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Mutual Daily Mutterings

Quote of the day…

 

“The problem is that the people with the most ridiculous ideas are always the people who are most certain of them.”.…Bill Maher

 

 

 

 

 

Chart du jour: YTD spread change….financials

 

 

 

“Unshackled Inflation…

Source: www.hedgeye.com

 

 

 

OverviewFreedom…?”

  • Offshore markets closed on a positive note with stocks up on the day and week with US market notching up their best week since July.  Treasury yields continue to reflect rising inflation pressure as markets continue to doubt the Fed’s “its transitory” call – the front end particularly feeling the pain over the week. Metals continued to surge, and crude gained again.  Supporting risk sentiment was a surprise jump in US retail sales and earnings reports across Europe and the US continue to reflect rebounding sales and earnings, albeit reflecting weak base effects.
  • A key component to the prevailing inflation story is the impact of supply-chain bottlenecks globally.  Normally difficult to gauge other than anecdotally, I found this nugget from Bloomberg…“ports are growing more gridlocked, threatening to spoil the holiday shopping season, erode profits and drive-up prices. Bloomberg’s Port Congestion Tracker shows at least 107 container ships waiting off Hong Kong and Shenzhen as of Friday after a typhoon, and congestion won’t be isolated to Asia for long, as ships start sailing globally. RBC Capital Markets reckons 77% of all ports are experiencing abnormally long times to turnaround traffic.
  • Changing tack, banks are awash with cash / deposits at the moment, resulting from a mix of much of the population being locked down and still receiving income (government support payments).  Offshore evidence indicates bank deposits are not being drawn down, with the absence of a consumption surge expected by some economists suggesting perhaps the prospect of a lasting inflation shock feared by central banks. If we have a similar response here, this would suggest less wholesale issuance from the banks (unless lending surges), which would be supportive for spreads…one to watch.
  • Talking heads…”we’re not seeing any signs that the accumulated savings are coming back into the economy…because people have these extra savings, they feel wealthy and they spend a bit more. A fraction of that money maybe gets spent, but it doesn’t come surging back.

 

Details….

  • Offshore Stocks – all green across the screens to end the week in offshore markets, led by the old guard, with the DOW +1.1%, followed by the S&P 500 +0.8% and the NASDAQ +0.5%.  European markets put in a solid showing also, +0.8%, buoyed by ECB voicing their commitment to keeping the stimulus spigot fully open.  Within the S&P 500, some 64% of stocks advanced and eight out of eleven sectors closed up on the day.  Discretionary (+1.8%), Financials (+1.5%) and Industrials (+1.0%) dominated the leader board, while Utilities (-0.2%), Staples (-0.2%) and Telcos (-0.1%) all received participants ribbons.  On the week, a solid recovery from the prior week, up +3.3% for the S&P 500 and NASDAQ, while the DOW gained +1.8%.  Just shy of 10% of the S&P 500 has reported Q3 results.  Aggregate sales are up +13.2% YoY, while aggregate earnings are up +40.5% YoY.  Optically very strong numbers, but keep in mind Q3’20 was the worst of the worst of the pandemic, so some meaningful base effects.  Against expectations, aggregate sales are up +2.5% and aggregate earnings are up +14.3%, with ~80% of firms beating estimates.
  • Local stocks – a reasonably buoyant end to the week in local markets also, albeit on slightly subdued volumes (vs recent averages).  A smidge over two-thirds of stocks in the ASX 200 advanced and all sectors but Utilities (-0.5%) closed in positive territory.  Tech (+1.4%) led, followed by Materials (+1.3%) and Discretionary (+0.8%).  Over the week the ASX 200 closed +0.6% higher, led by Materials (+3.0%), Tech (+1.8%) and REITS (+1.4%).  Meanwhile, Utilities (-1.7%), Financials (-0.8%) and Industrials (-0.5%) dragged the chain.  Forward EPS expectations have eased a touch MTD, down -0.7% to $408/ps.  Earnings expectations have now fallen -5.0% since their post reporting season peak (August).  Meanwhile, forward PE’s are back above 18.0x, and well above pre-pandemic averages (2014 – 2019, 16.0x).  Futures are up +0.4%.

