Mutual Daily Mutterings
Quote of the day…
“Just give me all the bacon and eggs you have. Wait … I worry what you heard was, ‘Give me a lot of bacon and eggs.’ What I said was, give me all the bacon and eggs you have. Do you understand?” – Ron Swanson
Chart du jour… market rate hike pricing (AU)
“All Gas No Breaks…”
Overview…”All jokes aside …”.
- Stop me if you’ve heard this one…”stocks fell on concern that inflation could pose a challenge to the global economic rebound, forcing central banks to raise interest rates sooner than expected.” Apparently, a potential resurgence in COVID infections and the likely disruption such poses to the global economic rebound is weighing on investor’s minds also. Not original ideas I know, but they’re the best the offshore narrative could come up with. Not that I could do better, markets moved lower on little news, therefore must be inflation and COVID’s fault. In truth, EU and UK inflation was released overnight, both printing ahead of consensus estimates.
- There was also some second tier US data, housing starts and building permits, both of which missed to the soft side, which probably has some influence on the mood – “suggesting builders are struggling to break ground on projects amid high materials prices and ongoing labour shortages.”
- Talking heads…“while we remain structurally bullish on stocks, we do anticipate a push-and-pull of market dynamics into year-end given inflation concerns, supply-chain pressures, labour shortages, and fiscal uncertainty.” As for inflation, there are still some fence sitters out there, and I’d probably coin myself as one…”inflation is clearly not as transitory as some might have hoped, but we’re not at the point yet where we could definitively say that it’s ingrained or persistent.”
- Oil futures fell as investors continue to brace, or should I say punt, on a release of crude from strategic petroleum reserves. While oil prices aren’t far off multi-year highs, there are many bearish indicators for the coming months. Both OPEC and IEA see a supply surplus and prices cooling by 2022. A release from strategic reserves could dampen prices just enough as demand lessens and supply increases going into the northern hemisphere winter.
- Fed speak…officials warned that the Treasury market isn’t as resilient as it should be. While emergency measures from the Fed and government staved off a full-fledged panic during the pandemic, disruptions were driven “by a failure of the markets to function in the ways they were expected to do in response to those particular circumstances,” John Williams said. Improving structural resiliency is a top priority, and all risks need to be “carefully evaluated,” Loretta Mester added.
- Offshore Stocks – a mixed day for European stocks, although the Euro STOXX was able to extend its winning streak by an extra day (now nine days running). US markets started in the red and pretty much stayed there for the day. Within the S&P 500, the downers dominated uppers, 63:37, although the sector split was almost even, 6:5. Energy (-2.0%) and Tech (-0.3%) were the main headwinds for the broader index, while Discretionary (+0.7%) and Healthcare (+0.3%) did their best to get the party started, but to no avail.
- A sign that perhaps markets are a little (maybe a lot), crazy-loco. A new automaker listed a couple of weeks ago in the US, Rivian Automotive, an electric vehicle manufacturer that has, as yet, not sold a single car. I’m not sure they’ve even made a car. Having said that, Rivian does have some heavy-weight backers in Amazon (18%) and Ford (11%). The automaker to be listed with a market cap of US$67bn on November 9. It soon peaked at $153bn, before easing back to US$130bn last night. At its peak it was valued more than Volkswagen, one of the world’s largest traditional carmakers and a company that actually makes vehicles, many vehicles in fact, and actually makes money from doing it. Rivian’s net income for the 12-months to June 2021 on the other hand was a loss of $1.6bn. Basically, investors are punting on Rivian being the next Tesla (US$1.1 trillion), which is somewhat understandable.
- Local stocks – financials were a major drag on the broader market yesterday, specifically banks. The ASX 200 retreated -0.7%, almost entirely driven by Financials (-2.7%), with a bit part played by Materials (-0.9%). Every other sector gained ground, led by Tech (+1.6%), Utilities (+1.2%), and Telcos (+0.9%). The lead recalcitrant for financials was CBA (-8.1%), which was smoked following its Q1 trading update, while fellow majors fell -1.1% to -2.0%. The main area of concern for investors was hitherto CBA’s fortress like profit margins, which have been impacted by the prolonged low cash rate and fierce home loan competition. A very modestly weak start is on the cards given offshore leads.
