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Mutual Daily Mutterings

Quote of the day…

 

“When you’re right, nobody remembers. When you’re wrong, nobody forgets”…Muhammad Ali

 

 

 

 

Chart du jour…spread changes


Source: Bloomberg, Mutual Limited

 

 

“Bludgeoning…


Source: www.hedgeye.com

 

 

OverviewIs inflation pressure waning.…?”

  • Softer across stocks on COVID and growth concerns, while bond yields rallied, led by the back end.  The main focus on the session was US inflation data (CPI), which indicated prices rose over August, but by less than consensus expected and at a slower rate vs July.  Average hourly and weekly earnings fell also, causing some angst over household disposable income and resulting pressure on earnings, especially given valuations remain elevated.
  • Some optimists are figuring that the moderating pace of inflation will stay the Fed’s tapering hand over the near term.  Maybe, but only for a month, or two, tops. The weaker than expected print also offers some validation of views among Fed officials and the Biden administration that high inflation will prove temporary.  We’ll see.
  • Talking heads…“it appears that the continued rally in Treasuries is due to speculation that some people have that the CPI data pushes off the Fed.” I don’t necessarily agree with this view.  I continue to see the Fed announcing the start of its tapering agenda in November or December.  Unless of course some other form of financial Armageddon rears its insidious head.
  • Another talking head…”today’s sell-off in equities is simply a continuation of the weakness we saw last week…although the August CPI report all but guarantees no taper announcement at next week’s FOMC meeting, the clear and present danger is around a slowing economy.”  I have more empathy with this view.
  • According to the latest Bank of America investor (institutional) survey, fund managers are souring on global growth and earnings but won’t give up on stocks…sniff, sniff, smells like TINA…’There Is No Alternative’. The outlook for global growth and profits in September slumped to the lowest in more than a year but investor allocation to equities fell only slightly to a net 50% overweight and the share taking higher-than-normal risks rose to 9%. Bonds remained unpopular.

 

Details….

  • Offshore Stocks – a weaker session overnight, which is around six negative days over the past seven trading days, I think.  Three out of four stocks in the S&P 500 retreated, and no sector made it out of the gates, all in the red.  Energy (-1.6%) was the worst performer on the day, followed by Financials (-1.4%) and Industrials (-1.2%).  Healthcare (-0.1%), Tech (-0.1%) and Discretionary (-0.3%) did their best to staunch the blood-letting, but failed.  The S&P 500 is again tickling its 50-day moving average, which stands at the 4,429 level.  That technical level has served as a key support level this calendar year, since November last year in fact.  It may be a spot to watch again, for dip buyers.  It’s worth noting, the weakness in tech, as modest as it was, was driven by weakness in Apple shares after the company unveiled its new product line.  Apple, which is the heaviest-weighted stock in the broad market index, dropped -1.2% and is at its lowest in almost three weeks.  Apple shares have a history of slipping on product launch days, usually shedding -0.8% on average.  On the inflation front, even though the rate of price increases slowed, fears of further price pressures won’t evaporate anytime soon.  Inflation increased outside of re-opening and supply chain issues are building.
  • Local stocks – a very modest rally in the local market yesterday, +0.2%, with around 60% of stocks advancing.  Across the main sectors, the winners vs losers split was reasonably well balanced.  Energy (+4.5%) led from the front, followed by Utilities (+1.1%) and REITS (+1.1%), while at the other end of the tables, Industrials (-1.1%), Tech (-0.9%) and Healthcare (-0.8%) were the main trouble makers.  The broader index remains inside its 50-day moving average, 7437 vs 7450.  With the weaker leads from offshore markets, we’ll head closer to the 100-day moving average.  Markets haven’t threatened their 100-day moving average since March this year, the height of the reflation trade hysteria.  I’d suggest we at risk of breaking through these levels over the near term, by year end at least.  Futures are down -0.5% this morning.

 


(Source: Bloomberg)

 

