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Mutual Daily Mutterings


Quote of the day…


“Always do sober what you said you’d do drunk.  That will teach you to keep your mouth shut” – Ernest Hemingway












“What’s Next…?”





Overview…”chaos theory… ”


  • Moves: risk on… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • The end of a chaotic week!  Offshore stocks advanced on Friday, with little new news or data to peg the change in tone to.  Not that I could see anyway.  Some US Fed speakers were out and about, but they just re-iterated past comments, no change to the hymn book.  NAB noted that perhaps the better mood was driven by Powell pushing back on +75 bp rate hikes drove gains.  Yeah, ok, maybe.  Then again, it could have been the full moon.  Who knows?


  • Fed speakers…”unless there are some big surprises, I expect it to be appropriate to raise the policy rate another 50 basis points at each of our next two meetings” (Mester)…and some follow up thoughts (from NAB)…”the recent consolidation/easing in inflation expectations may be viewed favourably by the Fed and if this trend continues into September it could be viewed that the Fed can shift to a more gradual path of taking policy back to neutral (and potentially higher if inflation remains stubbornly above target). For now, neutral is seen to be at 2.5%.


  • Macro…”Goldman Sachs cut its US growth forecast, saying a recent tightening in financial conditions will persist as the Fed hikes rates. Economists including Jan Hatzius see GDP growing +2.4% YoY in 2022 from a prior +2.6% YoY forecast, and +1.6% YoY in 2023, from +2.2% YoY. Earlier, Goldman’s Lloyd Blankfein urged companies and consumers to gird for a US recession, telling CBS that it’s a “very, very high risk.” (Bloomberg)


  • More macro…”the EU plans to cut its prediction for 2022 growth and almost double its estimate for inflation in its spring update on Monday, according to draft projections from the European Commission. It sees euro-area GDP expanding 2.7% this year and 2.3% next, down from February readings of 4% and 2.7%. On inflation, a rate of 6.1% is predicted for this year, up from a prior outlook of 3.5%.” (Bloomberg)


  • Talking heads…”I don’t think we have seen capitulation just yet. This week has been pretty brutal, and investor sentiment, especially in the technology area, is shot to pieces. We’re going to have a tricky few weeks and months ahead.


  • China reports a slew of data this week, which is expected to show the weakest monthly economic indicators since early 2020, the outbreak of the pandemic.  There is considerable divergence amongst street analysts on whether the PBOC will cut interest rates.  Noting, however, that they have effectively cut the interest rate for new mortgages over the weekend in an attempt to prop up housing, which is struggling.



The Long Story….


  • Offshore Stocks – a positive end to the week, with the DOW (+1.5%), S&P 500 (+2.4%) and NASDAQ (+3.8%) making solid ground, but it wasn’t enough to erase weekly losses (-2.1% – 2.8%).  Over 90% of the S&P 500 advanced and no sector was left behind.  The worst of the best included Healthcare (+1.1%), Utilities (+1.1%) and Industrials (+1.2%).  Best of the best included Discretionary (+4.1%), Tech (+3.5%) and Energy (+3.4%).


  • The narrative around whether or not markets have bottomed continues with the bears noting the S&P 500 is still about 14% above its 200-week moving average, a level that’s previously been a floor during all major bear markets, except for the tech bubble and the global financial crisis.  And, for all the recent declines — the S&P 500 is down more than 13% from its high on March 29 – stress indicators also aren’t at levels seen during comparable slumps. Fewer than 30% of the benchmark’s members have hit a one-year low, compared with nearly 50% during the growth scare in 2018 and 82% during the global financial crisis in 2008 (data per Bloomberg).  Conviction remains anaemic, and until it firms up, we’re as likely to see +2.0% days as -2.0% days.  Volatility will persist until we gain some clarity around inflation’s path, and in turn how far and how hard the Fed will have to go on rate hikes.