- CBA Q1 specifics…NIM’s were “considerably lower” at sub 2.0% because of the aforementioned competition, but also a higher proportion of low fixed rate loans on the books. A sub 2.0% NIM for CBA is some rare air, having only been there once before, 1.99% and 1.95% in 2007 and 2008 respectively. Nevertheless, cash earning came in at $2.2bn, or +20% vs Q1’FY21, although that was during peak pandemic malaise. The bank grew volumes faster than system across deposits (1.1x), home lending (1.52x) and business lending (1.5x). Capital measures were lower with CET1 at 12.5% vs 13.1% at the end of FY’21, because of dividend payments. Pro-rata CET1 is lower again at 11.2% (October) following completion of a $6bn buyback – but still well in excess of regulatory requirements. Liquidity was robust with an LCR at 132% (vs 100% regulatory minimum) and asset quality very strong – impairment expense at just 5 bps of gross loans and acceptances.
- Local Credit – a pretty active day in primary markets (corporate), which kept investors occupied and less interested in secondary. Melbourne Airport (BBB+/Baa1) priced a $7700m 10-year line (book of $1.2bn) at the tight end of guidance. In secondary, not a lot to report on the banks with the major senior curve unchanged. A little more action in the tier 2 space following CBA’s Q1 trading update, which underwhelmed equity markets. The tier 2 curve moved +1 – 2 bps wider, with CBA paper the most active. From the traders…”as it stands street inventories feel elevated, interbank liquidity is poor and spreads will likely remain under pressure until we see a resumption of meaningful bid side interest”. The result was a negative for stocks, but negligible for credit – I’d suggest the movement in tier 2 spreads was more technical driven than not, with the CBA results presenting some holders with a convenient excuse to sell.
- Bonds & Rates – ‘twas a choppy day yesterday. Leading into wages data the 3’s and 10’s were +4 – 6 bps higher, but then the data hit, bang on consensus (deets below), and we saw a meaningful -8 bps, possibly -10 bps rally across the curve within the space of an hour. By day’s end, yields were -3 bps lower in the 3’s and +3 bps in the 10’s. A wild day given data actually came out bang on consensus estimates. Rate hike pricing moved a smidge lower, with cash futures for Dec-22 dropping to 0.95% from 0.99% as at the end of last week. Offshore bonds rallied a few basis points, which should set the tone for a better day for local long bond holders.
- Some valid commentary on the outlook for treasury yields…slightly edited, for style rather than substance…”financial regulators are meeting soon to address recent wild price swings in US Treasuries, presumably to find out why markets all of a sudden aren’t working properly. But traders say that, once again, rules created in Washington are having unforeseen consequences. The Volcker rule which limited banks from taking large proprietary positions limits the amount of risk and, therefore, the amount of inventory banks can keep on their books. In times of QE, that’s no problem, the more supply the better. Bonds just kept going up as the Fed kept the cash coming. But now, partly because of rising inflation expectations and partly because of the start of tapering, bonds have been falling and traders can’t hold and trade them the way they used to. Frankly, given the biggest buyer of bonds since the financial crisis is slowing purchases, why would anyone else want them? The Fed not buying bonds is de-facto selling. This is the regulatory agencies’ own doing and creating more rules to fix broken rules is not likely to help. Prices are volatile as traders try to trade the timing of the next rate hike. And if a central bank is eventually going to be trimming their balance sheet and removing liquidity it probably isn’t too smart to take them on”.
- Offshore Macro – Eurozone inflation rose +4.1% in the year to October, more than twice the central bank’s target. And in the UK October CPI inflation jumped from +3.1% to +4.2% YoY, a 10 year high and well ahead of the consensus (and Bank of England) expectation of +3.9%. Tonight: US jobless claims data, the Philly Fed survey and the Conference Board leading index are released. Evans and Daly from the Fed are speaking
- Local Macro – Q3 wages data came out yesterday bang on consensus, up +0.6% QoQ (vs +0.4% in Q2) and +2.2% YoY (vs +1.7% YoY in Q2). Some commentary from ANZ…”it’s still too early to see wage prints in Australia as strong as those in New Zealand, let alone the US. Overall, businesses aren’t yet responding to labour constraints by lifting wages faster than pre-pandemic rates. A Melbourne Institute survey shows Australian households continue to report weak actual wages growth and we haven’t yet seen a ‘Great Resignation’ here to put upward pressure on wages.” From NAB…”the data confirm that the wage-setting environment has recovered from its pandemic nadir, and the September quarter wage environment was broadly similar to the pre-pandemic environment. The faster-than-expected recovery in the labour market ahead of the recent lockdowns has flown through into a rebound in wage setting. But the pre-pandemic environment was weak, and well short of the 3%+ the RBA sees as consistent with sustainably higher inflation. The RBA continues to see the outlook as one for gradual improvement and is prepared to be patient in that environment”. No local data today, but RBA Assistant Governor Luci Ellis speaks on “Innovation and Dynamism in the Post-pandemic World” at 3pm
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907