Mutual Daily Mutterings
Quote of the day…
“I don’t worry about terrorism. I was married for two years.”…Sam Kinison
Chart du jour…CPI , US vs AU
Source: Bloomberg, Mutual Limited
Overview…”Earning’s season, do we believe the hype?”
- Modest gains across stocks overnight, while bond yields did very little. US stocks again hit all-time highs ahead of Q2 reporting season, with the big banks kicking things off tonight – JPM and GS out of the blocks first. Reporting season will allow investors to gauge whether corporate profits can support lofty equity valuations, noting that forward EPS growth expectations have risen +17.0% YTD. US Treasury sold US$58bn of 3-year notes at yields slightly higher than before the auction while a sale of US$38bn of 10-year notes was greeted by stronger demand (books were ~2.4x covered). Gold and oil both lost some ground. Credit was moribund.
- Bank reporting season…what’s in store? Earnings are expected to look weaker, but more normal versus last year. The main drag is expected to be trading revenue, which analyst expect to drop -28% on average after 2020’s volatility-driven windfalls. On the upside, investment banking revenue is expected to be higher after a surge of M&A, stock offerings and debt deals — though probably not enough to offset the drop in trading revenues. Investors will be keeping an eye on reserves / provisioning, with JPM, BofA and Wells Fargo estimated to release ~US$1bn between them. US Bank stocks closed +1.3% higher on the session.
- US CPI out tonight, details below / overleaf. Some anecdotal evidence on prices…demand for personal computers in the US is slowing after soaring for two consecutive quarters. That may signal a return to pre-pandemic trends, and if PCs are a leading indicator, other in-demand goods may be set to drop too – like lumber – offering more validation for the Fed’s, transitory inflation narrative (also the RBA’s view). While we’re on lumber, futures have dropped substantially, down -55% from their May peaks, and down -21% YTD.
- Broad themes remain largely unchanged on the week, probably even month. Despite the occasional hiccup, stocks and bonds have rallied amid a decline in long-term interest rates and inflation expectations as central banks hold off on any meaningful unwinding of the policy support that is fuelling the post pandemic recovery. Nevertheless, investors broadly remain concerned about the spread of the Delta variant and a slowdown in vaccination rates, while pondering when the Federal, and RBA in a local context, will start tapering stimulus.
- Offshore Stocks – modest gains across the board, although in a stock sense it was a somewhat narrow rally, just 55% of the S&P 500 rising. Sector wise, it was more-broad based with all but two sectors gaining. Leading the charge out of the trenches was Financials (+1.0%), Telcos (+0.9%) and REITS (+0.9%), while at the bottom of the pile was Staples (-0.2%) and Energy (-0.1%). Some broader commentary on the depth of market performance, “the market cap-weighted S&P 500 is outperforming the equal-weight gauge (SPW) month to date, and unlike the S&P 500, the SPW hasn’t closed at a record since the start of July. Recent stumbles in the equal-weighted index could herald a short-term “period of disruption.” While real estate is the best S&P 500 performer MTD thanks to the drop in yields, it’s less than <3.0% of the S&P 500. More cyclical sectors, especially energy, have been on the back foot. Tech has continued to look attractive as yields fall; Apple and Amazon alone comprise over 33% of S&P 500 gains in terms of index points since July” (Bloomberg).
- Local stocks – reasonably broad gains yesterday with 65% of the ASX 200 advancing on average volumes. All bar three sectors post gained, headed up by Materials (+2.2%), REITS (+1.1%) and Tech (+0.8%), while at the shallow end of the pool, Staples (-0.4%), Utilities (-0.4%) and Energy (-0.2%) did nobody any favours. Futures are pointing to modest gains on the open.
- Offshore Credit – reasonably active day in US primary markets, including a US$6bn three-part deal from Japanese bank, MUFG. European markets were bit on the subdued side. Secondary spreads were largely unchanged in cash markets and virtually no change in CDS markets also.
