Mutual Daily Mutterings
Quote of the day…
“Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career..…” – Bill Vaughan
Chart du jour: Offshore credit spreads…
Source: Bloomberg, Mutual Limited
“Miss Timing & Mr. Market…”
Overview…”looking for some direction…”
- On a slow news and data day (second tier) markets decided to feather the brakes a touch, or was it ease off the gas…six of one, half a dozen of the other. In a choose your own adventure moment, inflation unease was retro-fitted to the narrative to explain last night’s moves. A spike in COVID cases, in Asia, was also dragged into the narrative again. Markets are very much like the Victorian State Government at the moment, looking for some leadership! Despite the modest risk off tone, bond yields inched higher across the world overnight. Gold and oil both had reasonably solid gains (>1.0%)
- Talking heads… “investors should brace for further bouts of volatility, driven by inflation data along with other risks, such as setbacks in curbing the pandemic…but we don’t see inflation concerns ending the rally in stocks, which we expect to be led by cyclical parts of the market as the global economic reopening broadens.”…someone’s overweight stocks!
- The main theme in town is the fine balance between confidence in Fed policy competency and real-world (and market) reality. “an array of Fed and ECB policy makers have stressed that they expect inflationary pressures to be muted in the long-term. There’s a camp of investors buying that message and seeing secular forces, like demographics and technological innovation, as reasons to buy when yields rise, in a bet that there’s little chance of a sustained break higher” (Bloomberg)…but, there is also the possibility that the economic rebound will lose momentum, with vaccine resistant COVID variants causing economies to lockdown again in some parts of the world.
- With the release of FOMC minutes to be dissected to the nth degree. Talking heads… “expect this volatility to continue as the market searches for direction…the release of the Fed minutes on Wednesday will be interesting. With earnings season almost over, inflation will continue to hold centre stage.”
- Offshore Stocks – in a word, a generally ‘soft’ish’ session in global stocks overnight, another word possibly is directionless after three days of gains, after two days of pain. Most European bourses were marginally in the red, a handful eked out some gains, but in the end it was plus or minus ±0.3% on average. Similar themes and magnitudes across US markets, with the NASDAQ underperforming both SPX and DOW. Within the SPX, 59% of stocks closed lower, and all but three sectors were sporting new season red. Energy (+2.3%) gained most, followed by Materials (+0.9%) and Financials (+0.1%) was there for appearance’s sake. At the bottom of the pool with burst floaties we had Telcos (-0.9%), Utilities (-0.9%), and Tech (-0.7%). The SPX closed at 4163 with key support at 4070, or 2.2% away. E-mini’s are marginally in the red.
- Local stocks – very modest gains in the end yesterday. The day showed promise with the ASX 200 up around +0.8% in early trading, but then faded into the closed, clinging to a +0.1% gain. Up’s vs down at the stock level were virtually even, while more sectors gained (6) than sectors that lost (5), aka participants. The top of the heap was populated by Tech (+1.2%), Energy (+1.1%) and Discretionary (+0.9%), while in the cellar we had Utilities (-1.9%), Telcos (-1.0%) and Financials (-0.4%), the latter being the biggest drag on the broader index. The index kept its nose above the 7000 line, at 7023 with key support levels at 6926 (50D moving average). Despite the modest losses offshore, local futures are marginally up…whether they stay there when the market opens remains to be seen.
- Offshore Credit – another buoyant start to the primary week with multiple deals launched in US$. I won’t go into detail, rather I’ll focus on an observation from Bloomberg. Premiums on ‘BBB’ rated corporate bonds have fallen to a level last seen before the financial crisis, i.e. over 14 years ago. The average spread for the asset class fell to T+107 bps at the end of last week. That’s the lowest level since early 2007, according to data compiled by Bloomberg, and joins a far-reaching compression in spreads that’s brought the single-A class to a new 16-year low of +67 bps. With Treasury yields holding in range for the past couple of months, spreads have crept lower, keeping a tight lid on historically low funding costs for borrowers looking to sell new debt. Fed policies have contributed to scant yield for investors looking to hit return targets, forcing some into more risky bonds. Not necessarily a reason to suggests spreads will now begin to widen, but rather does indicate very little cushion left to absorb any market shocks.
- Local Credit – eat, sleep, do nothing, repeat. That’s the mood in local credit markets of late, no momentum, no direction, almost like a teenager. Some primary action with PACCAR doing a deal, from memory they’re a truck financing outfit. They’re doing a modest 3-year deal. In the major banks space, nothing done in senior, while in tier 2 the increasing likelihood of no new deal in the immediate future saw spreads a basis point tighter across the board. The 2026 callable cohort is now hovering around +136 – 138 bps. Supporting this growing sense of no A$ primary tier 2 love on the horizon is the fact NAB priced a US$ tier 2 transaction overnight. NAB printed a US$1.25bn (A$1.61bn) 10-year tier 2 bullet at T+135 bps (vs IPT of +160 bps area). With a coupon just shy of 3.0%, this swaps back around BBSW+165 bps, suggesting the A$ curve is cheap (from an investor’s perspective). On a straight linear curve basis, A$ 10-year sits around +240 – 250 bps.
- Bonds & Rates – despite a very modest, and somewhat directionless risk-off tone overnight, US treasury yields rose. US Federal Vice Chairman Clarida was on the wires saying the US economy is in a “very fluid period” and if data were to threaten to raise inflation expectations policymakers would act. Further, he made it clear the US economy has not met the “substantial further progress” threshold for tapering asset purchases, and if they were to ‘anticipate’ beginning scaling back purchases, they would “certainly give advance warning,” how civilised of them. It is unlikely the FOMC’s 28 April meeting minutes released Thursday morning our time will deviate from this narrative. US 10-year yields were up +2 bps to near 1.65%, while at the front of the curve 2-year yields lifted +1 bp to near 0.16%. Still on central bank minutes, the RBA releases its latest meeting minutes later this morning. Not expecting any surprises…stupid comment really, if we were expecting surprises, well they wouldn’t be surprises.
- Macro – some second-tier data out last night in the US, but hardly influential in the grand scheme of things. The New York Empire State manufacturing index fell from 26.3 to 24.3 in May (consensus: 23.9). Prices paid for materials lifted 8.8 points to 83.5, the highest level since records began in 2001. The NAHB housing market index was steady at 83 in May (consensus: 83).
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907