Mutual Daily Mutterings
Quote of the day…
“I wish there was a place where atheists could all get together and sing songs about physics. I love being a rationalist, but it’s lonely”…Simon Pegg.
Chart du jour …global debt has risen more in the last two years than any similar period since WWII…
Overview…”a slightly dovish hawkishness…”
- A somewhat volatile session overnight. European markets opened firmer, but then caught a case of the woe-is-me and weakened as the day progressed. The US picked up the woe-is-me baton, but in true ra-ra American fashion fought back post release of the Fed January meeting minutes (slightly more dovish than expected) to be unchanged to up a smidge at the close. In the UK, CPI surprised in the upside, which perversely pushed GILTs lower. UK CPI is now at 30-year highs.
- Talking heads (Fed minutes)…”on balance, there was nothing in the minutes that suggested the Fed would be more aggressive than what the market has already priced in…” yep, well said that man. “The FOMC Minutes offered little beyond the hawkish pivot already delivered,” and that man too.
- And this one…“the fear that investors had coming into the release of the minutes was a very aggressive conversation potentially around balance-sheet reduction or maybe more chatter about a 50 bps rate hike in March…I don’t think that any of those fears of even more aggressive hawkish language came through in today’s minutes.” Yeah, ok…I’ll accept that.
- Fed speak… “ahead of the release of the FOMC meeting minutes, Fed Kashkari (known dove) appeared to be pushing back on the idea of a 50 bps hike noting that if the Fed raises rates aggressively it may hurt the economy. Fed Harker also backed a 25 bps move in March and market pricing of a 50bps move is now back at a 50/50 bet.” (NAB)
- Russia-Ukraine headlines persist, but nothing seems to have changed…both sides sticking to diplomacy for now. It is being noted, however, that there is no proof the Ruskies have actually withdrawn troops as reported, a headline generally accepted – rightly or wrongly – as being the catalyst for yesterday’s market buoyancy.
- Cartoon commentary…” Eleven years ago, shortly after the onset of QE 2, Ben Bernanke gave us his definition for “monetization” of the debt. At the time, The Fed’s balance sheet was approaching $2.5 trillion. Today, it stands at nearly $9 trillion, more than triple the figure from a decade ago.”
The Long Story….
- Offshore Stocks – European stocks were largely in the red, while a slightly less hawkish (or more dovish) Fed than expected gave US stocks a lift, closing off their lows in the case of the DOW (-0.2%) and NASDAQ (-0.1%), and into the green for the S&P 500 (+0.1%). Within the S&P 500 two-thirds of stocks advance, and only two sectors fell, Telcos (-0.2%) and Tech (-0.2%). Energy (+0.8%), Materials (+0.7%) and Industrials (+0.5%) were top of the pops.
- Local Stocks – local markets tucked into the risk-on Kool-Aid yesterday, latching blindly on to questionable headlines on Russian troop withdrawals. But, as the saying goes, “have money, will punt.” Not really a saying, just something I made up. The ASX 200 advanced +1.1%, with 84% of the index gaining round, led by strong gains in Health (+6.2%), REITS (+3.1%), and Staples (+1.7%). An +8.5% rally in CSL post a solid interim earnings report was the catalyst for Health gains. Only two sectors in the red, Energy (-0.7%) and Materials (-0.4%). The index has rallied +6.5% in the past two weeks, clawing back a large portion of the January retreat (-8.1%). A decent turn around all things considered, rising inflationary risk, increased likelihood of policy tightening, and the evolving Tom Clancy novel in Eastern Europe. Futures are up a bee’s bum hair, so not much at all.
- Offshore credit – still drifting wider in cash, although it remains gradual. CDS marched to the beat of equity’s drum, a smidge wider in MAIN (EU) and a touch tighter in CDX (US). Despite the broader risk headwinds, and continued drift wider in spreads, primary markets remain active. US IG markets saw US$16.3bn priced on the day, taking WTD issuance to US$27.1bn, with deals from Citi, JP Morgan, Morgan Stanley and Mizuho among others. While spreads are drifting, the narrative remains constructive with no observable impact of a more hawkish Fed. UBS reported recently that “the were no signs of corporations re-leveraging and refinancing costs were not punitive yet, suggesting credit was still in the early stages of a late cycle.”
