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Mutual Daily Mutterings

Quote of the day…

 

“Kids are great. You can teach them to hate what you hate and, with the Internet and all, they practically raise themselves…” – Homer Simpson

 

 

 

 

 

 

Chart Du Jour: US CPI Diffusion Indexes

 

 

“Law Of The Jingle…

Source: www.hedgeye.com

 

 

Overviewslow news day…”.

  • Offshore markets have put the surprise overshoot in US inflation data largely behind them, for now, posting modest gains overnight, while bond markets (treasuries) were closed for Veteran’s Day (futures continuing yesterday’s losses though). It wasn’t all rainbows and lollipops, the DOW retreated a touch, while the NASDAQ charged onwards and upwards.  The S&P 500 looked to be faltering heading toward the close, posting very modest gains.  Oil fluctuated as investors weighed the odds that the White House will intervene to cool prices. Gold approached a five-month high.
  • Talking heads…on the post CPI market moves… “was a combination of profit-taking after a nice run from the October lows but then also some concerns about margin and overall earnings in 2022.”  And…”although inflation hasn’t made a dent in third-quarter earnings, if we stay at these uncomfortable levels of inflation for three or four more quarters, this is definitely something that could impact margins and create demand destruction in the economy, both of which are headwinds to earnings.”
  • Speaking of inflation, because that’s all we’ll be doing for the next 12 months (likely)…”among the vast majority of the individual goods and services that together make up the CPI basket is now tracking above the Fed’s stated 2.0% target. That adds to worry about the pervasive nature of the current trend toward higher prices.  There’s been a sharp, and continual, increase in the breadth of components with above-target inflation since April. The proportion now sits at 87.2% of the CPI’s weight, up from 63.1%, according to a new diffusion index from Bloomberg” (Chart du jour).
  • Some Chinese politics…” Xi Jinping delivered the first doctrine on Communist Party history by a Chinese leader in 40 years, a mandate to potentially rule for life. Only Mao Zedong and Deng Xiaoping had previously enacted so-called historical resolutions, and both went on to dominate party politics until they died. While the full text wasn’t released, the Central Committee’s communique of approval called for China to “unite around the party with Xi at the core” to reach goals through 2049. It highlighted Xi’s economic themes of “common prosperity,” “self-reliance” and “quality” growth”. Bloomberg.  Not sure having Xi as premier for life is a good thing for Australia to be honest.

 

Details….

  • Offshore Stocks – a very modest and thin recovery from yesterday’s CPI driven sell-off.  The DOW closed in the red, while the S&P lost early ground to close with its nose only slightly above water.  The NASDAQ was the strongest of the three main US indices. Within the S&P 500, five sectors gained (out of eleven), led by Materials (+0.9%), Financials (+0.5%) and Tech (+0.5%), while at the other end of the spectrum, Utilities (-0.7%), Industrials (-0.4%), and Telcos (-0.3%) dragged the chain. Name specifics – Tesla struggled for direction after filings showed founder and CEO Elon Musk unloaded $5bn of stock. Meanwhile, Walt Disney Co. slid and Beyond Meat Inc. plunged after disappointing quarterly figures.  Inflation concerns and resulting earnings impact continue to linger, and will realistically not dissipate until inflation begins to slow.
  • Local stocks – a reasonably dour day in local markets, but with some strange intra-day action.  Taking its lead from the weaker US markets, the ASX 200 opened on the back foot, but then had a strange surge immediately post the weaker AU labour data.  Common sense prevailed and the index went south again, hitting intra-day lows of -1.3%.  From there it was a modest grind higher, with the index ultimately closing -0.6% lower.  It was a broad-based sell-off with just under 70% of stocks closing lower, and nine out of eleven sectors retreating.  Only Materials (+2.3%) and Telcos (+0.8%) were able to gain ground, and realistically, if not for Materials, the broader index would have been routed, down by more than 1.0%.  At the back of the bus, causing all manner of mayhem and distraction, was Tech (-2.5%), Healthcare (-2.2%) and energy (-2.0%).  Modest offshore gains will likely see a firmer open, futures are up +0.4%.

