rate hikes.  Admittedly the latter is not really on the radar just yet, but tapering is definitely imminent.  So, while the Fed will still be adding monetary accommodation, it’ll be at declining rates, a last gasp hurrah before ending the party, likely mid-2022 all other things being equal.  Accordingly, while there may be scope for the market to run higher from here, fair to say most of the fun has been had and we’re closer to the end than not.
  • Local stocks – modest gains on Friday in the ASX 200 (+0.9%) with weekly gains of +1.9%, outperforming most offshore peers, although Friday night’s offshore leads were mildly negative.  On the day, some 70% of stocks gained and no sector printed in the red (on the day).  Leading from the front (where else would you lead from?) was Materials (+1.8%), followed by Tech (+1.3%), and Telcos (+1.0%).  While no sector printed in the red, the laggards were Industrials (+0.2%), REITS (+0.2%) and Staples (+0.5%).  Futures are down a smidge, less than -0.1%.  A lot of the themes touched on above for offshore markets are pertinent for local markets also.  While the RBA has had less of an impact on local markets, it’s rare for the local market to material shrug offshore trends, so if offshore sells off, so will local markets thematically, to a greater or lesser extent.

 

 

 

(Source: Bloomberg)

 

 

  • Offshore Credit – US payrolls on Friday, so it’s common for no deals to be done, and so no deals of note done.  Offshore spreads drifted wider on the week as broader risk sentiment waxed and waned.  European high yield spreads have especially come under pressure over the past month, up +80 bps.  Over the week, US IG spreads are +2 – 6 bps wider, while EU IG spreads are +2 – 3 bps wider.  CDS spreads drifted wider on the day and week and currently sit at their 30-day highs.  US primary markets could see several self-led deals post reporting, which has historically been the case for US banks.  Traders will also be watching fund-flow data, after investors pulled US$2.5bn from investment-grade bond funds for the week ended October 6 (Refinitiv Lipper data). That was the largest outflow since April last year, and just the third weekly outflow this year.  The CDX (US) is at 54 bps (46 – 54 bps 30D range), while the MAIN (EU) is at 52 bps (45 – 52 bps).
  • Local Credit – trader’s commentary…”an active end to the week with the ongoing sell off in rates enticing outright buyers back to the secondary market”.  Any firmer upward adjustment to rates expectations, and therefore increase in rates could intensity some of the outright buying seen over the week.  In this regard, treasuries sold off again on Friday, which will likely see local yields also rise.  On the financials front…”seems we have reached something of an impasse here, we are not seeing any meaningful buying or selling…we expect this standoff to persist until $3bn matures in late October”. With no imminent supply of any scale over the coming weeks (majors in results black out), we may see some modest near term grinding tighter in spreads – likely short-lived with issuance to begin normalising from November onwards – my guess.
  • No meaningful change in major senior or tier 2 on the day, and moderately wider on the week, the Aug-26’s are +2 bps on the week, up to +47 bps.  Implied 5-year major bank average spread is +49 – 50 bps.  Over the coming 3 – 6 months I expect some mean reversion across major bank senior paper, which should see 5-year paper trend toward +60 – 70 bps…gradually, which would be welcomed, especially for FRN’s, less so fixed rate.

 

 

  • While Major bank senior paper has seen some movement over the past month, mostly CLF related, tier 2 has been relatively stable.

 

 

  • Bonds & Rates – local curves copped a kick up the backside on Friday with a +5 bps parallel shift higher, with the most notable move being the +5 bps rise in three-year yield, to 0.47%, and 18-month highs.  This took the weekly move higher to +8 bps and +27 bps over the past three weeks.  The move higher saw relative strength indicators punch through ‘oversold’ levels.  Likely more rising pressure today given Friday’s offshore moves, with 10-year yields rising above 1.615%, with a curve bear steepened (long end rising faster than front end).

 

 

(Source: Bloomberg)

 

 

  • Local Macro – the RBA released its October Financial Stability Review on Friday.  The bank stated the “financial systems in Australia and internationally have been resilient to the effects of the COVID-19 pandemic.  Banks have cushioned the economic impact of the pandemic and have supported the recovery through loan repayment deferrals and new lending”.  There have been consequences to the RBA’s highly accommodative monetary policies…”low interest rates have contributed to high prices for financial assets and housing. There has been some increased risk-taking and higher borrowing”. And, “most borrowers’ income has recovered from large falls resulting from the pandemic. But income remains lower for some in heavily impacted industries and particularly in some emerging market economies”.  Cyber security is on the radar also after an increase in the volume and sophistication of attacks on financial institutions.
  • Offshore Macro – US payrolls underwhelmed for September, with the slowest month for job growth this year, signalling a tempering of the labour market recovery and possibly complicating the Fed’s decision on when to begin scaling back QE.  While jobs were added, it was only +194K, well below the +500K expected by markets, and evidencing a deceleration from August (revised to +366K from +235K).  The participation rate picked up a touch, from 61.7% to 61.8%, while the unemployment rate dropped to 4.8% vs 5.1% consensus and 5.2% last month.  While the volume of jobs added slowed, averagely weekly earnings beat estimates, +0.6% MoM vs +0.4% MoM (and +0.4% MoM for August, revised from +0.6% MoM).
  • The Week ahead – some data of interest locally with NAB Business Conditions and Confidence indices (Tuesday), followed by Westpac Consumer Confidence (Wednesday), with both likely softer on account of lockdowns.  The main event however will be labour data, due out on Thursday.  Consensus expectation is for a -120K fall in jobs, a moderation on last month’s fall (-146K).  The participation rate is expected to fall again, from 65.2% through August to 64.7% for September, with the unemployment rate to tick up to 4.8% from 4.5%.  Offshore, we’ll likely see a lot of noise and focus around US CPI and PPI data, due out Wednesday and Thursday respectively. Consensus are expecting Core CPI to come in at +0.3% MoM (flat to last month) and the annual figure to be +5.3% YoY, also flat to last month, but also the kind of figures not seen since the post financial crisis days (2008-2009).  At that time 10-year yields were in the 4.0% range…they closed at 1.61% on Friday.  Different times.  PPI is forecast to come in +0.6% MoM and +8.7% YoY vs +8.3% YoY last month, well above average and evidencing the supply-chain issues plaguing market narrative over the past year.  If past relationships hold fast, as per the chart below, then CPI will likely run higher, which is quite the opposite to consensus forecast.  Street estimates have CPI peaking in Q3’21 at +5.3%, before declining to +2.3% in the next 12 months.

 

 

 

 

Cheers,

 

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.78%
MCF – Mutual Credit Fund
Gross running yield: 2.62%
Yield to maturity: 1.70%
MHYF – Mutual High Yield Fund
Gross running yield: 5.49%
Yield to maturity: 4.24%