  • Offshore Credit – strong primary supply continues with another seven deals seeing US$9.1bn priced in US IG markets, led by Bank of America (US$2bn).  These deals take MTD issuance to over US$100bn.  EU IG markets were active also, with multiple deals and €16.1bn priced.  Books were 3.8x coverage and average spread compression from launch to final pricing of -20 bps, so primary conditions still very constructive.
  • Local Credit – traders commentary…”a fairly quiet day as local participants digest primary supply, grapple with the implications of the CLF, struggle to fathom the SFE calendar roll and pick clues from the Anika Address given by RBA Governor Lowe. Furthermore, we await US CPI this evening so unsurprising that flows were modest and conviction seemingly light”.  And “we close senior spreads slightly wider again. However, this is not indicative of any selling that we have seen since Friday, more so the illiquidity that now exists on the bid side in the interdealer market, which is typically 5m max. We suspect that some selling isn’t too far way and think our chances of on-selling this risk is somewhat unlikely. We think it likely that spreads go modestly wider and the curve steeper with the pivot point being the 3-year point. We think the same is true on regional curve, though the moves there will likely be larger still”.  The modest widening path for spreads is a growing consensus call, and we are of the same opinion, but see it as a positive for FRN funds longer term.  The recent NAB Aug-26 is at +43 bps (+5 bps vs pre-CLF announcements, and +2 bps from issue levels).  The Jan -25’s are at +29 bps (+0.5 bps), while the 3-year part of the curve is +2 bps wider yesterday at +25 bps.  Tier 2 paper moved a touch tighter across the curve (-1 bps), with the 2026 callable cohort at +124 – 129 and the 2025 callable cohort at +117 – 120 bps.
  • Bonds & Rates – RBA Guvna Lowe delivered his annual Anika Address speech yesterday.  I’ve been tied up and haven’t had a chance to read it, or view it, so I’ll resort to stealing borrowing my former brother in arms brief comments…from CBA’s Marty ‘McFly’ Whetton…”having decided to press ahead with a taper at the most recent meeting and indicate the near term was soft, but the medium term was ok, some of the wind was taken out of expectations. Governor Lowe remains puzzled at market pricing of rate hikes being brought forward. One consistent view of the RBA through the pandemic, has been the 2024 rate hike timeline. While some may challenge that view on the basis of their own expectations, getting to consistent inflation at the mid-point is still a challenge. For certain, there will be some strength (from a low base) once the NSW and Victorian economies reopen, and there is of course the pile of discretionary savings our economics team has flagged for a while.”  Overnight in offshore markets, treasuries rallied with ten-year yields dropping -5 bps to below 1.25%, and the yield curve steepened. Local bonds will likely rally further today.

 


(Source: Bloomberg)

 

  • Offshore Macro – US inflation data (CPI) out last night, which missed consensus estimates to the downside and indicated a slowing rate of growth.  August Core CPI printed at +0.3% MoM (vs +0.4% MoM consensus & +0.5% MoM last month), while the annual run-rate printed at +5.3% YoY (vs +5.3% YoY consensus & +5.4% YoY last month).  The long run average for core CPI (annual) is +2.1% YoY since 2020.  Core CPI climbed +0.1% MoM, reflecting declines in the prices of used cars, airfares and auto insurance. The rate of inflation has only been above +5.0% YoY once before (since 2000), which was also a period of disruption and high-uncertainty, in 2008.  That’s the time of the GFC for you youngsters out there.  While the rate of inflation has stabilised, an equally concerning measure is causing…well, some concerns.  Average weekly earnings for August fell -0.9% MoM, accelerating from -0.7% in July, which indicates household disposable income is under pressure.  The average growth rate (since 2020) has been +0.9%.  From Bloomberg…“the gap in consumer disposable income, higher inflation and lower wages in the U.S. could be cause for worry. The last two times we saw such a wide divergence, economic growth slowed to the point of a recession” – see chart below. And…”while the likelihood of a recession is slim given the amount of fiscal spending Washington is proposing, a slowdown in consumer spending is more probable. Shrinking disposable income will likely change spending habits, potentially hurting earnings and therefore weighing on the stock market

 


(Source: Bloomberg)

 

  • Local Macro house price data yesterday surprised to the upside, +6.7% QoQ vs +6.1% QoQ consensus expectations (and +5.4% QoQ last quarter), and +16.8% YoY vs +14.0% YoY consensus (and +7.5%YoY  last quarter).  Also out, NAB Business Conditions and Confidence data…from NAB…”both conditions and confidence saw a small improvement in the month, though the latter remains well into negative territory, reflecting a sharp deterioration in Victoria and more generally, the degree of uncertainty in the economy as lockdowns persist and the timing of a full re-opening remains unknown. That said, business conditions are still elevated – and rebounded in both NSW and SA in the month – and remain well above average in all states.”  Today we have Westpac Consumer Confidence Index, which printed at 104.1 last month, -4.4% MoM.  No consensus expectations published.

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.74%
MCF – Mutual Credit Fund
Gross running yield: 2.51%
Yield to maturity: 1.59%
MHYF – Mutual High Yield Fund
Gross running yield: 7.33%
Yield to maturity: 5.51%