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Mutual Daily Mutterings


Quote of the day…


“Marge, don’t worry. It’s like when we stopped paying the phone bill. They stopped calling us. In fact everyone did.” – Homer Simpson






“Trust is earned when actions meet words…




“Knock Knock….”




Overview…”collateral damage”


  • Moves: risk off, off, off… stocks , bond yields , curve , credit spreads , volatility and oil ….
  • Last night’s rout in offshore stocks is what I expected the night before, after the Fed hiked rates +75 bps and warned of more.  Markets on the day however clung to Fed Chair Powell’s comment that such hikes will not be common.  Markets belatedly had a light-bulb moment last night, realising the Fed was full of horse-hockey! The moment of clarity was aided by US data signalling slowing growth – new US home construction declined 14.4% last month to the lowest in more than a year. Homebuilder stocks fell as mortgage rates jumped the most since 1987.
  • Stocks were smoked. Bond markets on the other hand rallied, although were in loss territory early in the session.  Perhaps reflecting a collective realisation that a lot of old-timey nastiness has been priced in, and perhaps, like Steven May, markets had taken things (yields) a bit too far?  Credit spreads continued to drift wider.
  • Talking heads…this guy sums it up well…”we’re worrying about growth and where the Fed takes us ultimately.  Yesterday everybody said, ‘Oh good, the Fed is doing something aggressive, they’re going to get aggressive, they’ll try to catch up to the inflation curve.’ But now, you’re looking at it and saying, ‘Yeah, but are they chasing something they’re not going to be able to catch?’”  At the moment the market is the Road Runner while the Fed is the Wiley Coyote, and we all know how their adventures together ended.  Despite all their assurances, history suggests the Fed really doesn’t have the tools, or know-how to tame the inflation beast without collateral damage, i.e. stalling growth.
  • Several pundits are suggesting markets have not yet fully priced in a US recession.  “In the end, if recession does eventually come, I am left thinking it happens the way the Ernest Hemingway’s passage in “The Sun Also Rises” describes it: “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” (Bloomberg).  JPM now has probability of a recession at 85%, a view based on the average 26% decline in the S&P 500 during the past 11 downturns.  JPM strategist fear heightened concerns could become self-fulfilling if they persist, prompting them to cut investments or spending.
  • In Europe, the BOE delivered its fifth-rate hike in a row and sent the strongest signal yet it’s prepared to unleash larger moves if needed. Though the 25-bp increase to 1.25% disappointed some, policy makers pledged to act “forcefully” if necessary. The bank also raised its forecast for peak inflation this year to slightly above 11%” (Bloomberg)


The Long Story….

  • Offshore Stocks – not pretty, not pretty at all.  The DOW dusted -2.4%, the NASDAQ puked -4.1%, while the S&P 500 was smoked to the tune of -3.3%.  European markets were similarly beaten and bloodied, down -2.4% – 3.3% across the board.  Within the S&P 500 it was almost a clean sweep with 97% of stocks losing ground.  Worst of the worst was Energy (-5.6%), followed by Discretionary (-4.8%), and Tech (-4.1%).  The best of the worst was Staples (-0.7%) and that’s really all you could list.  It was all downhill from there.  Year to date every sector is in the red bar one, Energy (+39.2%).  The next best is Utilities (-9.2%).  The worst performers YTD are Discretionary (-34.7%), Telcos (-32.3%) and Tech (-29.5%).  With US Q2 reporting season a month away, headline risk is elevated as we expect some pretty grim outlook statements given the macro back drop.  Looking at long run trends, I see risk of a further -20.0% downside to the S&P 500 from here, which would put the sell-off on par with the 2008 financial crisis.  I’d assign a 25% – 30% probability to this happening.
  • Local Stocks – I think I said recently that I saw the ASX 200 getting down to 6300 – 6500 levels, or there abouts.  The index closed at 6591 yesterday, down a smidge (-0.2%) and cruising toward my target range.  Last night’s soiling of the bed by offshore markets will exert more downward pressure on stocks and the top end of my target range will be in play.  As for movements yesterday, not a lot to really day, uppers and downers were evenly matched, while more sectors retreated (seven) than advanced (four).  Top of the pops was REITS (+1.2%), followed by Telcos (+0.5%) and Energy (+0.5%).  Utilities (-1.6%), Industrials (-1.2%) and Staples (-1.0%) were all at the back of the bus.
  • If we chart the ASX 200 back to say the early 1990’s and overlay that with a simple trend line, which I’ve done below, we see that in instances where the index has fallen below trend, the overshoot has been around 8% – 15% (ignoring the pandemic for now).  Rudimentary I know, drawn with crayons in fact, but sometimes it helps to step back and look at things more simplistically.  At present the ASX 200 is at trend and if we assume an overshoot in line with past experiences, the floor looks to be around 5600 – 5900.  Futures are down -2.1%, so strap in.



  • ASX 200 long run trend…

Source: Bloomberg



  • Offshore credit – cues are firmly stuck in the rack given conditions for issuance couldn’t really get any worse….”there are no new US investment-grade bond sales on the calendar Thursday, according to an informal survey of debt underwriters, as a selloff continues in the wake of the Federal Reserve’s rate announcement Wednesday. That would make it the first week to see no deals in the primary market in 2022.” (Bloomberg).  Secondary spreads pushed wider, which action in synthetics was a little friskier.  CDX rose +7 bps to 103 bps, while MAIN also rise +7 bps to 113 bps.  Senior Financials are +8 bps and Subordinated Financials are +16 bps.


