Mutual Daily Mutterings
Quote of the day…
“Life is hard; it’s harder if you’re stupid.…” – John Wayne
Chart du jour: Number of S&P 500 firms trading at 10x sales…
Source: Twitter, Mutual Limited
Overview…”dip buyers awaken…”
- Cats and dogs are friends again…US stocks and treasuries rallied together overnight in some dip-buying action. It appears after due consideration investors are giving the Fed the benefit of the doubt, on the whole drinking the ‘inflation-is-transitory ‘Kool-Aid, particularly the value vs growth brand. The next couple of months will be interesting as data either confirms or shatters the Fed’s hopes and dreams of controlling inflation. Commodity prices softened overnight, aiding the Fed’s cause, if only temporarily
- Data was mixed in the US. Initial jobless claims came out better than expected, 473K vs an upwardly revised 507K a week earlier. Consensus was at 490K. US PPI (producer prices) popped more than expected, adding to inflationary pressures. Talking heads…“taking a step back from inflation, the fact that jobless claims hit another pandemic-era low suggests we’re inching even closer to full reopening, which is no doubt a good thing.”
- Nevertheless, Fed officials thumped the table again, adamant that rising prices are transitory and won’t require any change of policy course (yet)….”we will not overreact to temporary overshoots of inflation” (Gov Waller). While the latest CPI report was “unexpectedly high,” the Fed wants several more months of data to judge the strength of the recovery. Again, pent-up demand and base effects are being blamed for the spike. Also, many Fed members seem comfortable with an over-shoot for a period of time because inflation has been moribund for so long. Hmmm, we’ll see.
- Despite the bounce in risk assets, the ‘US Misery Index’ is rising, and yes, it’s a real thing…I just found it. The index is a compilation of the current rate of inflation and the employment rate derived from results of both consumer and business surveys, and is generally seen as a decent way of tracking overall sentiment in the US economy. Since the end of February the index is back above the 30-year monthly average, which is according to Bloomberg “a worrisome sign for a continuation of higher trends in risk assets, equities in particular”
- Offshore Stocks – after a handful of down days, dip-buyers emerged, supporting a fairly broad rally across US stocks – less convincing in European markets. The S&P 500 rose +1.2%, underperforming the DOW (+1.3%), but outdoing the NASDAQ (+0.7%). Within the S&P 500 some 88% of stocks closed higher. Only one sector didn’t get the memo, Energy (-1.4%), falling in line with oil price declines (Brent down -3.3%). Industrials (+1.9%) were the life of the party, with fellow enablers Financials (+1.9%), Utilities (+1.8%) and Materials (+1.5%) all partying into the wee-small hours. European markets closed mixed after a rough start (reflecting weaker prior US trading day), with the FTSE off a touch (-0.6%), as was the Spanish market (-0.5%), while the rest of the funky bunch were sporting modest shades of green (+0.1% up to +0.6%). Not surprisingly given recent activity, volatility has fired up again. With the rout earlier in the week VIX hit 27.5%, but has eased off the gas last night, down 446 bps to 23.13%. Nevertheless, some interesting trades have been noted…including someone buying 87,000 contracts betting the VIX will rise toward 60% by June 16th (that’s just over a month away). Why? It’s possibly a hedge or a directional bet. Alternatively, the buyer is punting on next month’s inflation read being off the charts and sending markets down the s-bend. The last time the VIX was in the 60’s was the height of last year’s pandemic induced sell-off (VIX peaked at 82%), which ended up being the fastest bear market in history. E-mini’s are up.
- Local stocks – it was another tough day at the office for local markets with the ASX 200 down -0.9%, with some broad-based beating. Just under 64% of stocks closed lower and only two sectors were able to eke out any gains at all on the day, Healthcare (+1.0%) and Energy (+0.1%). At the head of the pack leading markets astray was Tech (-4.7%), followed somewhat distantly by Materials (-1.7%) and REITS (-1.5%), although Materials did the bulk of the damage with regard to the ASX 200 moves. We’ll get a bounce this this morning, from the firmer offshore leads. Futures are up +0.67%.
- Offshore Credit – US IG first, it seemed almost certain that supply would at least match projections of US$45bn this week after Monday’s US$28bn bonanza, however, macro uncertainty fuelled by inflation fears seems to have curbed issuance. Less than US$3bn priced overnight, bringing the week’s volume to US$42bn. Week to date secondary spreads are a touch wider, +2 bps in financials, +1 bps in the corporate space, and +17 bps in high-yield. Year to date, US IG spreads are mixed, with financials +1 bps wider and corporate -6 bps tighter. High yield is -23 bps tighter. European IG primary markets were on the quieter side as secondary is suffering from some doubts on future performance – some 60% of deals priced in May have widened in secondary. Casting the eye over the indices and we see financials are +5 bps wider over the week, while corporate paper is flat. High yield has underperformed, +12 bps wider. Versus pre-pandemic levels, US spreads are comfortably tighter, while EU IG Financials remain wide of these levels, as does EU HY. Only corporate paper in the EU space is tighter than pre-pandemic levels.
- Local Credit – just very little to talk about in local credit. No change to major bank senior spreads and no change to major bank tier 2. The mini-rout in stocks had minimal impact on flows or pricing. Over the week, AU spreads are flat to unchanged. AU Industrials (Fixed) spreads are unchanged, while AU Financials (Fixed) were almost a basis point tighter (-0.8 bps). The roaring champion on the week was AU Floaters, which were almost a couple of basis points tighter (-1.7 bps). Certainly not enough to retire on.
- Bonds & Rates – taking its lead from offshore inflationary concerns, the local market steepened yesterday with the yield on the 10-year ACGB index rising +4 bps to 1.81%, toward the top end of the post February trading range (1.65% – 1.84%). The average over this period has been 1.74%. Offshore overnight – despite the higher-than-expected US PPI figure last night, a mediocre 30-year bond auction, and firmer jobless claims, not to mention rally in risk assets, bond yields fell and curves bull flattened. US 10-year yields fell almost 4 bps to 1.66%, which will likely see us a little flatter today also.
- Macro – I’m all tuckered out and in need of a nap…I’m borrowing someone else’s words now….from NAB’s morning note….”the latest NY Fed Weekly Economic Index for the week ended May 13 – configured on high frequency data such as jobless claims, electricity output, fuel sales and the like – indicates annual US GDP growth of 11.45% YoY, pretty much in line with the 12.2% current consensus for Q2 GDP in year to terms. Finally, on the US inflation front, the April PPI exceeded expectations, headline PPI up to +0.6% MoM/+6.2% YoY from +1.0% MoM/+4.2% YoY, core PPI up to +0.7% MoM/+4.1% YoY after +0.7% MoM/+3.1% YoY, annual growth boosted by weak prices in the teeth of the pandemic a year ago. The likes of airline passenger services, vehicle rentals, lumber, steel products, food retailing, and hardware retailing and building materials were all adding to the upstream inflation pressure in April”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907