Mutual Daily Mutterings
Quote of the day…
“Eventually, everyone will be quarantine to their house with no sports to watch…and in 9 months from now a boom of babies will be born and we will call them coronials”…random
Chart du jour…global credit spread changes
Source: Bloomberg, Mutual Limited
“Gee, so glad he’s back…”
Overview…”thinning on top”
- News or data that could be tagged as a likely catalyst for movement on the day was pretty thin, giving markets the time and space to dissect Fed Chair Powell’s second day of testimony. European stocks fell a fair clip, while US stocks were ‘moderately’ mixed with the NASDAQ underperforming as Amazon and Google dropped from recent all-time highs. Bond yields bull flattened (long end down faster than the front end) as Powell’s persistent dovishness exacerbated concerns about the economic recovery’s sustainability.
- Fed Chair Powell’s testimony continued into its second day, this time in front of the Senate Banking Committee. Powell acknowledged that inflation is running hot, but defended the Fed’s accommodative approach. He labelled price developments “unique“. Focus remains on any signs that inflation is likely more sustained than they currently forecast. He again reiterated that reducing bond purchases is still a way’s off, but the matter is being discussed nonetheless. He declined to give an opinion on more government stimulus.
- Not all Fed members are on the same page though. James Bullard thinks “it is time to end these emergency measures.” In his mind the Fed has achieved its goal of achieving “further substantial progress” on jobs and inflation. Bullard has the luxury of being a little more non-consensus in his views, he’s a non-voting member this year. Another Fed member, Charles Evans, suggested the Fed will pull the trigger on tapering around the end of the year and rate hikes would be likely in 2024, possibly “a little bit earlier.” Evans is a voter this year.
- In other central bank news, the BOE’s Saunders stated that withdrawing stimulus may be appropriate soon…“in my view, if activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus.” That is simply common sense: if things continue to improve then less support from monetary policy will be required, and this is not really a contentious point of view. However, it’s the timing that’s grabbing the markets’ attention.
- Offshore Stocks – a narrow’ish sell-off in US markets, while the European weakness on the day had some sting to it, the STOXX down -1.0%. The DOW eked out a +0.2% gain, supported by Healthcare and Discretionary. The S&P dropped -0.3%, with 53% of stocks in the red and five of the eleven main sectors in negative territory. Utilities (+1.2%), Staples (+0.4%) and Financials (+0.4%) topped the leader board, while Energy (-1.5%), Tech (-0.8%) and Discretionary (-0.6%) underperformed. In the financials space, Morgan Stanley followed Wall Street peers reporting Q2 results, with investment banking topping consensus and helping it post its second-most profitable quarter on record. Still, it missed on FICC sales & trading. E-mini’s have continued the theme in after-market trading.
- Local stocks – for the first half or so of the trading day yesterday the ASX 200 bobbed up and down between modest gains and modest losses. As the day wore on the lockdown rumour mill kicked into gear, Victoria was heading toward its fifth lockdown. Sydney-siders, hold my beer, this is a lockdown! Short of being shackled to the radiator, we’re house bound. This sent a bit of a shiver through markets and the ASX 200 closed in the red. Not quite a plunge, but there was a noticeable change in tone. And, stronger than expected labour data didn’t have the muscle to hold the tide back (details below). Just over half of the ASX 200 closed weaker, and only two sectors were able to post gains, Materials (+1.4%) and Utilities (+0.7%). At the other end of the spectrum, Healthcare (-1.4%), Tech (-1.2%), and REITS (-1.2%) were the key underperformers. Futures are signalling a modestly weaker start.
- Offshore Credit – as is often the case, US banks are tapping the bond market for some cheddar post their Q2 reporting. Last night it was Bank of America and Morgan Stanley, following Goldman Sachs yesterday. BofA issued US$7.75bn, with the longest-dated security, a 31-year bond, set to yield T+103 bps. Morgan Stanley issued US$8.5bn at T+95 bps for its 11-year offering. Recent earnings have highlighted rapid balance sheet growth through the pandemic. Secondary spreads have drifted wider as this supply is absorbed. US Financials are +1.5 bps wider on the session, and +4.0 bps wider MTD.
- Local Credit – from the traders “credit remained mostly sideways yesterday atop yet another strong employment report and a deteriorating COVID situation across the East Coast of Australia. Traded volume was light with little in the way of discretionary risk adding”. Some colour on the banks “flows light across the complex with dealers preferring to add major bank paper on the day. ANZ to retire $2bn today before another $2.75bn this time next month, we expect this keeps pressure on spreads in the near term. The major bank curve (senior) closed unchanged with no flow of note on the day”. In tier 2 some small buying, but enough to grind spreads a basis point tighter across the complex. The 2026 callables are at +124.5 – 126.5 bps and the 2025’s are at +115 – 120 bps. The MQG 2025’s are at +135 bps, still offering relative value to the Majors.
- Bonds & Rates – local bond markets shrugged off a better-than-expected labour report (details below) with ACGB 10-year yields hitting new six-month lows as Victoria reluctantly announced it was joining NSW in lockdown. We’re old hands at it, this lockdown stuff, we know the drill. I’m off to Dan Murphy’s for essentials. Powell and the Fed’s willingness to let monetary policy run hot for a little triggered some growing doubt on risk, which resulted in US 10’s rallying some -5 bps to sub-1.30%. Also, hedging from the hefty US bank issuance touched on above would have applied downward pressure on long end yields.
- Offshore Macro – tonight’s US retail spending data will be closely watched for various reasons. One in particular is for any signal it might provide on the state of disposable income and the damage that inflation is doing. The recent surge in CPI and PPI data potentially masks a real underlying problem for the US economy. Inflation adjusted disposable income hasn’t been this low since the GFC (2007 – 2008), and it has only temporarily been propped up by fiscal stimulus. When stimulus ends, which is expected sometime around the end of the third quarter, the ability for consumers to lift the economy will be severely compromised, all other things being equal. If higher inflation persists, transient or otherwise, consumers will have less disposable income. Slower spending means lower earnings, which spells trouble for equities, which have some very solid earnings growth numbers baked into their valuations.
- Local Macro – another strong labour report yesterday with +29.1K jobs added vs +20.0K expected (consensus), which comprised +51.6K full time and -22.5K part time. The unemployment rate continued to surprise to the downside, falling to a decade low of 4.9% vs 5.1% consensus (and 5.1% last month). The participation rate was unchanged at 66.2%. Unemployment is running well ahead of the RBA’s forecasts, which had unemployment down to 5.5% by December 2022 and 5.3% by June 2023. Continued strong labour data supports further withdrawal of monetary policy support, in time.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907