  • Offshore cash spreads drifting wider on broader risk off tone …12-months

Source: Bloomberg, Mutual Limited



  • Local Credit – traders…”intuitively, you may think that risk assets bounce post FED, yet it looms likely that any strength will be seen an as opportunity to sell. Very hard to accurately comment on where spreads close today. The round trip in rates and punch wider in swap spreads has muddied the water further. Flows, whilst two-way, remain characterised by domestic accounts selling and offshore accounts buying.”  Major bank senior long end drifted again yesterday with the May-27’s almost back at reoffer levels, +104 bps (+2 bps CoD).  Tier 2 spreads drifted also, + 2 – 3 bps wider across the curve.  CBA’s Apr-27 call is at +235 bps (+45 bps to reoffer, and +3 bps CoD).  Given prevailing liquidity conditions – or lack thereof – and squiffy overall risk sentiment, any major bank brave enough to issue into this market would have to start conversations around +265 – 275 bps, I’m thinking.
  • I’m still in the money on my “we’ve hit peak spreads call”, which I made at +105 bps for 5-year senior.  However, if we factor in time decay, we’re back at peak spread levels, with the implied 5-year curve at +108 bps before adding any new issue concessions.   Three-year major bank senior held steady at +84 bps, so that’s a 3s5s senior curve of +20 bps, which is probably a touch on the flattish side all things considered.  In a firm market +10 bps per annum for curve extension is acceptable, but markets at present are not what one would call ‘firm’.  As such, you could mount the case that 5-year major bank senior spreads should be around +115 bps, give or take, or +15 bps per annum of curve extension.
  • If the pain and suffering in stocks persists, a gradual drift wider in spreads is expected and likely.  Add this to rising underlying yields, and the already poor returns across fixed income markets will only get worse.  Fortunately, for Mutual at least, rising underlying yields are positive for floating rate notes, which largely offsets spread widening headwinds….as long as the drift in spreads is not too aggressive.  Year to date the Bloomberg AusBond Credit Index (FXD) has dusted -8.93% vs -0.42% for the FRN index.


  • Major bank 5 year implied spreads (senior)…

Source: Bloomberg, Mutual Limited



  • Bonds & Rates – a solid rally in ACGB’s yesterday with 10-year yields back at 4.00% (-21 bps CoD) and 3-year yields at 3.51% (-19 bps CoD), this oxy-moronic rally followed similar moves in US treasuries, in turn driven by an aggressive rate hike from the Fed.  The rally persisted last night, which will given local markets some respite.  Month to date losses on the Bloomberg AusBond ACGB Index eased back from -4.50% to -3.38%, still eye-wateringly high, but better than it was.  Year to date losses are back at -11.69%.  Similar in semi’s.  We’ll likely see ACGB 10-year yields below 4.0% today and I might suggest 4.0% is the new 3.0%.  Given growth headwinds I’ve been getting twitchy when 10-year yields breach the 4.0% level and would suggest anything north of these levels is a tactical overshoot.  BBSW 3M is up to 1.70%…from 0.01% at the beginning of the year.


  • Some long run perspective…

Source: Bloomberg, Mutual Limited



  • A$ Fixed Income Markets…

Source: Bloomberg



  • Macro – “Domestically, no data today.  The labour force report yesterday was strong and confirms the strength of the labour market. It also reaffirms the need for the RBA to continue on with their 50bps step (at the least). RBA communication ramps up next week with the June Minutes along with Governor Lowe delivering a speech and participating in a panel discussion. Overall, the Bank should reinforce its hawkish stance that further hikes are forthcoming and emphasise upside inflation risks. Importantly, the RBA is likely to retain optionality on the size and timing of subsequent hikes.” (BAML)
  • A good summary of the state of affairs post the Fed here from my old crew at CBA…”we understand that inflation is far too high – essentially everywhere – and that Central Banks need to tighten settings to lower inflation.  But that neat sentiment slides over a number of important intermediate steps.  Raising the interest rate works to slow the economy and it is the slowing of the economy that lowers inflation.  It slows the economy via reduced discretionary income, via lower Government spending (after interest costs rise), via the wealth effect assuming asset prices fall and via increased saving and via reduced investment.  In short, raising the cash rate works because it slows the economy.  And slowing the economy can be painful – which will normally see rate cuts after the task of slowing the economy is achieved.”
  • And from this, thoughts on the Fed’s recent moves…”Which brings us the FOMC dot plots.  The dot plots now forecast a peak in the cash rate of 3.8%   which is almost exactly identical to market pricing which has a peak of 3.875% in mid-2023.  But it’s also important that the FOMC is projecting below trend growth in both 2022 and 2023.  At the moment the projected slowdown is calm and mild: 1.7% vs longer run growth of 1.8% – 2.0%.  But the FOMC doesn’t have a great history of engineering mild slowdowns.”  CBA forecast the Fed to hike rates to a peak of 3.50% – 3.75% by the end of Q1’2023 and then start cutting rates from November 2023 down to 2.25% – 2.50% (eventually). The following chart highlights some of the Fed’s predictive shortcomings, although to be fair, most central banks and market-based economists could be subject to the same criticism.  And, I confidently raise my hand as card-carrying a member of the peanut gallery hurling criticisms without a skerrick of a solution to be seen.


  • Crystal Balling…

Source: Bloomberg



  • 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: 0.78%
MIF – Mutual Income Fund
Gross running yield: 2.07%
Yield to maturity: 1.78%
MCF – Mutual Credit Fund
Gross running yield: 3.34%
Yield to maturity: 2.99%
MHYF – Mutual High Yield Fund
Gross running yield: 6.00%
Yield to maturity: 6.02%