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Mutual Daily Mutterings

Quote of the day…

 

“Aren’t we forgetting the true meaning of Christmas? You know, the birth of Santa.” – Bart Simpson

 

 

 

 

 

 

Chart du jour… Australian employment…

 

 

 

“Loss of Faith…

Source: www.hedgeye.com

 

 

Overview…”and that’s a wrap”

  • As they tend to do on the second day post a meaningful FOMC meeting, markets continued to digest said meeting and the ramifications for growth (consensus is higher) and the path of interest rates (also higher, but to lower highs).  The net effect on the day was stocks fell, led by tech, with the NASDAQ down over -2.0%, and treasuries rallying (yields lower), on the belief the Fed’s aggressive tapering and response to inflationary pressures will result in a short, sharp hiking cycle with a lower terminal rate than previously anticipated.
  • Still with central banks, the ECB temporarily boosted its regular monthly bond buying for six months in order to smooth the exit from crisis stimulus.  And, the BOE surprised markets with its first-rate hike since the pandemic struck early last year, lifting borrowing costs +15 bps to 0.25%.  Omicron added uncertainty, but Governor Bailey cited “more persistent” inflation for the move.  With its no rate hike until 2024 (maybe 2023) rhetoric, the RBA is increasingly looking like an outlier within the central bank club….and, Governor Lowe’s comment yesterday that “we are in quite a different position than the United States” on inflation still finds few believers in markets
  • Talking heads…”Bitcoin and big tech are getting punished today as investors reallocate some of their more profitable risky bets. The growth outlook still remains upbeat for next year”….”while we expect increased stock market volatility as the Fed embarks on normalizing policy, equity markets should end the year higher as the economy still remains strong, which should lead to continued earnings growth”…and, “I do think that central banks are being reactive, which is good. If inflation does start to moderate as these major central banks are still expecting, we may actually expect some turn in the policy direction in the later part of next year.” All reasonably optimistic…must the spirit of the festive season.
  • This will be my last ‘Morning Mutterings’ for 2021, unless of course something monumental occurs.  I’d like to say it’s been a great year, but it hasn’t, it’s been miserable, and I’m cooked.  A mix of that dastardly COVID lingering at our door, and on top of that poor political leadership, has really sucked the fun out of life.  To my readers, I borrow some words from that great entertainer, Krusty the Klown…”so have a Merry Christmas, Happy Hanukkah, Kwazy Kwanza, a tip-top Tet and a solemn, dignified Ramadan.

The Long Story….

  • Offshore Stocks – “the S&P 500 fell after earlier climbing on bets that central banks can move toward tighter policies to fight inflation without derailing the economy. The Nasdaq 100 sank, led by losses in giants like Apple Inc. and Tesla Inc.  Commodity, financial and industrial shares rose. European equities jumped as the region’s officials unveiled a gradual pullback of pandemic stimulus, while the pound gained as the Bank of England unexpectedly raised rates” (Bloomberg).  YTD the S&P 500 is up +24.3%, led by Energy (+46.3%), REITS (+36.9%), and Financials (+33.6%), with Utilities (+12.5%) at the bottom of the leader board.  Forward PE’s remain elevated at 22.2x vs a pre-pandemic historical average of 17.7x (2021 average of 22.6x), so still elevated and frothy in the face of COVID uncertainty (new variants) ands tightening monetary policies (growth headwind).
  • Local Stocks – a moderately softer session yesterday, with the ASX 200 down -0.4%.  Just over half of the index advanced, while within than various sectors, more retreated than gain, but it was marginal.  Tech (+2.1%) was top of the leader-board, followed by REITS (+0.7%) and Discretionary (+0.5%).  At the bottom of the table, an institutional share placement by CSL (-8.1%) saw Healthcare (-5.1%) as the reddest of the red.  Energy (-1.2%) and Materials (-1.2%) rounded out the bottom three.  With a little under two weeks left in the calendar year, the ASX 200 is up +10.8%, led by Telcos (+27.2%), Discretionary (+20.7%), and Financials (+18.4%).  Only Energy (-2.8%) and Tech (-1.8%) have failed to fire. Forward PE’s are hovering around 18.1x, down on the YTD average (18.9x), but well up on the pre-pandemic historical averages (16.1x).  The YTD range has been 17.2x – 21.9x.  Forward EPS expectations have risen +33.9% YTD as the economy recovers from the worst of the pandemic lockdowns.  I’ll have a think about the outlook for stocks over Christmas and see what I come up with.

