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Mutual Daily Mutterings


Quote of the day…


“You know, the very powerful and the very stupid have one thing in common.  They don’t alter their vciews to fit the facts.  They alter the facts to fit their views” – Doctor Who (1977)







“Novo Regratz





“Gone Too Soon!”





Overview…”Flipping and a’ flopping… ”


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


  • Another choppy offshore session as investors struggle to digest a vast array of continuing uncertainties.  The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. News flow and data releases on the day was muted – just the NY Fed Empire manufacturing report, as well as some hawkish Fed commentary, but again, nothing new.  China growth concerns amid vigorous COVID suppression strategies are adding to uncertainty.  Stocks spent some time in the green, but also a lot of time in the red…in the end, stocks were mixed globally.


  • Bond yields did little on the day, moderately flatter (bull), but there wasn’t a lot in it, again, little conviction in either direction.  Where treasuries go from here could be a function of bank buying.  According to recent Fed data, commercial banks were good for US$400bn of bond buying in 2021.  As the Fed hit the breaks on buying and hiked rates to combat inflation, banks have stepped back and holstered buying, which has been a significant contributor to yields doubling YTD.  And, despite holding a near-record amount of deposits, banks may prefer to hold cash until “they have a better handle on the impact of the upcoming QT liquidity drain.”  The net effect is there is no respite expected for bonds in the immediate future.


  • Fed speak…”Fed officials were too slow to react to surging inflation and now face a period of stagflation, former Fed Chair Ben Bernanke told CNBC, calling the central bank’s response a “mistake.” The economy will likely slow in the next year or two and prices will stay elevated, he told the NYT separately. Meanwhile, New York Fed President John Williams downplayed worsening market liquidity, saying it was to be expected given tightening is driving volatility.” (Bloomberg).


  • Talking heads…”you’ve got investors pulling back from the market in the expectation that we’re going to have a recession. It’s hard to, frankly, make a strong argument against that, the idea that we’ll have a recession. We know that that’s what Federal Reserve tightening produces most of the time, it’s a recession. And so, you have to have a good answer to the question of why would this time be different, and it’s not that easy to come up with that answer, frankly.”  Thanks Frank!


  • And…”with inflation showing little sign of letting up, the Fed is under pressure to accelerate the pace of tightening.  This is increasingly problematic as the complicating factors from the Russia-Ukraine conflict and the China COVID response are also intensifying. All told, this suggests global growth may be decelerating more quickly than forecast.”


The Long Story….


  • Offshore Stocks – intra-day volatility in stocks highlights the lack of conviction amongst investors, in either direction.  By day’s end the old school DOW was able to keep its head above water, just, closing +0.1% higher.  NASDAQ dropped -1.2%, while the S&P 500 was somewhere in the middle, down -0.4%.  Some 62% of the S&P 500 retreated and most sectors were in the red.  Energy (+2.6%) was the main shining light, benefiting from surging oil prices again (+2.4% CoD & +7.8% CoW).  Healthcare (+0.7%) played a supporting role, as did Staples (+0.5%) and Utilities (-0.3%).  On the other side of the tracks we had Discretionary (-2.1%) slumming it, joined in misery by Tech (-0.9%) and REITS (-0.8%).


  • Local Stocks – modest gains for the ASX 200 yesterday, +0.3%, which will probably be erased today.  Around 62% of stocks advanced, while only three sectors retreated.  Healthcare (-0.6%), Materials (-0.5%) and Discretionary (-0.1%) all dilly-dallied.  The daily go-getters were Industrials (+2.4%), Tech (+2.1%) and Telcos (+0.7%).  Despite the lack of conviction offshore overnight, and my initial expectation of likely losses this morning, futures are up a touch (+0.3%).  Local PE’s (forward) are running around 14.8x, bouncing off recent lows of 14.4x last week.  This is well below the pre-pandemic 5-year average of 16.1x and highlights the lack of conviction around future growth prospects.  Hard to see what catalyst could emerge to materially boost valuations anytime soon…perhaps signs that inflation has peaked, which is probably the most likely.  But when? Stay frosty (cautious)!


  • ASX 200 Relative Strength Indicators


Source: Bloomberg


  • Offshore credit – with some sense of calm across markets, primary activity in US IG markets picked up.  Six companies priced US$9.1bn overnight, paying +18 bps in new issue concessions, which is almost double the YTD average (+11 bps) and 9x the 2021 average (+2 bps).  Two companies elected not to proceed with their planned issuance, but are expected to follow through tonight if conditions remain conducive.  While new issue concessions were elevated vs recent averages, order books were solid at 3.3x oversubscribed.  The YTD average has been 2.9x and the 2021 average at 3.0x.  Weekly issuance is forecast to be US30bn.  Spreads in secondary drifted wider again, just a touch.  The US IG Financials index is sporting a weighted average spread of +150 bps, levels not seen since the height of the pandemic in Q2’2020.  CDS pricing was marginally wider, +1 bp in the CDX, and same the MAIN.  Senior Financials were +1 bp higher, and Sub Financials +2 bps.