  • Local Stocks – a solid session for the ASX 200, gaining +1.9% with all but 6.5% of the index gaining ground.  All sectors were firing with even the bottom of the pack returning +0.8%, that being Staples.  Neighbouring sectors included Industrials (+1.0%) and Utilities (+1.1%).  Meanwhile, up in first class, sipping the bubbly we had Tech (+7.0%), Healthcare (+3.0%) and REITS (+3.0%).  Despite all the froth in Tech, it was Materials (+1.6%) and Financials (+1.4%) that drove broader returns.  The strong day of returns came just as RSI’s were hitting oversold, and with strong positive leads from offshore markets, these gains should have legs, at least for another day.  Nothing has really changed fundamentally.  Markets are still staring down the barrel of tighter monetary policy and all the joy that that brings.  Futures are suggesting a solid start to the week, +0.8%.


  • ASX 200 Relative Strength Indicators


Source: Bloomberg


  • Offshore credit “early projections call for US$30bn of new high-grade bonds sales this week, as issuers navigate an increasingly volatile market backdrop and higher borrowing costs. The primary market has had a stop-and-go nature, with steady days like Tuesday seeing as many as a dozen deals, right after all issuers chose to stand down a day earlier…. while the investment-grade market has remained open for issuers willing to pay up, the high-yield primary market has ground nearly to a halt. New junk sales have been frozen as borrowers contend with a rapidly rising cost of debt fuelled by uncertainty about over the Fed and the economic outlook. (Bloomberg).  Cash spreads mixed to close out the week, but generally tighter on the day.  Less positive on the week though, spreads are +7 – 13 bps wider across US IG and EU IG.  CDS dropped, mirroring the better tone in stocks.


  • Historical offshore spreads, with AU FRN for context


Source: Bloomberg, Mutual Limited


  • Local Credit – Westpac priced its new senior and covered deals on Friday.  Fair to say, it was a strange bookbuild.  Either way, at the final update the senior floating book was at $1.45bn and the fixed had only garnered $240m of bids.  Consequently, as Snoop Dogg would say, “drop it like it’s hot.”  The fixed line was abandoned.  Books closed before any guidance update – which is the strange part, usually we receive guidance adjustment to ‘will price in the range’ of X bps before the books close.  Not this time.  Pricing was adjusted to +105 – 107 bps (WPIR) for the senior line, which was a little higher than expected, I was thinking +102 bps at the time.  Pricing on the covered line was adjusted from +77 bps down to +73 – 75 bps.  In the end…they printed 3yr Covered FRN – $1.20bn (1.16x covered) and 3yr Covered FXD – A$800m (1.19x covered) at +73 bps.  In the 5yr Senior FRN line WBC printed $1.00bn (1.35x covered) at +105 bps.


  • Trader’s remarks…”an unexpected and somewhat underwhelming reception given to the latest A$ senior major bank deal. Sadly, the broad-based inability of the street to absorb switch flow likely contributed to the wide prints with prospect of near term spread performance in the new lines largely reliant of the front end finding some traction.” Major bank 5-year senior is quoted at +103 bps (+1 bps CoD and +7 bps CoW), while 3-year is unchanged on the day at +78 bps (+2 bps CoW).  Traders again…”to be clear, we are not seeing much selling at these levels, more so it is the absence of buying that is hampering this market. Having breached the symbolic +100 rubicon in 5yr majors have we now hit the wides..? Possibly, (probably in our view) though this deal seemed somewhat clumsy, panicky even – as was the case with their 3yr deal back in March.”  I agree, the whole deal was a shambles, and I am no strongly of the view (again) that we’ve seen the wides…ok, give or take a few basis points to save some face.


  • In the tier 2 space, no flow reported.  All majors have printed in some shape or form in recent months, which may signal that any tier 2 needs over the near term will be met offshore.  This may in turn provide a tail wind for tier 2 spreads.  If correct, it’ll likely be a grind rather than gapping, risk sentiment remains cautious and unlikely change meaningfully any time soon.  Tier 2 spreads closed unchanged on Friday, but +4 – 8 bps on the week.  CBA’s Apr-27 is at +212 bps (vs +190 bps at print), while the 2026 callable cohort is at +196 – 203 bps.  The 2025’s are at +186 – 188 bps.  With BSW 3M on the rise, recent tier 2 paper will be paying 3.0% before long.


