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Mutual Daily Mutterings


Quote of the day…


“If inflation continues to soar, you’re going to have to work like a dog just to live like one” – George Gobel





“Inverse Cramer



“No More WFH…”




Overview…”Inflation slowing, but less than expected”


  • Moves: risk off… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • US inflation surprised to the high-side.  CPI printed at +8.3% YoY vs +8.1% YoY consensus and +8.5% YoY last month, a multi-decade high.  US stocks slumped, yields rose and curves flattened on risks the Fed will tap the breaks harder.  Overall, the market reaction was reasonably measured, I thought.  Upon seeing the headline data before hitting the sack last night, I expected to wake up to a deeper shade of red across the screens.  Having said that, between getting out of bed and putting my feet under the desk, the tone in markets had weakened considerably.  Still, could have been worse.


  • Curve flattening signals markets are pricing in risk Fed will keep tightening monetary policy aggressively in an attempt to reign in inflation.  The key risk of course is they’re still behind the curve, which could require even more policy aggression down the line.  To this end, Fed Bank of Atlanta Pres. Raphael Bostic said he’s open to “moving more” on rates if inflation persists at elevated levels.  Despite these fighting words, traders appear hopeful that pending rate hikes will be restricted to +50 bp hikes, not +75 bp hikes that some consider probable / necessary…according to Fed-fund futures markets.  An additional +50 bp hike in September has been added to pricing however – in addition to the already priced June and Jul meetings.


  • Talking heads…”this is a rude awakening for a bond market that thought peak inflation would be a clear process. The idea that inflation rolls over is too soon and we likely won’t get a clear view until the end of summer.”  And, “this merely means it’s too early for the market to be pricing a near-term slowing of Fed hawkishness, but equally, I don’t see this as reason to price a higher and higher terminal rate. The Fed is going to be much more data dependent, as they get more hikes under their belt.”


  • Casting the eyes across the pond, and monetary policy tightening is all the rage there also…or is about to be. The ECB is increasingly embracing a scenario of taking rates positive before year-end, apparently.  Markets are looking for a further +25 bp hikes before year end, from the current -0.50%.  Governing Council member consensus is converging around a +25 bp hike in July.  ECB President, Christine Lagarde, has said a first increase may come “weeks” after the end of net bond-buying early next quarter.


The Long Story….

  • Offshore Stocks – no surprises overnight given the higher-than-expected inflation data print. Stocks closed lower, led by the NASDAQ (-3.2%), then the S&P 500 (-1.7%) and the DOW (-1.0%) fighting a rear-guard action.  Three-quarters of S&P 500 retreated and eight out of eleven sectors are sporting wounds and injuries of varying degrees of severity.  The most beaten-up sectors included Discretionary (-3.6%), Tech (-3.3%) and Telcos (-1.5%).  Coming out ahead was Energy (+1.3%) and Utilities (+0.8%).  Materials was flat (ish).  All remaining sectors lost ground.  “The rout in stocks isn’t over just yet, according to Morgan Stanley strategist Michael Wilson, who sees scope for equities to correct further amid mounting concerns of slowing growth. He said that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Fed tightening policy into slowing growth…we continue to believe that the US equity market is not priced for this slowdown in growth from current levels. We expect equity volatility to remain elevated over the next 12 months.” (Bloomberg)


  • S&P 500 Relative Strength Indicators…


Source: Bloomberg


  • Local Stocks – modest gains in the ASX 200 yesterday, up +0.2%.  Healthcare (+1.7%) and Materials (+0.9%) contributed most on the upside, collectively offsetting Financials (-1.1%), which did the bulk of the damage on the downside.  Majors were key drivers of underperformance here.  NAB closed -3.9% after going ex-dividend, while WBC took it in the neck, down -1.6% on fears of lower dividends.  ANZ dusted -1.5% and CBA eased back a touch, -0.2%.  CBA reported unaudited Q3 results this morning.  Cash earnings came in at $2.3bn, while net profit was $2.3bn, down -4.2% on Q3’21.  CET1 was lower at 11.1%, down 9 bps over the quarter.  CBA reported continued growth in household deposits, home loans, business lending and business deposits as key features of the quarter.  Income was down -1.0% QoQ, or up +1.0% QoQ on a day weighted basis, with +3.0% volume growth and higher non-interest income helping to offset continued margin pressure from elevated swap rates, mix effects and competition.  Expenses dropped -2.0% QoQ on a headline basis, down -1.0% QoQ excluding remediation costs, with the benefit from higher annual leave usage and two fewer days partly offset by increased staffing levels.  Asset impairment expense remains low.  Weak offshore leads is pressuring futures lower, -0.5%.


