Mutual Daily Mutterings
Quote of the day…
“You’re not drunk if you can lie on the floor without holding on” – Dean Martin
Rolling weekly spread change…
“Nothing to see here, move along…”
- Overview – ta be sure, ta be sure, happy St Paddy’s day. Not a lot going on in markets overnight, some modest moves across stocks, albeit down directionally, while bond yields were a smidge higher ahead of the Fed’s two-day meeting, which kicks off tonight. As with stocks, moves were very modest. The broad narrative from the financial market’s ‘intelligencia’ (that’s a made-up word, it means the collective smarty-pant experts) is a repeat of prior sessions, “stocks fluctuating near record highs, with bond yields around 1-year highs as investors weigh the strength of the global economic recovery.” Put differently, the reflation trade has paused for a Gatorade ahead of tomorrow’s FOMC meeting and subsequent round of monetary policy soundbites. Eat, sleep, speculate, repeat. Some macro data out in the US of note, although market reaction was muted – retail sales dropped more than expected in February, reflecting the effects of extreme weather. It is worth noting however that retail sales for January were revised up, so on a two-month basis, not so bad. Nevertheless, with every man, women and child’s respective wallet / purse / hip-pocket bulging with $1,400 of Dr Feelgood’s (aka President Biden) economic elixir, retail sales over March and April will no doubt be rippers.
- Offshore Stocks – European stocks put in a modestly positive rally, closing +0.3% – 0.8% higher on the day. US markets started on the good foot, but caution ahead of the Fed meeting sucked confidence from markets and the broad complex of US indices drifted into the red at the close…except the NASDAQ, which was able to make some positive (marginal) gains. While the S&P 500 dropped only -0.2%, under the hood the tone was notably weaker, or perhaps, just cautious, with gains in Telcos and Tech stocks moderating broader market losses. Almost 70% of stocks closed while sporting some shade of crimson, with all Energy (-2.8%) stocks down. Industrials (-1.4%) fared only marginally better, 90% of stocks in the red. Only four sectors had a buoyant and jaunty spring in their respective steps, Telcos (+0.9% and 73% of stocks up), followed by Tech (+0.8% and 59% up). Utilities (+0.1%) and Staples (+0.1%) eked out gains, but they needn’t have bothered, marginal benefit to the index as a whole. Futures have continued the weaker tone
- Local Stocks – stocks go up, stocks go down, stocks go up…and yesterday they did, although by the end of trading the ASX 200 was a touch off its intra-day high (6859, +1.3%). The rally was reasonably broad-based with 78% of stocks closing up, and only two sectors in the red, Energy (-0.1%) and Materials (-0.5%). At the top of the tables was Tech (+3.0%), which has gone from daily pariah to saviour many times over recent weeks. Yesterday it had some time in the sun. Silver went to Health Care (+2.5%) – although for impact on the ASX 200 it took home the gold given its larger relative weight. The bronze went to REITS (+2.2%). Also, on the plus side of the ledger, Financials (+0.8%) with a 30% weight, was a significant contributor, shadowing Health Care. Futures are pointing to a modestly softer open (-0.4%).
- Offshore Credit – the back drop of rising economic growth and inflation expectations is fuelling a renaissance in fixed income products with floating rates, i.e. loans and FRNs, yay for us, that’s our thang…deliberate misspelling, trying to be cool and sassy! Bloomberg is reporting funds flow into loan funds in the US has risen sharply YTD, with growth in FUM on track for the strongest flow since 2013. Having said that, primary markets in the fixed rate bond space remains active, with another US$15bn across six issuers pricing overnight. Deals met with decent demand, with continued spread compression from launch to final print.
- Local Credit – not a lot to add here, focus over the past couple of days has been the range of corporate primary deals, including the three tranche Verizon deal, which ended up totalling $1.25bn from a $1.45bn order book. Traders reported modest switching activity ahead of the deal, with long end corporates closing wider on the day. In our sand pit, no change to major bank senior paper, although good two-way flows were reported. In tier 2, spreads were unchanged to a basis point tighter, flow was two-way, but modest with the “Asian private bank cohort predominantly looking to reduce”.
- Bonds & Rates – the local bond yield roller coaster coasted along yesterday with a solid rally, the ACGB 10’s dropped 10 bps…”like it’s hot” as Snoop Dogg would say. The RBA March meeting minutes were released yesterday, but contained little information of any note, that is there were no surprises. One focus for bond punters is when, and probably if, the bank’s 3-year YCC mechanism shifts focus from the Apr-24’s, which are hovering around 0.09% (vs YCC target of 0.10%) out to the Nov-24’s at 0.27% (-3 bps on the day). Ever the tease, the RBA offered little, stating they would make a decision later in the year and monitor “the flow of economic data and the outlook for inflation and employment”. For those keen on getting the detail directly from the horse’s mouth, the minutes can be found here. Local bonds should do little today given the anaemic offshore leads, but will likely feed on what happens in treasuries over the next couple of days as the market digests what is said and what is not said at the Fed’s two-day meeting.
- The FOMC – some talking head pontification…”it’s kind of fun for the Fed to be relevant again, isn’t it? To be sure, Wednesday’s meeting isn’t a “live” one from the perspective of interest rate or QE policy; no one expects either one to be changed. But when forward guidance forms the vanguard of your policy armoury, you have to deal with expectations — or at least excitement — over a potential shift when underlying conditions change. That’s the situation confronting the Fed this week as speculation over a shift in the dot plot percolates throughout the market. What makes it particularly spicy is that it isn’t altogether clear how the bond market will react, no matter what the outcome”…regardless of what is said, “it’s reasonable to expect a fair amount of noise as bond operators sift through the announcement and decide what its various components actually mean.” To state the obvious, if markets view the meeting statement as lacking in sufficiently dovish language, then bond yields will rise, and vice versa. I’d be surprised if there was any reference to the recent rise in yields in the statement, rather the Fed will likely continue to espouse the war chest of monetary policy tools they have at their disposal to throw at the market if financial conditions become too unruly. Whether markets believe them or not, well that’s another matter.
- Macro – local house price data out yesterday and as expected it surprised on the upside. I say as expected not because I have some fancy model that forecasts this stuff, but rather old-fashioned anecdotal evidence. I still have my house in Sydney and a house down the road went to auction last Saturday with guidance of $2.5m, three bed, and unrenovated (not for 30 years at least). Have a guess what it went for…..correct, $3.2m, almost 30% above initial ‘guidance’. Anyway, the official figures show house prices for Q4’20 rose +3.0% QoQ vs +1.8% consensus estimated (+0.8% for Q3). YoY prices rose +3.6% vs 2.9% YoY consensus and +4.5% YoY as at the end of Q3’20. Sticking with local data, payroll data rose +0.4% YoY. NAB notes that payrolls themselves “are likely to become less useful as an indicator from early March given the impact of the pandemic in early 2020 will make YoY comparisons effectively meaningless in interpreting jobs growth in the month”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907