Mutual Daily Mutterings
Quote of the day…
“Bart, with $10,000, we’d be millionaires! We could buy all kinds of useful things like… love!”.…Homer Simpson
Chart du jour…..US earnings season…
Overview…”running of the bulls… ”
- Early season US reporting has delivered some better-than-expected corporate earnings, which, along with some better than economic data outweighed fears on the day that inflation pressures and supply-chain blockages could hinder growth. Aiding the better tone, lingering COVID anxiety may be easing, with IMF analysis suggesting there’s enough global vaccine production to cover the world. Accordingly, the bulls grabbed themselves by the horns and ran with the positive turn in sentiment. Consequently, stocks had their best day since July, while bond markets displayed only a muted reaction, a very modest bull flattening (long end lower than the front end). The day’s affairs did not change the likely path of rates, just a better mood for earnings growth.
- Banks have been the main entities to report so far, with management signalling an optimistic outlook – “a deal-making and trading windfall unleashed during the pandemic will keep growing”. The big five banks have reported with four indicating rising lending, another positive sign for the broader market (Citigroup was the outlier). Outside of banks, it is expected in some quarters that pent-up demand ‘should’ drive revenue growth, while pricing power and operating leverage ‘should’ help offset inflationary pressures.
- Bloomberg…”estimate-topping net interest margins, particularly at BofA, and healthy credit-card spending are also good omens, while an optimistic macro view from BofA CEO Brian Moynihan adds to similar comments in recent days. Bank executives also expressed confidence supply chain issues will eventually be resolved. Biden’s also working on breaking a logjam at U.S. ports and preventing holiday shortages”.
- Talking heads “even though there are cost pressures and supply concerns, the other side of this is that business is strong…to the extent that producers can pass on to consumers higher prices — which it seems like they’re able to do – we’re seeing stronger profits, which is helping to give a boost to stocks.”
- Offshore Stocks – a very solid and broad-based rally across offshore stocks as US reporting season starts on a positive footing – but, one drink doesn’t make a summer, we’ve only seen ~7% of the S&P 500 reported so far. Still plenty of time for some disappointment. Almost 95% of the S&P 500 advanced overnight, and no sector delivered anything worse than +1.0% gains. Leading the pack was Materials (+2.4%) followed by Tech (+2.3%) and Industrials (+1.9%). At the other end of the performance tables, still with respective numbers, were Discretionary (+1.0%), Staples (+1.1%), and Utilities (+1.2%).
- I haven’t had a chance to look at US bank reporting in any great detail, but from Bloomberg “It’s been a very good week of bank earnings so far. Morgan Stanley, BofA and Citi posted better-than-expected trading, though Citi’s credit card unit struggled to boost lending. BofA and Wells Fargo reported healthy credit card spending and net-interest margins that beat. Morgan Stanley’s investment bankers scored their best quarter ever and BofA’s fees climbed, thanks to a surge in dealmaking. Goldman Sachs reports Friday”
- Local stocks – modest advances across the board with around 70% of the index closing higher on the day, with volumes a smidge under recent averages. Tech (+4.1%) was the clear stand out with a goodly handful of stocks up +4.0% – 7.0%. It was a fair amount of daylight to second place, Materials (+1.7%) which 33 out of 37 stocks sporting some festive green. Health (+0.9%) took out the bronze. At the other end of the daily performance tables, we had Energy (-1.0%) falling despite a day of modest gains in crude. Second place for the wooden spoon was held by Financials (-0.5%) and then Utilities (-0.2%). Futures are up +0.6%.
- Local Credit – traders commentary…”with parts of Asia out yesterday interest was on the light side. We saw a small push wider in some major bank and tier 2 lines, both street led, whilst select corporates benefited from client interest”. Across the major bank senior curve, the NAB Aug-26’s edged a basis point wider, closing at +49 bps. Across the tier 2’s, the shorter end of the 2026 calls where +1 – 2 bps wider at +126 – 127 bps, while the back end 2026’s was unchanged at +132 bps. CBA’s Sep-25 also inched wider, +1 bps to +121 bps and the 2024’s were all a basis point wider at +95 bps. Traders noted in their commentary, no client selling, just street action weighing on spreads.
- Bonds & Rates – a bull flattener yesterday in local markets, and again a similar trend offshore overnight – albeit very modest. A small breather for mine, the main theme is for rates to trend higher globally, although if consensus estimates are to be believe, US treasuries have only limited scope to rise too much further this calendar year – consensus for 10-years is at 1.59% by Dec-21 (vs 1.52% last night), and then 1.69% by Mar-22. ACGB’s on the other hand are +10 bps through consensus Dec-21 forecasts (+1.63%). Talking heads…Morgan Stanley’s CEO “prick this bubble,” he’s girding for rate hikes and he thinks markets are prepared as well, “money is a bit too free and available right now.” Some Fed speak…James Bullard (Fed Governor) warned that this year’s inflation surge may well persist. “While I do think there is some probability that this will naturally dissipate over the next six months, I wouldn’t say that’s such a strong case that we can count on it,” adding that he wants tapering to start next month.
- Local Macro – labour data out yesterday…. From CBA…”employment down 138K in Sept…..higher than consensus, but bit less than our forecast. As expected, most of the damage was in Vic at -123K, with NSW just -25K and Qld +31K. Participation rate dropped sharply, -0.7%/pts, to 64.5%, keeping unemployment rate to 4.6% (forecast 5%, Aug 4.5%). Hours worked was up 0.9% in Sept, partly recovering from -3.7% in Aug, with hours worked up in both NSW and Qld. Hours worked down sharply in Vic (-3.6%) and ACT (-10.5%) due to lockdown”
- Offshore Macro – US PPI’s came out marginally below consensus expectations, but still advancing on the prior month and still elevated historically. Some of the narrative coming out of the commentary community suggests that “inflation fears may be fading” as a consequence, hmmm, maybe…we’ll see. Specifically, US PPI ex food and energy rose +0.2% MoM vs +0.5% consensus and +0.6% MoM last month. Annual data came in at +6.8% YoY vs +7.1% YoY and +6.7% YoY. In other US data, initial jobless claims dropped more than expected last week, to 293K from an upwardly revised 329K, resuming a downward trend that was upended in September.
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