Mutual Daily Mutterings
Quote of the day…
“Laughing at our mistakes can lengthen our own life. Laughing at someone else’s can shorten it.” – Cullen Hightower
Weekly spread change…
“See no inflation…”
“A tussle between growth benefits and inflation headwinds…”
- Overview – a mixed session again on Friday, although the value vs growth daily ‘switch-a-roo’ rolled on. Europe mixed, while US stocks turned higher toward the end of the trading day. However, rising treasury yields weighed on tech shares, as did the Chinese government’s increased focus on Tencent. Gold was little changed, while oil fell. The broad themes remain largely unchanged. The dominant one being the outlook for inflation, which is proving divisive, compared to the outlook for growth – will the latter outweigh the former. In the red trunks is the bond market, aka the bond vigilantes, who collectively are calling shenanigans on the Fed and its benign outlook for inflation, consequently driving yields higher. And, of course in the blue trunks we have the Fed. On the week, the vigilantes have the points with yields higher – despite actual US inflation data coming in lower than expected. Nevertheless, we saw bond markets stabilise mid-week, with a couple of sessions of muted yield changes. Consequently, we saw a prompt rebound in stocks and growth sectors, signalling that appetite for tech names and growth sectors remains reasonably robust. Talking heads “if the rise in bond yields is too quick or too high, it’s a negative for equity valuations. However, if controlled and modest over time, equities can absorb the adjustment reasonably well”…and that’s the crux of the matter.
- Offshore Stocks – mixed across European markets, some up, some down, but moves on the day were marginal. On the week, gains were on the solid side. In the US, the S&P 500 closed higher, new historical highs in fact, with rallies in Financials (+1.1%) and industrials (+1.3%). The DOW JONES also hit new all-time highs. On the week, all sectors closed in the green, led by Discretionary (+5.7%), REITS (+5.7%), and Utilities (+4.4%)…i.e. ‘value sectors’. At the bottom of the weekly league tables, we have Telcos (+0.7%), Energy (+1.1%), and Healthcare (+1.3%). As for the outlook for stocks – thus far the somewhat meteoric rise in yields has done nothing to really harm risk appetite… broadly, and the heavy hitters expect the back drop to remain that way. Talking headings…“absent a shift in central banks’ thinking, we don’t think yields will rise to a level where it broadly hurts equities…provided the Fed sticks to guidance, and remains comfortable, willing to look through any temporary spike in inflation, I don’t see an environment where yields are rising in a way that’s problematic for equities broadly.” While stocks generally are up on the week, rising yields has hurt “frothier” sectors, such as Tech and defensive shares, leading to a dip of as much 11% in the NASDAQ. However, bets on a recovery in economic growth, aided by vaccination programs, as well as consumer spending are filling equity bulls with confidence that they can keep reaping returns despite higher interest rates. We’ll see.
- Local Stocks – a broad rally to close out the week with 69% of ASX 200 stocks up and all sectors up. Materials (+1.6%) had the most significant impact to the broader performance of the market, while tech (+2.5%) closed up most. On the week, most sectors closed up, led by Discretionary (+4.1%), Industrials (+3.7%) and Utilities (+2.6%). Three sectors closed in the red, Energy (-1.0%), REITS (-0.7%) and Financials (-0.1%). Similar themes to offshore markets continue to dominate here – particularly around the path – pace and steepness – of bond yields, and that obviously feeds off the growth vs inflation battle.
- Offshore Credit – quieter in US IG primary after the bumper Verizon deal the previous session. Secondary markets underperformed over the week, with US softer vs EU markets where ECB assurances around bond buying had a stabilizing effect on spreads. US IG Financials were +5 bps wider on the week, underperforming Corporates (+2 bps). US HY also closed wider, +13 bps, underperforming their EU counterpart, which tightened -11 bps. EU IG Corporates were +1 bps wider, while Financials were largely unchanged. The narrative out of offshore markets relatively buoyant, espousing the view that growth benefits from stimulus measures, along with vaccine programs and economic re-openings will outweigh inflationary risks. US IG credit fund inflows were a positive US$3.3bn last week. Synthetics (CDS) were marginally, I mean like a bee’s bum hair, wider on the day (less than a bp), but tighter on the week (-2 – 3 bps).
- Local Credit – constructive broadly, with traders reporting they’re “starting to see buyers reappear though the inventory overhang in the street will likely dampen any material spread compression”. With that, major bank senior paper was largely unchanged on Friday, although the Jan-25’s dropped a basis point to +32 bps (-2 bps on the week). Further down the food chain in the tier 2 space, the major bank curve shifted a basis point across the board to +128 – 134 bps, from +129 – 136 bps at the beginning of the week. Not a lot on the near-term horizon, that is observable at least, to upset the credit apple cart. Spreads to remain supported – an equity correction is the main risk. AusBond indices were marginally wider on the week with FRN’s (+0.6 bps) outperforming fixed (+1.6 bps).
- Bonds & Rates – US treasury 10-year yields passed 1.64% at one stage on Friday, +10 bps intra-day, before closing at 1.625%, 12-month highs. A cluster of factors triggered a sudden bout of selling, the passing of the fiscal stimulus bill and stronger than expected consumer confidence being a couple. Talking heads… “growing concern stimulus will fuel an explosion in economic growth that ignites price pressures. Expectations for inflation over the next decade lurched to a seven-year high”. Further…and connect this back to stocks above of course…”it’s important to remember that historically, rising yields have been consistent with rising markets, because both are driven by growth, and we think that will remain the case this time….yields above 2.25% -2.50%, if not accompanied by an improvement in the long-term earnings growth outlook and lower risk premia, would start to make current equity valuations look more challenged.”
- Macro – a big week of local data kicking off with Q4 House Prices tomorrow, consensus is at +1.9% QoQ and +2.7% YoY vs +0.8% QoQ and +4.5% YoY for Q3. Labour data (Feb) is out on Thursday, with +30K of new jobs expected to be added (consensus) vs +29K last month, and the unemployment rate is forecast to drop from 6.4% to 6.3%. The participation rate is expected to remain unchanged at 66.1%. Lastly, retail sales are published on Friday, with consensus at +0.6%, up a smidge on January (+0.5%). Also a big week of data in the US with retail sales (16th), Housing Starts (17th), Business Inventories (17th), the FOMC meeting (18th), and Jobless Claims (18th).
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907