|EU Cash vs CDS…
Source: Bloomberg, Mutual Limited
|USD Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Local Credit – traders…”an (apparent) de-escalation of tensions in Ukraine was the catalyst for a slew of A$ primary, with three new financials sector either priced or mandated. Sentiment remains fickle, we do not expect to be bowled over by inquiry in secondary with most investors continuing to add risk via primary and then top up or sell down in secondary.” Shortly after publishing my morning note yesterday NAB launched a multi-tranche A$ senior deal with a 3Y floater on offer at +50 bps (guided) and 5Y fixed and floating at +75 bps (guided). At the last update the book was just shy of five-yards ($4.97bn), with a 3Y fixed line added following reverse enquiries. The final print was chunky at $4.0bn, including $1.75bn of fixed across the 3Y ($500m) and 5Y ($1.25bn) – somewhat surprising given the expected path of interest rates. I suspect some offshore buying drove the fixed appetite. Final pricing tightened in to +47 bps and +72 bps respectively across the 3Y and 5Y, which was bang on our expectations and showed NAB’s desire for volume rather than price superiority. All lines priced at a slight premium to secondary, +2 – 4 bps, and as a consequence pushed the major curve out a touch. The CBA and WBC Jan-27’s are middling +68 bps, while the new NAB deals is +70 bps on the break (-2 bps). The 4Y and 3Y lines were a basis point wider at +60 bps and +45 bps respectively. With CBA and WBC’s line, the NAB deal takes YTD major bank senior A$ issuance to $10.8bn. No flows of note reported in tier 2 lines with the range of active lines generally unchanged…slight drift in ANZ’s Feb-26 call at +141 bps (+1 bp).
AU Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – local bonds followed the US lead yesterday, with yields +1 – 4 bps higher as markets continue to adjust their collective thinking around monetary policy settings, and the prospect of a full-blown bruhaha in Eastern Europe. Overnight, the tone turned somewhat dovish after minutes to the Fed’s last meeting (released overnight) were a smidge more dovish than originally expected. US two-year yields dropped -5 bps to 1.53%, while ten-year yields are largely unchanged at 2.05%.
- Meeting minute specifics…”the headline-grabber is the comment that a significant reduction in the balance sheet is likely to be appropriate, and the process will unfold at a quicker pace than the previous cycle. In the long run the FOMC wants the balance sheet to be comprised primarily of Treasuries, and to speed that process there was discussion about actively selling MBS or rolling MBS maturities into Treasuries.” (Bloomberg). Members moved up the window to start running off its balance sheet to the third quarter of 2022, about 18 months sooner than seen in December, and probably more quickly than in 2017-2019, minutes showed.
- On the economy…“there was plenty of discussion about omicron and its potential to weigh on output. There was also mention of the potential for further variants to provide headwinds in the future. There was also plenty of discussion about price pressures from business contacts in this context. On the labour market, “many” participants judged that it is at or very near full employment. “A couple” suggested that there is still slack out there.” (Bloomberg)
- Inflation…”there was discussion about the broadening of price pressures, and that businesses were adjusting their practices to compensate — eg by raising prices themselves. Still, there remained a general belief that price pressures would moderate, with some pointing to well-anchored expectations. The default setting, therefore, is that much of this issue will work itself out (perhaps with a help from policy) this year.” (Bloomberg)
- Monetary policy…”only “a couple” favoured a premature end to QE, which was one of the things punters were looking out for at the meeting. In terms of rate increases, “most” now believe a faster pace of hiking than the previous cycle will be warranted, which naturally is already priced. There is little in here to suggest a marginally hawkish tilt relative to what is priced — if anything, the discussion seemed more concerned with the possible tightening of financial conditions than one might have expected. As such, you could argue that that’s a marginally dovish nuance to the discussion, particularly relative to market developments over the past couple of weeks.” (Bloomberg).
- Macro – local labour data (January) out today with consensus expecting donuts for the employment change, down from +65K in December. Consensus per Bloomberg is expecting a flat unemployment rate of 4.2%. More colour from NAB…”Labour force data today largely comes down to whether unemployment reaches 4% or not. If it does amid widespread disruption over New Year from Omicron then the RBA’s patient stance is under more pressure, while it is just a matter of time if it doesn’t. We are below market at -35k for the headline jobs number that follows gains of 430K over the previous 2 months due to reopening. Leading indicators were mixed. The forecast range is +59k to -60k.”
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Scott Rundell, Chief Investment Officer
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