Mutual Daily Mutterings
Quote of the day…
“There are 17 more days until Christmas. So, guys, that means 16 more days till we start shopping, right?” – Conan O’Brien.
Chart du jour… index of US supply chain pressures
“Mostly Sprouting Malarkey…”
Overview…”market shrugs off 40-year record CPI…”
- US CPI data came out bang on consensus on Friday night (our time), with inflation now at levels not seen since 1982, when Ronald Reagan was US president. Despite the historic CPI, stocks closed higher in the US (the S&P 500 setting new record highs), but a touch weaker in Europe on omicron concerns. Bond yields dipped, and marginally bull flattened, while precious metals and oil rallied.
- The main event this week will be the US FOMC meeting (Tues & Wed), although 19 other central banks meet also, but the Fed packs more punch for global markets. Fed Chair Powell is expected to kick off tapering, and likely with more urgency than expected a month ago as inflation pushes to nose-bleed levels. The ECB also meets, but they’ll likely stick with their expansionary stance, citing transitory inflation expectations. Closer to our time zone, consensus expect the BOJ to remain dovish, while back in blighty, the BOE is easing its hike rhetoric.
- “The bond market is warning the Fed that it might be unusually constrained in how much action it can take. The Treasuries yield curve looks set to be the flattest at the beginning of a tightening cycle in a generation if Powell begins hiking in mid-2022 as now forecast. Both that flatness and the level of longer-term yields suggest investors see the central bank not being able to do too much before having to hit pause, or even reverse course.” (Bloomberg).
- Policy error remains my main concern for market stability over the next 3 – 6 months and likely beyond. “Two years since Covid-19 first emerged, global central banks are about to determine if their economies are strong enough to withstand the impact of its most elaborate mutation yet” (Bloomberg)
- COVID corner…the London School of Hygiene & Tropical Medicine has stated in their research that the omicron variant could cause almost 75,000 deaths in the UK this winter, which is around half of total deaths from the pandemic thus far. I would suggest this is the worst-case scenario, which is all the media tends to focus on. Nonetheless, ”…from the Health department is that Astra-Zeneca provides virtually no protection against Omicron for those who received their second jab several months ago and have not yet received a booster. The good news is that booster shots are seen restoring vaccine efficacy against Omicron to 70-75%.”
The Long Story….
- Offshore Stocks – European markets closed on a softer note on Friday, but up (+2.0% – 3.0%) on the week. US stocks shrugged off the higher CPI print and prospect of Fed tapering to close higher on the day (+0.6% – 1.0%) and week (+3.6% – 4.0%). All sectors within the S&P 500 advanced on Friday and on the week also, closing at record highs. Best performers on the week were Tech (+6.0%), Energy (+3.7%) and Staples (+3.5%), while at the bottom of the leader-board we had, Discretionary (+2.5%), Utilities (+2.6%), and Financials (+2.6%). Forward PE’s are back at 22.4x, the higher end of recent ranges, and well ahead of pre-pandemic averages of 17.7x with a range of 14.3x – 20.1x). Liquidity in the system is keeping valuations elevated.
- Local Stocks – modest losses (-0.4%) on the day in the ASX 200, but ok advances on the week (+1.6%). All sectors were able to advance on the week, led by Staples (+3.0%), Utilities (+2.9%), and REITS (+2.6%). Tech lagged, closing largely unchanged, while Healthcare (+1.0%) and Financials (+1.2%) rounded out the bottom three. Unlike US peer indices, the ASX 200 is well off its record highs (-3.6%), trading at a forward PE of 18.2x (vs pre-pandemic averages of around 16.0x).
- Local Credit – traders…”very quiet end to the week with liquidity conditions and engagement from buy side and sell side indicative of where we sit in the calendar. US jobless claims and inflation data likely to dictate near term risk sentiment.” Major bank senior spreads closed the day unchanged and mostly unchanged on the week, although the Aug-26 line did drift wider, +1 bps to +64 bps. Elsewhere, the three-year remained unchanged at +44 bps. In the tier 2 space, also unchanged on the day, but some life in the market on the week with the curve -3 – 5 bps tighter. The 2026 calls were pricing +141 – 144 bps, the 2025’s at +133 – 134 bps and the 2024’s are back in at +102 bps. With liquidity drying up as traders wind down into the festive season and year end, spreads will likely range trade in the absence of any meaningful change to the narrative or shock events.
- Bonds & Rates – all eyes on the Fed this week…some thoughts from CBA’s International Economists….”we expect the FOMC to leave the Fed Funds rate unchanged but to announce a faster taper of $US25bn per month from January. That would be consistent with the FOMC’s tapering ending in April 2022. The risk is an even faster taper of $US30bn or more given high and widespread underlying inflation that pushes the USD higher (and AUD lower). We also expect the median ‘dot plot’ will show the majority of members now expect two rates hikes in 2022. In September, roughly half of the FOMC members expected one 2022 hike. As a result, we also expect the median dot plot will show a higher Fed Funds rate by the end of 2024 of at least 2.0%”
- Offshore Macro – US CPI came in generally around expectations….some NAB commentary…”headline US CPI rose to 6.8% from 6.2% (0.7% m/m) the highest headline read since 1982 (versus since 1990 for the October reading) with core (ex-food and energy) up to 4.9% from 4.6% last time, both bang in line with consensus. While use car prices (up 2.5%), lodging away from home (2.9%) and airline fares (4.7%) drove the headline increase, the most disconcerting element of the release was that shelter, comprising both rents and owner-equivalent rents (the latter largely a function of (rising) house prices) which together comprise 32.8% of core CPI – rose by 0.4%. This is the third straight increase above 0.4% and so running at a 5% annual rate. Clothing, new car prices and tobacco also contributed positively to the overall 0.5% monthly rise in core CPI.” 1982 was an interesting year. It was the year of the Falklands War, Chariots of Fire won the Oscar for best picture, the Commodore 64 home computer went on sale. The European Court for Human Rights declared that the use of the cane in schools was in breach of the Human Rights Convention. The first CD or compact disc was manufactured, and the DeLorean car company was placed into receivership.
- Local Macro – pilfering some commentary from NAB’s daily…”locally, the Employment numbers for November are on Thursday. We forecast employment to have risen 280k in the month (consensus +200k), the largest gain on record, which would confirm a rapid rebound occurred through October alongside the easing of restrictions in NSW, VIC and the ACT. We see the unemployment rate falling three tenths to 4.9%, with the key uncertainty being around the participation rate. RBA Governor Lowe speaks an hour before the numbers with no title as yet given. Also expect a mid-year budget update (MYEFO) during the week. The latest NAB Business Survey is on Tuesday and the W-MI Consumer Sentiment Index on Wednesday).”
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907