Mutual Daily Mutterings
Quote of the day…
“The more numerous the laws, the more corrupt the government.” Tacitus
Chart Du Jour: US CPI vs 10Y Yields (2000 – 2021)
“Here No Inflation, See No Inflation…etc”
- A meaningful overshoot in US October CPI was the primary focus across US markets last night, along with a disappointing treasury auction. Fuelled by continuing supply-chain disruptions and higher food and energy prices, CPI rose +0.9% MoM, more than double the September print and well ahead of consensus estimates of +0.6% MoM. The fastest rate of inflation since 1990, a result which saw yields surge and the curve bear steepen as markets adjust to a potentially more hawkish Fed. Yields also came under pressure after a dismal 30-year auction result (dealers left holding a quarter of stock because of weak demand).
- Stocks threw their toys from the cot, with algos again making their presence known – not surprising given where momentum and relative strength indicators have been lately. Tech stocks came in for some additional attention with the NASDAQ underperforming. Adding to the woes of higher consumer prices, average earnings fell. With falling household purchasing power little Johnny won’t be getting that new iPhone 13 for Christmas, maybe a Nokia?. Jobless claims came in slightly ahead of estimates, adding to the steaming pile of misery that was November 10th 2021 in US markets. Oil was poleaxed after US crude stockpiles unexpectedly increased by 1 million barrels, and the USD strengthened. Traders are continuing to assess the Biden administration’s plans to quell rising energy prices, with the dovish news complicating the decision.
- Treasury Secretary and former Fed Head, Janet Yellen, reiterated her view that elevated US inflation won’t persist beyond next year and said the Fed will not allow a repeat of 1970’s style price increases. Words, words, words…traders will ignore that, they’ll be worrying about the Fed stepping on the gas and tapering more aggressively than previously signalled.
- More from Fed officials on CPI… Mary Daly pushed back against such talk (Fed hiking sooner than later). “It would be premature to start changing our calculations about raising rates” or the pace of tapering, the San Francisco branch chief said. She repeated her acknowledgement that inflation is “eye-popping,” but said the central bank also has a responsibility to foster job growth. “The issue is that we still have Covid.“…On the matter of jobs, some four million pre-pandemic jobs are missing. Call Crime Stoppers if you see them.
- Offshore Stocks – European markets closed on a firmer footing, but any warm and fuzzy leads from that theatre of battle were eliminated once US CPI came out, smashing through the psychological 6.0% level. US markets closed off their intra-day lows, perhaps soothed by Fed cooing that they ‘got this’ (that’s gangster talk for under control). Nevertheless, there was a meaningful splash of the red stuff across the screens. A little under two-thirds of S&P 500 stocks retreated and only three safe-haven sectors were able to advance. Utilities (+0.7%), Healthcare (+0.3%) and Staples (+0.3%) being the tree. Energy (-3.0%) was puked after the sell-off in crude, while Tech (-1.7%) was hit on growth and valuation concerns. Telcos (-1.3%) was down because….well, I’m not sure, possibly just collateral damage. As for CPI and its impact…”heading into the fourth quarter with the same amount of money to spend but with higher prices, consumers will buy less goods and services. The resulting loss in purchasing power will slow growth, reduce earnings and weigh on stock prices. In order to keep pace we will need to see much higher wages and so far, that isn’t happening”.
- Local stocks – a very modest down day in the ASX 200 with the local index in a bit directionless and stuck in a bit of a funk. Since mid-October the index has been stuck on or around its 50D and 100D moving average with RSI’s in the 50 – 55 range. Hard to see what can provide any more upside from here given valuations are on the punchy side vs historical averages. Perhaps as the NSW and Vic economies open up and we get some positive macro data that will provide some impetus, but for now, not really any compelling reasons to buy. As for yesterday’s trading, average volumes changed hands with 57% of stocks closing in the red, and only three sectors up: Utilities (+0.8%), Financials (+0.7%) and Industrials (+0.2%). Meanwhile, team-red included Materials (-1.5%), Energy (-1.1%) and Staples (-0.4%). Despite the scale of movements offshore, futures are only down -0.2% as I type.
- Local Credit – the local market has gone bat-poo crazy! With initial price guidance of +180 – 185 bps for Bank of Queensland curiously timed tier 2 deal (i.e. second in seven months), bidders were lined up around the block with guidance at +13 – 15 bps to the regional bank tier 2 curve (BEN & BOQ). It was like when Krispy Kreme opened its first store in Sydney! The book hit $1.15bn at the third and final update with pricing tightened into +175 bps and a print of $400m, more than double what BOQ would normally print in the tier 2 space. Keep in mind, you couldn’t get a bid for BOQ tier 2 say two weeks ago. What’s really changed? I’m calling shenanigans with some of the bids! If you add the $800m senior line issued last month, BOQ has funding up the wazoo and is primed for growth…if not, they’re be sitting on a lot of lazy coin. Trader talk on the new deal…”we close with mids marked -4 bps tight of reoffer after having seen selling from one local real money account and the PB network active on both sides. Switch flow was modest given the size of the print. We think the response to today’s deal helps clear the air in T2 and would not be surprised to see secondary perform over the coming sessions.”
