Mutual Daily Mutterings
Quote of the day…
“The only function of economic forecasting is to make astrology look respectable…” – John Kenneth Galbraith
Chart du jour… US break evens…
Source:Bloomberg, Mutual Limited
- A modest risk on tone across global stocks last night, led again by the DOW, followed by the STOXX and then the S&P 500, while the ‘higher growth’ NASDAQ retreated. The former three indices all hit new record highs once more. Treasury yields dipped a couple of basis points as the much-anticipated US CPI print came in or around expectations, moderating concern about the urgency for the easing of extraordinary monetary stimulus. Oil reversed early losses, which occurred in the wake of a report that the US will urge OPEC to revive production more quickly. In the end reports indicating declining US stockpiles steadied the ship.
- While the US CPI figures were in line with consensus estimates, given the head of steam built up in some cost bases, it could take several more months of data prints to settle the argument over whether inflation is truly transitory or not. Talking heads…”the Fed should find comfort in this report, but the Fed’s taper announcement in September is not a done deal…policy makers should be focused on how the delta variant is impacting leisure and hospitality sector. Possibly we’ll see lower activity in August due to COIVD”. Agreed, once again COVID is muddying the data water and how to interpret the data, making policy setting challenging and subject to error. Errors that may not be discovered until after the fact…no pressure. Having said that, the RBA chose to look through the prevailing COVID infection spikes and maintain its taper agenda, the Fed could choose to do the same.
- Fed speak….I borrowed the following from Bloomberg, a good summary of the Fed’s mindset I think…”if the Fed moves early on the taper, it is looking to do so while still keeping both inflation and future rate hike expectations stable. What the Fed is trying to do now is to reduce the size of its balance sheet without yields going through the roof — in effect divorce the asset taper from the rate-hike timetable. This CPI print helps it do that. And that means, we could have inflation well above 2.0% with 10-year yields below 2.0% for some time to come”.
- Offshore Stocks – a relatively broad-based rally across global stocks last night, although the NASDAQ did retreat somewhat. Three-quarters of the S&P 500 stocks gained and only one sector failed to put any runs on the board, Healthcare (-1.0%). The top of the scorecard was dominated by the old-guard sectors, Materials (+1.4%), Industrials (+1.3%) and Financials (+1.3%). YTD the S&P 500 is up +18.4%, leading all comers. Given valuations are stretched and there are meaningful concerns around whether earnings growth can be maintained in the face of the Delta variant, where to from here? For what’s it’s worth, some historical observations… “the S&P 500’s year-to-date gains mark one of the top five performances for the benchmark in data going back to 1991. History suggests that this level of strength can continue, with the four other strongest performances through August 10th of the year eventually extending the rally into the rest of the year” (Bloomberg). Or there’s this nugget…”the share of analysts who recommend buying stocks in the S&P 500 rose to the top decile of observations since the aftermath of the Enron Corp. scandal in 2002 that brought about a wave of tighter regulations. Turns out, when so many analysts were this bullish before, the S&P 500 proceeded to rise another 13% in the next six months.” All to be taken with large grains of salt…we’re not in Kansas anymore Toto, circumstances are much different this time around.
- Local stocks – another up day for the ASX 200 (+0.3%), with relative strength indicators edging that little closer to ‘overbought’ territory. It was a relatively narrow rally, with a smidge under half of stocks closing lower on the day. Heavy weight sectors dominated, with Financials (+0.9%) and Materials (+0.9%), both accounting for the vast majority of gains. On the downside, Telcos (-0.8%), Tech (-0.7%) and Healthcare (-0.6%) retreated. Futures are point to a very modest positive open, which will likely send relative strength indicators into ‘overbought’ territory. Caveat emptor.