 

 

 

 

  • Local Credit – traders…”volumes remain modest although client interest skewed to better buying yesterday, across all asset classes. Closing cash spreads largely unchanged, aside from T2, which benefits from ongoing buy cares.”  Per the chart below, credit spreads have drifted wider and curves steepened over the year, which was not surprising following expiry of the RBA’s term funding facility.  Added to this was the impact of APRA change use of the CLF.  Meaningful major bank senior or tier 2 issuance remained illusive through the year and while spreads have drifted wider – particularly post the CLF changes – spreads remain toward the low end of primary pricing levels.

 

 

 

 

  • Bonds & Rates – a decent sell off int the front half of the curve yesterday, reflecting changed Fed dynamics and relates leads in treasuries.  FOMC D+2 days and bonds are rallying again as markets seem to gain confidence that any rate hikes cycle will be short lived and overall monetary conditions accommodative.  The path of ACGB 3-year and 10-year yields, and slope, is charted below.  Subject to last minute movements in the coming couple of weeks, both the 3-year and 10-year are looking to close around the high end of their YTD range.  By the end of 2022, 3-year yields are forecast to be well over 1.0%, which isn’t much of a leap of faith given current levels.  Consensus expect 10-year yields to get to 2.21% (median) by the end of 2022 vs 1.48% close yesterday.  The range in consensus expectations is reasonably wide, 1.70% – 2.21%.  Regardless, returns in the fixed rate space are going to be challenging through 2022.

 

 

 

 

 

 

  • Local Macro – labour data shot the lights out yesterday, with my last gasping breath of pre-Christmas enthusiasm, I again pilfer commentary from somewhere else…”we were looking for a strong rebound and we couldn’t have asked for much more. Employment rose +366K in November, a record monthly increase and crushing the +200K consensus (NAB +280K). That also takes employment nationally to a new record high. The unemployment rate fell 6 tenths to 4.6% (NAB 4.9%, consensus 5.0%) and is below where it was prior to the recent lockdowns. The fall in the unemployment rate came despite a sharp 1.4ppt increase in the participation rate to 66.1% from 64.7%. In contrast to the experience in the US, participation has again recovered sharply out of lockdowns, with the employment-to-population ratio back to its pre-lockdown record high. Hours worked surged 4.5% MoM alongside the sharp recovery in activity, as did underemployment which fell a full 2ppts to 7.5%. Yesterday’s very strong data affirms our call that the RBA will end QE in Feb.”
  • And this from BAML on the MYEFO….the AU government has published its mid-year budget update which shows increased expenses to fund the delta lockdowns, but also a slight downgrade to the forecast deficit: *AUSTRALIA NET DEBT 30.6% OF GDP IN JUNE 2022; TO PEAK AT 37.4%. The views on the economic outlook are upbeat and in line with the RBA with *AUST. REAL GDP GROWTH SEEN 3.75% IN 2021-22, 3.5% IN 2022-23 *AUST. UNEMPLOYMENT TO FALL TO 4.5% IN MID-2022, 4.25% YR AFTER. Meanwhile, assumptions for commodity prices remain conservative to allow for flexibility *IRON ORE PRICE ASSUMED TO FALL TO $55/TON FOB BY END JUNE ’22

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.30%
MIF – Mutual Income Fund
Gross running yield: 1.39%
Yield to maturity: 0.98%
MCF – Mutual Credit Fund
Gross running yield: 2.66%
Yield to maturity: 1.88%
MHYF – Mutual High Yield Fund
Gross running yield: 5.24%
Yield to maturity: 4.34%