  • ASX 200 Relative Strength Indicators


Source: Bloomberg


  • Offshore credit – primary paused with focus on US CPI.  At least seven companies that had been looking to sell bonds in the US investment-grade market on Wednesday stood down as higher-than-expected inflation numbers prompted syndicate desks to advise clients to look again Thursday.  Secondary spreads were a smidge wider, while in CDS the tone was mixed.  CDX a touch wider, less than a basis point, while MAIN fell -2.5 bps.  Senior financials were -3 bps lower and sub financials -8 bps lower.


  • Historical offshore credit spreads


Source: Bloomberg, Mutual Limited


  • Local Credit – traders…”the customary calm before the storm as the market awaits pivotal US CPI data. Secondary conditions remain testing with the street ill equipped and disinclined to absorb the ongoing sell flow. Client sell-flow often finds its way onto the broker screens a matter of seconds after it trades perpetuating the cycle further. Sentiment remains poor with the consensus view that conditions can worsen further, clearly the provision of bid side liquidity not an easy proposition.”  In major bank senior, a mixed day.  ANZ’s 5-year senior line eked out half a basis point tightening, to close with a quite mid spread of +96.5 bps.  Three and four-year paper unchanged, former at +77 bps, while two-year spreads drifted wider, +2 bps to +65 bps and one-year out a basis point to +49 bps.  Tier 2 paper is not seeing a lot of action by all accounts.  Nevertheless, the path of least resistance still seems to be wider.  CBA’s Apr-27 call is at +210 bps (+2 bps CoD), which is +20 bps wide of where it launched a month ago.  The 2026 calls are at +195 – 199 bps (+2 bps CoD) and the 2025 calls are also out +2 bps, to +185 – 187 bps.  I still see value at these levels, but conditions are precarious and risk of being burned is real given widening momentum persists – albeit gradual.  Watching for entry opportunities.


  • A$ credit spreads (FRN’s) vs global peers…


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – a rally in local bonds yesterday ahead of US CPI data, which is covered below, but for here and now, it surprised to the upside.  In US treasuries two and five-year treasury yields, which are more sensitive than longer-maturity rates to Fed policy expectations, rose more than +10 bps initially before erasing the advance (+3 bps in the end, 2.64%). Ten-year yields temporarily exceeded 3.0%, before falling -7 bps to 2.92%.  So, the modest sell off (yields higher) at the front end is neither here nor there, nothing in it – this CPI reading does not alter the Fed’s path on policy, but lengthens the window for more market volatility ahead as clarity on inflation remains elusive.  The rally (yields lower) out the back end reflects risk to growth and prospect that the need for more aggressive monetary tightening could stall growth (at best) or tip the economy into a contraction (at worst).  US and AU 10-year yields are highly correlated historically, around 90% – 95% over the long haul, so a very high likelihood we’ll see yields lower here today, which fits our own narrative – yields have overshot the runway.


  • US treasuries curve – week on week change, flatter (bull)…


Source: Bloomberg


  • A$ Fixed Income Markets…


Source: Bloomberg


  • Macro – while annual CPI cooled slightly from March — signalling a peak that economists expected – the devil is in the detail, which painted a more troubling picture as monthly figures advanced more than forecast.  Services costs accelerated while inflation for most goods remained stubbornly high, underscoring the persistence and breadth of price pressures.  Reaction has been varied….a more optimistic view “a moderating inflationary environment in the second half of the year means there will be less pressure on the Fed to combat inflationary pressures with aggressive monetary policies, which leaves open the possibility of a soft landing of the economy as opposed to the crash and burn that markets have been pricing in as of late.”  Safe to say that’s an outlier, most of the narrative follows the tone of this comment…”inflation appears to be entrenched within many areas of the economy and regardless if we have witnessed inflation peak, a persistently slow grind lower will be more problematic for the Fed to simultaneously cool inflation without tipping the economy into recession.



  • Charts…





Source: Bloomberg, Mutual Limited



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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907





Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%