- Offshore Credit – a veritable plunge in the number of borrowers looking to price debt in US IG markets, eight new borrowers, down from 15 on both Monday and Tuesday…note heavy sarcasm. Still a busy day by number of issuers, yet volumes were on the modest side, US$5bn. Either way, US$41bn priced by the close of markets in a week where consensus estimates had total weekly issuance peaking at US$35bn. Deals continued to be well supported, while in secondary, spreads drifted wider…ever so gently. The rampant US IG issuance looks to be sucking some oxygen out of the EU IG market, which is moribund by comparison, just €3.1bn priced WTD. Secondary spreads are relatively stable.
- Local Credit – be still my heart, some major bank issuance announced yesterday with CBA seeking expressions of interest for a new A$ tier 2 deal. CBA are looking to do a 10-NC-5 deal, which comes on the back of a solid set of full year earnings numbers from the major. This makes CBA only the second major bank this calendar year to tap the market for this kind of deal. WBC was first, in January with a A$1.25bn 10-NC-5, which priced at +155 bps. Prior to markets adjusting for the new deal, the WBC Jan-26 call was pricing at +121 bps, but ended the day +3 bps wider at +124bps. Guidance on the new CBA deal has been set at +140 bps with the closest comp being the NAB Nov-26 call, which is pricing at +126 bps (+3 bps today). I suspect the new deal will price comfortably inside guidance, at around +130 – 133 bps. Major bank senior paper was left unchanged, with the Jan-25’s at +26.5 bps and the 3-year paper at +19 bps.
- Bonds & Rates – a modest drift higher in local bonds yields yesterday as markets gradually adjust for policy normalisation. Consensus forecast has the 10’s reaching 1.53% by the end of September, however this is the average and the range of forecasts is rather wide, 1.00% – 2.10%. There is at tender today for $1.5bn of the Nov-26 and $500m of the Feb-25’s. Offshore, US 10’s closed at 1.33% (-2 bps), which is +16 bps higher over the past couple of weeks. The CPI print, at consensus, didn’t really move the dial that much, a couple of basis points. Consensus average forecast for US 10’s by the end of Q3 (September) is 1.68%, although the range is pretty wide, 1.35% – 2.00%. Across the providers of forecasts, the 1.53% – 1.60% and 1.75% – 1.82% levels are most popular. End of year forecasts have been pared back from a month or two ago, when consensus was at or around 2.0% – 2.2%.
- Offshore Macro – US CPI out last night, which showed that inflation had moderated while remaining elevated in July. Consumer prices rose +0.5% MoM vs +0.9% MoM over the prior month, while climbing +5.4% YoY, or flat on the prior month’s print. Consensus expectations were +0.5% MoM and +5.3% YoY. This was the slowest rate of monthly growth since February. Core CPI was up +0.3% MoM, compared with 0.9% MoM a month ago. The largest contributions this month were in food and energy prices, food inflation up +0.7% MoM vs +0.8% MoM in June, annual food inflation at +3.4% YoY. Consumer energy inflation remained solid, rising +1.6% MoM after 1.5% MoM in June, up +23.8% YoY. Some NAB commentary (edited)…”while food and energy inflation remain sticky for now, the inflationary boost from US re-opening and bottleneck pressures looks to be passing. Three of the big four rises that contributed most to last month’s +0.9% MoM rise in core inflation in June were either flat in July or declined. Used car prices stalled in July (+0.2% MoM) after jumping +10.5% MoM in June. Used car prices – with a weight of 4.4% of the core rate – contributed nothing to core inflation this month after contributing one half (0.46 percentage points) of last month’s +0.9% MoM rise”.
- Local Macro – consumer confidence came out yesterday, and not surprisingly, it was down. From NAB again…” Consumer sentiment fell -4.4% in August to 104.1 in the W-MI survey. Consumer confidence shows a clear impact from lockdowns, but remains in positive territory, and well above 2020 lows. The survey period of August 2-7 overlapped with lockdowns in Victoria and Queensland, as well the protracted Sydney lockdown. Lockdown impacts are clearly evident in today’s data, but the hit to confidence has been much more muted than during the initial wave of 2020 lockdowns. That likely reflects expectations of a rapid recovery once restrictions have eased alongside the vaccine rollout”
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Scott Rundell, Chief Investment Officer
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