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Mutual Daily Mutterings

Quote of the day…


“A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn’t happen…” – Winston Churchill





Cartoon part deux…he’s from another planet!







OverviewUS retail surges …”.

  • Stocks were back on the good foot last night with markets up across the board, including new record highs for the Euro STOXX and the S&P 500 drifting back toward its own record highs.  Asian markets were mixed yesterday.  A solid jump in US Retail Sales (+1.7% MoM) boosted investor sentiment overnight, as did a stronger Industrial Production (+1.6% MoM) print.
  • Talking heads….”with the robust retail sales read and solid start to retail earnings, it’s crystal clear that inflation isn’t standing in the way of consumers…so despite some hiccups on the labour market and inflation fronts, this could serve as the vote of confidence investors needed signalling that the economy is still chugging along nicely.”
  • Bond yields were mixed with US treasuries yields drifting higher, while most European yields fell – GILTS being the exception following stronger than expected UK employment data.  Of interest to markets, is who will be the next Chair of the Fed?  Apparently, a decision is imminent with the two front runners for the gig being the incumbent, Jerome Powell, and existing Fed Governor, Lael Brainard, a Democrat.
  • Talking heads…”based on how markets reacted when they learned Brainard was in the running, it’s clear who’s viewed as the more dovish between the two”…while that would make her the stock market’s pick, it “may not necessarily be the case if investors view inflation as a greater risk than the central bank perceives, making inaction the less desirable approach longer term.”  I’m not an expert here, but, by all accounts Powell and Brainard are closely aligned in their monetary policy views and approach, although at the margin, Brainard is slightly more dovish, which would suggest hot monetary policy potentially for longer.
  • Fed speak… James Bullard wants the Fed to speed up its tapering plans. “It behooves the committee to go in a more hawkish direction in the next couple of meetings so we are managing the risk of inflation appropriately…we could move faster.”  The FOMC has the option to raise rates while tapering is going on, he added – but Powell has signalled lack of willingness to do so.



  • Offshore Stocks – the Euro STOXX remains on a tear versus it’s own track record, trading at it strongest since well before the pandemic, up +4.2% over the month.  The RSI is at 77.4 with the index at its widest to its own 50D, 100D, and 200D moving averages and it closed at yet another record high overnight.  Despite the solid gains, forward PE’s are not yet at the nose bleed levels evident elsewhere – modest at 16.9x, although they are elevated vs pre-pandemic historical averages (15.3x).  Consumers (+11.1%), Tech (+8.1%) and Financials (+6.1%) have driven these gains on a month to date basis.  US markets likewise have been on a tear with the S&P 500 up over +5.0% over the past month.  As for last night, modest gains, and less than convincing gains with stock level uppers and downers roughly equal, and more sectors down than up.  Discretionary (+1.4%) jumped on the better retail sales data, as did Tech (+1.1%).  REITS (-0.7%), Staples (-0.6%), and Utilities (-0.6%) dragged their feet.
  • Earlier this week, perhaps late last week, I noted Morgan Stanley’s bearish outlook for US stocks.  Alternative views were put out by Goldman Sachs overnight, lifting their outlook for US stocks, saying the rally that has pushed the benchmark index to successive record highs will continue into 2022.  It’s a reasonably universal view with global fund managers in Bank of America’s November survey signalling they’ll end the year with the biggest overweight in US stocks since August 2013.   JPMorgan is also on the optimistic side of the spectrum amid bets the Fed and fellow central bankers will stay dovish.
  • Local stocks – a tough’ish day on the tools for local markets yesterday with the ASX 200 dropping -0.7%.  Across the index three-quarters of stocks retreated.  Only one sector got out of bed, Tech (+0.2%), while the main party-pooper was Materials (-1.7%), followed by Telcos (-0.9%) and Healthcare (-0.8%). Intra-day there was no evidence to suggest the market was moved one way or the other by the release of the RBA’s November meeting minutes, or governor Lowe’s speech on inflation.  Over the past month the local index has materially underperformed global peers, +0.8% vs +5.0% – 7.0% in US markets and +4.0% – 6.0% in European markets.  In our own time zone, only the CSI 300 (Shanghai) has performed worse, -1.0%.  Energy (-9.1%), Staples (-1.0%) and Materials (-0.4%) have been the main culprits.  Futures are pointing to a modestly positive open (+0.3%).


(Source: Bloomberg)