 

 

(Source: Bloomberg)

 

 

  • Local Credit – trader talk…”a very quiet end to the week with little motivation on display from clients or the interdealer market. US corporate earnings and developments in Asia HY likely to set near term tone.”  In the financials space….”closing the long end of the curve a basis point wider, shorter dates unchanged. The true clearing point is likely +2-3 bps wider and the street remains poised to hit any sensible bid. This Friday’s redemption of $1.75m NAB may help stem the creep wider, however, if redemption proceeds are not redeployed in the secondary market we think it likely that the longer end of the senior curve can shift another 5 bps wider.” The Aug-26 major bank senior line raised the bat on Friday, acknowledging the half-century, +1 bps wider on the day and +3 bps on the week.
  • I’ve expected the five-year part of the curve would drift higher now for a few weeks, likely into the +60 – 70 bps area.  Is this creep wider a good thing? Yes, as it’s reflecting a general normalisation of the major bank curve.  Over the past 5 – 6 years, the average five-year primary issuance level for major bank senior in A$ has been +95 bps give or take, with a pre-pandemic range of +77 – 126 bps between 2015 – 2020. Will markets mean revert to +95 bps area?  No, not anytime soon (not within 6 – 12 months), unless there is some systemic shock to the system.  Instead, with the liquidity in the system, and technical backdrop, ‘normalisation’ probably looks like a level of +60 – 70 bps between now and say mid-2022.  Tier 2 was unchanged on the day, but a touch wider on the week.

 

 

  • Bonds & Rates – a tough week for local (and global) bonds if you play from the long side, in an absolute sense.  If you’re benchmark aware and played from the short side, then bully for you, well done – and by this, I mean short overall duration vs your index, not necessarily playing around the front of the curve as that’s where much of the action took place.  Over the week, ACGB 3-years punched +12 bps wider to close at 0.59%, while out the back of the curve, 10-year yields rose marginally, up +2 bps to 1.65%.  Over the past month 3-year and 10-year yields are +39 bps and +43 bps higher respectively, out to levels not seen since the pre-pandemic days…sorry, I need a moment, I’m choking up with nostalgia, memories of happier times.  Interestingly, the Apr-24 bonds hit a yield of 0.125%…for those with short-term memory issues, the Apr-24 is the target bond for the RBA’s Yield Curve Control mechanism, at 0.10%.  When this last happened, in February this year, the RBA stepped in and actively bought bonds to strong-arm the yield back to target levels.  Will they step up to the plate again?  Probably given Governor Lowe’s surprise at market pricing vs RBA guidance on rate hikes.
  • Offshore leads from Friday won’t help the long side with US 10-year yields +6 bps to 1.57% (-4 bps WoW), while 2-year yields were +3.5 bps higher at 0.39% (+8 WoW).  The rising action at the front of the curve, which has been more aggressive than the back end, i.e. bear flattener, reflects markets scepticism around how transitory inflation really is.  Consequently, markets are pricing in an increasing probability that central banks will be force to taper more aggressively than first thought, and raise official rates sooner than currently previously guided.  Globally, the acceptance of the transitory fairy tale across central banks is becoming more fractured.  The Fed, ECB and RBA are all still both in team transitory, while the BOE, BOC, and RBNZ are the rebels, talking a more hawkish stance.  Either way, yields are on the rise for the near to medium term, if you haven’t done so already, look to FRN’s for to hedge your fixed income allocation against inflation risk.
  • Month to date ACGB’s have collectively delivered a negative return of -1.04% and YTD losses of -2.75% (AusBond ACGB Index, all maturities).  On the latter basis, 2021 is proving to be the second worst year since 2000, marginally behind 2009 (-3.16%) at the same stage of the year.  Interestingly, on a calendar year basis, 2009 and 2021 are the only years where the ACGB index has been running at a loss as at October 15…and at this stage, 2009 is the only calendar year to generate a YoY loss.  I suspect 2021 will be joining the club.

 

 

(Source: Bloomberg)

 

 

  • Local Macro – it’s a quiet data calendar for local markets this week. There is the Q3 NAB business survey, RBA October meeting minutes and Governor Lowe is on a panel on Central Bank independence.  The next major data print of significance, and this one’s a biggy, is Q3 CPI data, due out on October 27 (Thursday week).  Bloomberg has consensus at +2.8%, but that’s codswallop! The high point within the consensus range on Bloomberg is +3.2% YoY, which is somewhat closer to the likely print.  The Q2’21 print was +3.8% YoY.
  • Offshore Macro – the main data of note for my mind is China GDP, which is due out today.  Growth probably slowed to +5.0% YoY at the end of Q3 vs 7.9% YoY at the end of Q2, as the energy crunch, pandemic, soaring commodity prices and government property crackdown will all have impacted. September industrial (+3.8% YoY vs +5.3% YoY prior) and investment data (+7.8% YoY vs +8.9% YoY prior), also out today, will reveal the severity of power shortages.  Retail sales growth may have picked up to +3.5% YoY vs +2.5% YoY prior. The PBOC’s Yi said he expects +8.0% GDP growth this year, and for the PPI’s rise to ease from its 26-year high…I guess if he says it, it happens.

Cheers,

 

 

 

 

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: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.78%
MCF – Mutual Credit Fund
Gross running yield: 2.62%
Yield to maturity: 1.70%
MHYF – Mutual High Yield Fund
Gross running yield: 5.49%
Yield to maturity: 4.24%