- Bonds & Rates – a reasonably meaningful bull flattening yesterday – for those not up with the cool kids lingo, a bull flattener is where back end yields fall faster than the front end. Nevertheless, given the overshoot in US CPI numbers (details below) and resulting bear steepener (long end yields rise faster than the front end), it’s going to be a tough day in the trenches for anyone long bonds and duration in local markets. Not us, we’ll sit back and watch the show unfold with smug self-righteousness, comfortable in our FRN world. As for treasury market reaction to the CPI print, a sizeable move on the day, but absolute yields vs CPI is damn-well modest. The last time annual core US CPI was running with a six-handle, US 10-year yields were almost 9.00%, and 2-year yields around 8.00%…last night the 10’s closed around 1.56% and the 2’s at 0.50%. Strange against historical averages, but explainable in the context of monetary accommodation now vs then (see Steak Knives below). Still doesn’t make it any easier to be comfortable with. Talking heads…”I can’t explain why the bond market is so content with the current situation, but inflation has been running hot for about a year and the bond market has not panicked. The bond market seems very, very happy with negative real yields. And as long as the bond market is happy, the Fed can be very slow.” For the sake of financial system stability, fingers crossed this remains the case. Either way, local bonds to be roughed up today.
- Local Macro – pilfering some words from NAB…”weekly ABS payroll jobs rose 1.3% in the fortnight to 16 October 2021, the first sign of a rebound in jobs from the effects of recent lockdowns…data are another positive indicator for a fast rebound in employment alongside reopening. All states formerly in lockdown ended stay at home orders in the October (NSW lifted stay at home orders on 11 October, the ACT on 15 October, and VIC from 21 October). Industries that were most impacted by lockdowns have seen a rebound in the lead up as firms prepared for re-opening. With restrictions easing further, and leading indicators pointing to a sharp rebound in activity and strong labour demand, that is likely to continue”.
- Offshore Macro – well, US Core CPI came in at a rather hot +0.9% MoM, well ahead of consensus expectations of +0.6% MoM and more than double the run rate reported in September, +0.4% MoM. CPI Ex Food & Energy tripled what it was in September, from +0.2% MoM to +0.6% MoM. Annual data looks pretty grim also, core CPI at +6.2% YoY vs +5.9% YoY consensus and +5.4% YoY in September. As one pundit noted, “inflation by itself isn’t the problem, it’s the failure of wages to keep pace that is troubling for the economy and the equity markets. Wednesday’s spike in inflation has eroded consumer spending power for the seventh consecutive month, putting growth and earnings forecasts in jeopardy”. Average hourly earnings fell -1.2% YoY (vs -0.8% YoY last month) and average weekly earnings fell -1.6% YoY (vs -0.8% YoY last month).
- Talking heads…”hearty congratulations to all readers out there: You’ve just witnessed history! Thanks to yet another high CPI print, the real Fed funds rate target is now at its lowest reading in history. It seems that we are in for a laboratory experiment to see if repeating the policy choices of the 1970s produces a similar economic outcome. While the highest annual inflation rates since the early 1990s may not be sufficient to resolve the “transitory” debate, the protestations of the “remain calm, all is well” crowd are starting to ring a little hollow”…. with the top of the nominal Fed funds target rate anchored at 0.25%, it now offers up a real yield of roughly -6.0%; that’s nearly 20 bps lower than at the peak policy error of the 1970’s.
- Steak Knives – extracted from Bloomberg…I have empathy for these views, and like the Colonel Sanders analogy (I’m a simple bloke)….”the Fed’s warning on vulnerable asset prices is a more pressing issue for US investors than those in Europe or Asia. Hearing central bankers warn investors about bubbles is a bit like Colonel Sanders telling diners they should watch their weight. But that’s exactly the message the Federal Reserve has given in its twice-yearly Financial Stability Report, warning that asset prices remain vulnerable to significant declines. “In some markets, prices are high compared with expected cash flows” and “most valuations are high relative to history” were two of the choicest quotes, with little said on the role central bank money printing has played in getting us here. As a reminder, the combined balance sheets of the Fed, European Central Bank and Bank of Japan is just shy of $25 trillion, up from less than $4 trillion at the beginning of 2008. That’s a rise that tracks nicely the climb in the MSCI World Index over the period (charted below)”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907