Mutual Daily Mutterings
Quote of the day…
“We’re very lucky in the band in that we have two visionaries, David and Nigel, they’re like poets, like Shelley and Byron. They’re two distinct types of visionaries, it’s like fire and ice, basically. I feel my role in the band is to be somewhere in the middle of that, kind of like lukewarm water.””…This is Spinal Tap
Chart du jour…US Break-Evens
Source: Bloomberg, Mutual Limited
Overview…”channelling the inner dove”
- A mixed session in risk assets overnight. European stocks were on the softer side, very mildly though, while US stocks once again tickled the underbelly of new all-time highs. Bond yields fell as investors turned to defensive favourites while Fed Chair Powell made the case to Congress for continued economic stimulus. After some early gains, global oil benchmarks puked it following agency reports indicating demand softening and inventories building. US Producer Prices rose in June, greater than consensus estimates, indicating pressure is mounting on companies to pass along higher costs to consumers.
- So, what did Powell say? Nothing new really. The core message was that tapering is still some way off, but he’s been trumpeting that for a while now. He reiterated his guidance that they (the US) are still a long way from achieving “substantial further progress” in employment markets. He repeated his view that present price rises will recede once the economy has fully adjusted to post-vaccine conditions. Markets – as judged by inflation expectations – is signalling its willingness to give the Fed the benefit of doubt on inflation…for now.
- Talking heads…”the Fed chair is deeply committed to the transitory narrative, putting the dual mandate of full employment in all caps while price stability is in lower case letters.”
- Also, the Fed’s July “Summary of Commentary on Current Economic Conditions by Federal Reserve District”, aka the “Beige Book” was published overnight. It doesn’t seem as if real-world contacts are quite as optimistic about an inflation moderation as the Fed. Supply chain issues were cited as key culprits, of course, and the text noted that input price rises were being met with a mixture of margin compression and passing hikes along to end users where demand was high. On the labour market, 75% of the twelve districts reported slight or modest job gains, with the balance noting moderate or strong employment growth. Labour shortages were cited as an issue, along with moderate wage growth and the use of non-wage incentives to attract labour. I borrowed this commentary from Bloomberg, with a little editing – I haven’t had time to read it yet.
- Offshore Stocks – the S&P 500 reversed a midday decline as Fed Chair Powell’s testimony got underway, stating that the US economy hasn’t recovered enough to scale back support, such as asset purchases. Gains across US markets were very modest, and narrow with just the DOW and S&P 500 up, while the NASDAQ retreated a touch. A smidge over half of the S&P 500 gained ground (+52%), while six of the eleven key sectors fell (five up). Staples (+0.9%), REITS (+0.9%) and Utilities (+0.8%) were singing Queen’s “We are the champions”, and they had no time for losers, who in this instance were dominated by Energy (-2.9%), followed by Financials (-0.5%) and Healthcare (-0.2%). E-mini’s are up a touch in after close trading, across the DOW, S&P 500 and NASDAQ.
- Local stocks – the two-week extension to the Sydney lockdown announced yesterday was ignored with extreme prejudice by markets. The ASX 200 eked out some modest gains despite weak offshore leads and the forecast economic hit to the national economy from the lockdown extension (more on this below). Volumes were around recent averages and two-thirds of stocks advanced, while only one sector failed to get out of the gate, Tech (-2.7%). The sell-off in tech was driven primarily by AfterPay (-9.6%), which impacted by PayPal announcing it was launching its own ‘buy-now, pay-later’ offering. Elsewhere, at the top of the tables, Utilities (+3.4%), Staples (+0.9%) and Discretionary (+0.7%) led. Futures are down a touch.
- Offshore Credit – Goldman Sachs became the first of the big six US banks to issue bonds after reporting earnings, bringing a two-part deal for US$5.5bn overnight. The deal, included an 11-NC-10 launched at T+125 bps, pricing at T+103 bps and a 21-NC-20, which also launched at T+125 bps, pricing at T+100 bps. And that was the only deal done. Morgan Stanley will be the last to report results on Thursday. At the index level, US Financials closed +1 bps wider, US Corporates closed unchanged, while across the EU indices, spreads were a basis point tighter. Relative to 12-month trading ranges, cash spreads are within 3 – 5 bps of their tights. No movement of note in CDS, with core indices hovering around their three-month averages. The MAIN is at 47 bps with a 46 – 53 bps three-month trading range, CDX is at 49 bps (47 – 54 bps range) and the Aussie iTraxx is at 60 bps (58 – 64 bps range).
- Local Credit – some interesting EOD commentary from traders…”despite the US CPI induced volatility in rates markets overnight (which was actually quite modest), local credit markets were mostly flat. Worth noting that bid side liquidity starting to wane as a number of fair-weather markets makers prepare for their seasonal retreat…” I know which bank they’re referring to here, but won’t divulge it to protect the innocent. Either way, they’re a heavy hitter normally, and around this time of year they take a hiatus, which can soften the liquidity back drop – not that we’ve noticed it. Spreads largely unchanged and no real change to themes. Steady as she goes.
- Bonds & Rates – a very modest increase in local yields yesterday, accompanied by an equally modest bear flattener. In laymen’s terms, that means front-end rates rose faster than the back end rates, with the 3’s +1.6 bps to 0.325% vs the 10’s +1.4 bps to 1.348%. Very modest moves, hardly worth mentioning, as is the outright move, a meh day. A little more-frisky offshore following Fed Chair Powell’s first day of testimony on ‘the Hill’, with a solid bull-flattener (back-end yields falling faster than front end yields). Two-year treasuries were -2.5 bps lower at 0.23% and ten-year yields fell -6.0 bps to 1.35%.
- Offshore Macro – US economic data continued to show rising prices, with the producer price index (‘PPI’) climbing and core PPI, which excludes volatile food and energy, up +1.0% MoM, the most on record, and double consensus expectations (+0.5% MoM). Tomorrow in the US, June Retail Sales data is due and there is a reasonable chance the print will miss to the downside. Retail sales are primarily a manufacturing, goods-oriented data set. With more and more spending moving to the service sector and away from goods producers as economies reopen – it sets up the opportunity for retail sales to disappoint. Consensus is expecting a +0.4% MoM print vs -0.7% MoM in May. Weekly jobless claims out tonight, which shouldn’t move the risk dial too much if consensus is correct. They’re calling for +350K, which is a touch below the +373K reported last week. Consensus expect continuing claims to fall to 3,300K from 3,339K
- Local Macro – some analysis out yesterday on the impact of the Sydney lockdown, which has been going for just over 2 weeks now, and as of yesterday was extended for another two weeks, at least. It is now scheduled to end Friday July 30, but as us Melbournians know all too well, that’s a pipe dream given the ‘loose’ restrictions in place and daily rate of infection. The Federal Treasurer has estimated the cost of the Sydney lockdown to be around $700m a week. So, if we take the two weeks already gone, the two additional weeks, and hey for the fun of it, let’s assume another two-to-four weeks on top of that, that’s 6-8 weeks, or a $4.8bn – $5.6bn hit to GDP. Given this, there is a good chance Q3 GDP will slip back into recessionary territory, with NAB amongst others suggesting a contraction of -0.1% to -0.2% for the quarter (vs current consensus expectation of +0.9% QoQ). Whether we slip into negative territory is a function of your starting expectations, so not all commentators expecting a negative Q3 GDP print because of the lockdown. Either way, government assistance packages will soften the blow, and as we’ve seen with other lockdowns, once let loose again, the economy roars back to life.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907