  • Offshore Credit – some commentary out of Bloomberg….”a last hurrah for investment-grade borrowers corresponds with a spike in the cost of funds, which in turn should spur more issuance. A glut of supply, combined with rising rates further imperils the high-duration corporate debt, which is already underwater this year.  Besides pressure on issuers to move fast as Treasury yields climb, new issue concessions are relatively slim, highlighting the strength of demand. Pension and insurance buyers are liquid, while foreign buyers need yield and net issuance has been slashed by a record pace of bond buybacks.  The fundamental backdrop seems appealing, but the bid for better-rated credit is on shaky ground as investors seek to avoid fresh losses with spreads flaring to a 12-week wide. Given the inflation and rates outlook, those that can will seek shelter in floating-rate leveraged loans and junk, both less exposed to higher yields, leaving high-grade hanging.
  • Local Credit – quiet but constructive according to peeps on the street.  No meaningful change to major bank senior or subordinated spreads.  Westpac’s treasury broke out the virtual passport again, heading to US$ markets for a US$1.75bn covered 5-year deal, which printed at T+30.5 bps, and is swapping back around BBSW+48 bps.  There are no real A$ comps, so I can’t really say whether they’ve saved anything.  But, 5-year A$ senior is around +58 – 60 bps in secondary for AA- risk, so +10 – 12 bps over the new US$ covered (AAA) deal.
  • Bonds & Rates – local yields followed offshore leads, bear steepening with the 10’s +7 bps and 3’s at +5 bps for a very modest +2 bps steepening (just in case you couldn’t do the math).  As far as I can tell no real reaction in bonds to the release of the RBA minutes, or Guvna Lowe’s speech, which I’ve commented on below under ‘Local Macro’.  As for monetary policy, Lowe stated the “no hike until 2024” mantra was still plausible given the RBA’s macro targets won’t be met until late into 2023.  Lowe also stated that trajectory of data was important for their rate decision process.  He also pointed out that recent data and forecasts do not warrant an increase in the cash rate in 2022. Markets were not convinced, still pricing a hike by around mid-2022.  Economist forecasts are pointing to Q1’23 as an outside chance, one or two even formally nailing a 2022 rate hike call to the mast, but most are centred around the second half of 2023.




  • Offshore Macro – the most significant data print overnight, from a market’s perspective, was US Retail Sales. Commentary from NAB…”headline retail sales rose +1.7% MoM against +1.4% MoM expected, alongside a modest revision to prior data. The core measure of retail was even stronger relative to consensus at +1.6% MoM against +0.9% MoM expected. It is notable that amongst the core group there was broad strength amongst the retail categories indicating strength in discretionary spending in the lead up to Christmas. It’s fair to say doubts had crept into the US growth narrative in Q4 after the run of weak University of Michigan Consumer Sentiment reports, but today’s data suggests consumers are not as pessimistic as that report suggests.”  Industrial Production also printed on the optimistic side of expectations…leaning on NAB again…”up +1.6% MoM, with a strong +11% bounce-back in auto production despite the concerns about supply of global semi-conductors. Even excluding this sector, the increase in production was a healthy +0.6% MoM, with manufacturers overcoming shortages of raw materials and labour constraints.”
  • Local Macro – two main events yesterday were the release of the RBA’s November meeting minutes, and the Guvna’s speech, titled “Recent Trends in Inflation.”  On the former, the minutes didn’t have much new information following the Governor’s post meeting webinar, although they highlight the risks for higher inflation… “members acknowledged that the risks to the inflation forecast had changed, with the distribution of possible outcomes shifting upwards“.  Having said that, the board decided to keep highly accommodative policies in place, with an unflinching focus on inflation and employment targets before hiking rates.
  • On to the speech, a copy of which can be found at  Overall, I have no issues with much of what Governor Lowe said, which included an explanation of why inflation has done what it’s done, and why we’re (Australia) different from the rest of the world.  Key soundbites…inflation is still transitory and prevailing levels (local) are still just at the bottom of target ranges.  On a broader scale, governor Lower highlighted IMF inflation forecasts, which have most developed economies sporting inflation rates of 1.0% – 2.0% over 2022 compared to 2.0% – 6.0% for 2021.  Makes sense to some degree, given base effects from this year’s elevated levels.  I have no strong conviction on inflation, whether its transitory or entrenched, although if I had to articulate a view, I’d say I’m a ‘transitoryist’, if I could coin it that way. But, I would say the period of transition will be longer than most expect, and consequently inflation may look entrenched. Will it go above 3.0% on a sustained basis over the foreseeable future? Probably not.
  • Per the speech, wages will be the key for local inflation though…. “fundamentally, a critical issue is how the labour market responds.  It is unusual to have persistently higher inflation without persistently higher wages growth (unless there is a shift lower in labour productivity growth).  The two generally go together”.  As for what the bank sees going forward “we are expecting a gradual pick up in wages growth as the labour market tightens.”  The banks central forecast is for the Wage Price Index to increase to 2.5% over 2022 and 3.0% over 2023.  Speaking of which, the Q3 Wage Price Index will be released today, just in time for elevensies at 11:30am.  Consensus is at +0.6% QoQ and +2.2% YoY vs +0.4% QoQ and +1.7% YoY respectively for Q2.  Underlying inflation is expected to be 2.25% over 2022 and 2.50% over 2023.
  • How CPI and Wage prices correlate with bond yields are charted below.  A simple correlation analysis of CPI vs yields and Wages vs yields, indicates yields are more closely influenced by wages than CPI.  Since 2000, wages and yields have been correlated around 82% – 83% (monthly data), while yields to CPI have a correlation ratio of around 57% – 59%.  Following on from this, a simple regression analysis indicates that a Wages Price Index of 2.5% (the RBA’s 2022 forecast) implies yields somewhere around 2.4% – 2.7%.  And if they go to 3.0% in 2023, also as forecasted by the RBA, implied yields will be 2.6% – 2.8%, levels last seen through 2016 – 2018.






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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: 0.29%
MIF – Mutual Income Fund
Gross running yield: 1.38%
Yield to maturity: 0.89%
MCF – Mutual Credit Fund
Gross running yield: 2.69%
Yield to maturity: 1.82%
MHYF – Mutual High Yield Fund
Gross running yield: 4.91%
Yield to maturity: 3.98%