- Local Credit – again, very little to add. Flows reportedly on the light side, with minimal spread movement. Realistically, I’m not expecting any friskiness in local A$ credit markets until we have some meaningful primary from the likes of the majors, and / or regionals in senior or sub. And, if a major treasurer did wake up in a frisky mood and decide to hit the market, what would the likely spread be, for say a 5-year deal? The ANZ and NAB Jan-25’s are pricing around +32 bps, largely unchanged for a month or so (give or take a basis point). The 3-year part of the curve is at +23 bps, which means the secondary curve indicates 5-year secondary levels are +37 bps. If we add new issue premium, I’d expect a primary 5-year deal to come at +40 – 45 bps range, which is still historically very cheap for them – the 6-year average is around +95 bps. Credit markets are global, so if local investors get too belligerent and try and demand more for a new deal, the majors can just scoot off to the US markets, or EUR, and no one wants that. WBC has a US$ Jun-26 senior line that is swapping back around BBSW+36 bps, marginally wider than local markets. Despite my pondering here, supply is not considered imminent. Still a Q4’21 likelihood, so spreads stuck in the mud for now, perhaps a few basis points of tightening as maturities are put to work, including CBA’s $2.5bn maturity yesterday and ANZ’s $2bn on Friday.
- Bonds & Rates – somewhat against my expectations, local bonds rallied yesterday (yields fell), which is a bit of a ‘Murphy’s Law’ moment after I made the call yesterday that yields had probably bottomed. In hindsight I should have allowed myself a margin of error given markets are a little directionless at present. Either way, offshore leads have done me a bit of a favour and risen, albeit very modestly, with markets waiting for tonight’s US CPI (some thoughts on this below). Talking heads…”the question at the core of the movements in the 10-year Treasury’s yield (and ACGB’s) for most of this year has been whether economic re-openings stateside and around the globe will generate levels of longer lasting inflation for economies, central banks and markets to contend with or will the near-term inflation consumers and businesses are experiencing be transitory as economies transition to a post-Covid environment,”
- I finally got around to properly read RBA Governor Lowes speech from last week, the one where he discussed labour markets and monetary policy (link here). As it relates to the bond market, I note this final comment in the speech…”RBA’s bond purchases from $5bn to $4bn a week does not represent a withdrawal of support by the RBA. The evidence is that central bank bond purchases have their impact through the total stock of bonds purchased, not the flow of those purchases. By mid-November, our cumulative purchases under the bond purchase program will have amounted to $237bn. We will hold a little more than 30% of Australian government bonds on issue and 15% of state and territory bonds. This represents a substantial and ongoing degree of support to the Australian economy. The adjustment in the rate of weekly purchases does not change this”.
- Offshore Macro – tonight we have US CPI, with consensus expecting +0.5% MoM (vs +0.6% MoM last) and +4.9% YoY (vs +5.0% YoY last), levels not seen since the GFC in 2008, with a post GFC average of +1.7% YoY. Inflation of any concern has been largely absent for around 40 years, since the early 1980’s. Consequently, it’s been a famine for bond vigilantes, or bond bears. With the COVID pandemic and policy response, an inflation pulse has been detected, and the bears feasted, gorging themselves as yields spiked over +100 bps (10Y). Post February, the feast waned as the narrative shifted and markets began drinking the Fed / RBA Kool-Aid, i.e. inflation is transitory and will pass. Tonight’s core inflation figures will provide a better gauge of which narrative has more pull, the Fed / RBA’s transitory view, or the bond bears and their structural inflation concerns. So far, food and energy prices appear to back the Fed’s view that price hikes will subside. Yet core-price inflation, which speaks to the longer-term impact of rising pressure on consumer income, is at a three-decade high and showing no signs of slowing at this stage. Per Bloomberg consensus data, the monthly number and year-over-year number are expected to moderate. But, if the trend continues, the Fed’s argument about transitory inflation will be in serious question and so will the recent trend of lower US Treasury yields
- Local Macro – NAB Business Survey out today (11:30am). Business Conditions last printed at 37.0, an all-time high in the history of the measure (data back to the 1990’s), with a long run average of 5.8. The Business Confidence measures last printed at 20.0, also an all-time high versus a long run average of 5.4. No consensus data available, but if I had to guess, I’d say both will be lower this time around, for no other reason than the lockdowns (Vic & NSW) and lingering Delta variant will weigh on sentiment.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907