 

 

 

(Source: Bloomberg)

 

 

  • Local Credit – traders…”renewed rates volatility and primary issuance combined for a low volume day in secondary markets. Spreads remain firm with client flows evenly balanced.”  Spreads in the major bank senior space were unchanged with traders noting some switching from fixed to floating.  On the outlook, a particular view we share is “our view remains unchanged: no senior supply in the coming 3 months with A$5bln of redemptions helping spreads 3-5 bps tighter from current levels.  We expect this tightening will be gradual, akin to the 1-1.5bp/month of tightening that we saw earlier this year.  We also expect to uncover sellers along the way, however, renewed engagement from domestic real money accounts should be sufficient to help spreads grind tighter.” The Aug-26 lines closed at +58 bps, roughly +20 bps wide of pre-CLF announcement levels, and the Jan-25’s at +43 bps, or +17 bps wider.  In the tier 2 space, “spreads unchanged, with the new BQD 10.5NC5.5 closing at +171 bps (-4 bps tighter vs reoffer). Modest selling from domestic real money account with the offshore buy base yet to re-enter the fray. If you consider that major bank 10NC5 oscillates on a 20 bp pendulum between +140 bps and +120 bps then we remain at the wides. Given the catalyst for this recent widening was the anticipation of domestic supply we think that spreads may now start to retrace if $400m BQDAU is all we get.”  Again, a view we share.
  • Bonds & Rates – local yields surged on the back of the US CPI overshoot and subsequent moves in treasuries.  Rate markets are pricing a greater chance of rate hikes by the end of the year vs a week ago.  Futures are indicating a cash rate of 0.97% by December 2022, up +14 bps over the week – much of that change coming yesterday.  US futures markets are pricing rates at 0.65%, a rise of +6 bps over the week.  US bond markets closed last night, so no leads, good, bad or otherwise, which should give markets some peace and quiet – although US futures are in the red again, so perhaps not.

 

 

(Source: Bloomberg)

 

 

 

  • Local Macro – a big miss yesterday in local jobs data…employment decreased by -46K people, most full time, and unemployment rose to 5.2% from 4.6%.  The jobs data was below expectations and does not reflect the reopening of NSW and Victoria.  Notably, the latest data covered the period from 26 September to 9 October. This included school holidays and some early changes to restrictions associated with the Delta lockdowns, particularly in NSW, ahead of larger changes from mid-October.  Labour force data also reflects divergence across the States, with the ABS noting “There was early recovery in New South Wales, with their participation rate increasing by 0.8 percentage points in October. This was underpinned by increases in both employment (22,000) and unemployment (35,000), with their labour force increasing by around 57,000 people. However, it was still 218,000 people lower than in May.”  “In contrast, while Victoria’s unemployment also increased, by 29,000 people, employment fell by a further 50,000, with their participation rate falling by 0.4 percentage points. The Victorian labour force was 113,000 people lower than in May”
  • Offshore Macro – tonight’s November University of Michigan consumer survey of inflation 5 to 10 years out is the next data highlight (2am Sydney time).  This survey-based measure of long-term inflation expectations eased in October to 2.9% from a multi-year high of 3.0% the previous month.  Nevertheless, long term inflation expectations remain around the highest level since 2014.  New York Fed President John Williams speaks tonight (4:10am Sydney time). Commentary curtesy of CBA.
  • Steak Knives – Bloomberg …“the Treasury market has become a minefield over the past month. As measured by Bloomberg’s U.S. Government Securities Liquidity Index, trading conditions are the worst since March 2020, when the pandemic spurred massive central-bank intervention globally. The index measures deviations in yields from a fair-value model. As for expected volatility, the ICE BofA MOVE Index for U.S. bonds is near the highest since April 2020. Volatility could move higher too when Treasury trading resumes after Thursday’s bank holiday, according to one analyst”.

 

 

 

 

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: 0.29%
MIF – Mutual Income Fund
Gross running yield: 1.38%
Yield to maturity: 0.89%
MCF – Mutual Credit Fund
Gross running yield: 2.69%
Yield to maturity: 1.82%
MHYF – Mutual High Yield Fund
Gross running yield: 4.91%
Yield to maturity: 3.98%