  • Historical offshore spreads, with AU FRN for context


Source: Bloomberg, Mutual Limited (the ‘Line in the sand’ is the level where credit spreads are deemed to be restrictive from a macro perspective)


  • Local Credit – traders signalling it wasn’t really worth getting out of bed yesterday, a very quiet start to the week with no change to prevailing themes or investor cautiousness, which is manifesting itself in little trading and hoarding of cash.  Major bank senior spreads were largely unchanged on the day, although WBC’s calamity bond new bond seemed to find some traction in secondary with spreads into +101 bps (-2 bps CoD), although I did see a +99 bps quote on the chats yesterday.  Elsewhere along the senior curve spreads closed unchanged.  Bank bills hit 1.00% yesterday (90 Days), up +27 bps MTD and up +74 bps since the beginning of April, which is providing a solid boost to FRN running yields.


  • In the tier 2 space, again nothing effusive from traders, very little trading being seen, and noting “secondary investors will be wary of the new issue concession that must surely be offered on any primary deal so we remain guarded in this space.”  For some context, WBC paid a +8 – 10 bps new issue concession on their senior deal last week.  You could argue on this basis that a new issue concession for a typical 10-NC-5 tier 2 line would be 2x, perhaps 3x this, so +20 – 30 bps….in the current liquidity constrained environment.  CBA’s Apr-27 tier 2 line is quoted at +209 bps (-3 CoD), which would suggest any new major bank tier 2 deal would have to come with spreads around +230 – 240 bps, possibly as high as +250 bps to ensure volume.  I’m a buyer at these levels!  Of the existing tier 2 lines, that are actively traded, the highest issue margin is +215 bps (NAB’s May-24 call), and the average is +180 bps.


  • Major Bank 5-year senior paper…historical …


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – not a lot to report on yesterday’s trading action, very modest flattening of the ACGB curve and same of the swaps curve.  About the only thing of note is 90-day bank bills raised the bat yesterday after cracking the tonne (1.00%), levels not seen since July 2019, a welcome sign for floating rate note investors.  Not much in the way of leads from offshore with US 2-year yields down -1 bps to 2.57% and 10-year yields down -4 bps to 2.88%.  ACGB spread to US treasuries is elevated at +50 bps in the 10-year part of the curve, well above the 5-year average (-9 bps) and not far off 5-year highs.  Somewhat surprising at first glance given US inflation if running much hotter than local inflation, by a good margin.  But, when you think through it, the Fed has a monumental task in containing US inflation (CPI at +8.5% YoY), indicating a more pressing need to tighten monetary policy aggressively relative to the inflation task before the RBA (CPI at +5.1% YoY).  Accordingly, it could be argued risk of policy error in the US is greater than here, and therefore the threat to growth greater there also.  The back end of yield curve generally reflects growth prospects, whereas the front of the curve reflects monetary policy expectations.


  • Probability of a recession in the US is running at 40%, whereas in Australia it is only 10%…according to Bloomberg data.  Meanwhile, this snippet of wisdom from JPM…”equity investors’ anxiety about a recession isn’t showing up elsewhere, giving JPMorgan’s Marko Kolanovic confidence in his pro-risk stance. US and European stock markets are pricing in a 70% chance of near-term recession, he estimates, compared with a 50% chance priced into the IG debt market, 30% in high-yield debt and up to 20% in rate markets. Should fears fail to pan out, downbeat equity positioning and sentiment will help the market to recover, he wrote.


  • A$ Fixed Income Markets…90-day bank bills raised the bat


Source: Bloomberg


  • BBSW 3M vs Cash Rate vs CPI…


Source: Bloomberg, Mutual Limited


  • Local Macro“May RBA Minutes are at 11.30am AEST. Expect more of the same to justify the hike following the press release & conference and forecast update. The Bank will signal further hikes. Some insight into the 25bps decision and any hints on the corridor would be welcome. Lowe suggested it was a “business-as-usual” decision, but it has served to add to uncertainty on the normalization strategy.” And “weekly consumer confidence will be out at 9:30am and will likely remain cautious due to stock market volatility and the dour election.  Petrol is going up again (oil +3% overnight) although the AUD’s 10% fall in the past month will likely have more impact on other imports if sustained.” (BAML)


  • Offshore Macro – Chinese activity data out yesterday, which highlighted the impact of lockdowns.  We Victorian’s complained about Chairman Dan’s lockdown, but they were a walk in the park (when allowed) compared to China.  Mind you, old Comrade Andrews would have followed the Chinese playbook here if he thought he could get away with it.  Any-hoo, off my soap box…” “Headline Chinese data for the year-to-April disappointed across the board, partly reflecting the impact of lockdowns. Industrial production growth fell to -2.9% from 5%, retail sales growth fell to -11.1% from -3.5% and (smoothed) fixed asset investment growth slowed to 6.8% from 9.3%. Growth in “hard” or verifiable activity indicators also surprised to the downside in April, with electricity output growth falling to -4.3% from 0.2% and nominal US dollar (USD) exports growth slowing to 3.9% from 14.7%.” (Barrenjoey)


  • Overnight…”the Empire manufacturing survey unexpectedly contracted in May with falls in orders and shipments, the latter falling at its fastest pace since early in the pandemic. Price pressures have eased but they remain at elevated levels. This report, following on from the soft China industrial production and consumer spending data, simply fuels investor concerns around a potential slowdown in economic activity. If this weakness in the NY Fed survey is reflected in other regional reports to be released later this week then we could well see further retracement in longer dated yields.” (NAB)



  • Charts…





Source: Bloomberg, Mutual Limited



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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%