  • “On Friday, APRA’s Chair commented that “banks’ credit risk capabilities will be tested” as inflation and interest rates rise because “a generation of borrowers haven’t experienced material increases in rates”.  APRA will continue to keep on monitoring banks’ housing lending standards.  Even though there could be pockets of stress as rates rise, especially if they rise quickly, banks are well capitalised and are in good stead to tackle these headwinds.” (CBA)


  • With yields easing back from the brink, as we head into the second half of the month the Bloomberg AusBond Credit Index (FXD) is down -0.64% MTD, a more palatable number than a week ago when it was down -1.34%.  The Bloomberg AusBond Credit Index (FRN) continues to outperform its fixed rate brethren, down just -0.09% MTD.  The chart below highlights the capital preserving attributes of FRN’s relative to other asset classes in a rising interest rate environment.


  • YTD total return across key asset classes…


Source: Bloomberg, Mutual Limited


  • Major Bank 5-year senior paper…historical …


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – bond curves flattened last week as policy error begins to weigh on sentiment, specifically that tightening monetary policy will drive the economy into a recession (at worst) or stall growth (at best). I’ve been mildly tapping the table of late on this, highlighting that perhaps 10-year ACGB’s had overshot the runway and were too high.  A view that is becoming more mainstream with yields -16 bps from recent highs (3.56%), closing Friday at 3.40%.  If we can accept that terminal cash rate this cycle will be 2.50% (RBA’s guidance), and we can accept that bond yields as a spread to cash are mean reverting, then 3.40% is around fair value given all we know.  The average ACGB 10-year to cash rate is around +90 bps, but admittedly with some very fat tails.  Also, market pricing has the terminal rate at 3.30%, +80 bps to the RBA’s terminal rate guidance, so a pretty wide potential margin of error.  Interestingly, market pricing for rate hikes has eased back to levels last seen just before the May RBA meeting.  Be that as it may, leads from offshore on Friday suggest yields will inch higher again, albeit modest. UST 2-year yields rose +2 bps to 2.58%, while in the 10’s yields were +7 bps higher at 2.92%.


  • ACGB curve – week on week change, flatter (bull)…


Source: Bloomberg


  • A$ Fixed Income Markets…note 90-day bank bills are approaching 1.00%


Source: Bloomberg


  • Market implied rate hikes…


Source: Bloomberg, Mutual Limited


  • Macro “US consumer sentiment weaker: The preliminary reading for May’s University of Michigan consumer confidence fell to 59.1, worse than the expected 64. This was a fresh decade low in sentiment. Both current and future expectations fell. Whilst headline CPI growth is off its highs, petrol prices are near record highs and mortgage rates are near to their highest levels since before the financial crisis. One-year ahead inflation expectations were unchanged at 5.4% and longer-term inflation expectations were unchanged at 3%. In other data, US import prices were flat in April versus +0.6% expected.” (ANZ)


  • Main event this week is wages data…borrowing from ANZ again…”the Q1 Wage Price Index (WPI) is due on Wednesday and will play a big part in determining how much the RBA lifts the cash rate target at its June meeting. An increase in line with our expectation of 0.8% q/q will likely see the RBA sticking with Lowe’s comment last week that it is not inclined to “deviate” from moves of 25bp in coming months, unless “there is a very strong argument to do so.” A jump of 1% q/q or more will, however, indicate that the acceleration in wages growth came earlier than indicated by the RBA’s business liaison talks and so likely has more momentum. In which case, the prospect of a move of 40-50bp in June increases materially.


  • Charts…





Source: Bloomberg, Mutual Limited


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



Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%