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Mutual Daily Mutterings


Quote of the day…


”Trying is the first step towards failure.” – Homer Simpson









“Dumb, Just So Dumb…”




Overview…”Fed to go hard…or go home…”



  • Moves: risk off … stocks , bond yields , curve , credit spreads , volatility and oil ….
  • A wild session in offshore markets as I return to the trenches after a week or so of leave.  European stocks were generally firmer, some modest gains.  US markets opened optimistically, up +1.2% initially, but then soiled the bed, falling -2.6% to end the day -1.5% lower.  The finger has been pointed firmly at rising bond yields as the catalyst for the demise of market optimism on the day.  After a brief moment of respite yesterday, yields were surging again.  Markets are pricing in a more aggressive Fed tightening cycle.  It’s not just treasuries, GILTs, OATs and BUNDs also puked, with yields up +10 bps in the long end (10Y) on the back of a slew of hawkish comments from central bank officials.
  • Fed speak…Chair Jerome Powell stated overnight that he emphasised with the case for front-loading interest-rate increases and that a half-point hike “will be on the table for the May meeting.”  Powell declined to comment explicitly on market pricing but noted minutes of the March meeting showed that many officials backed one or more half-point hikes.  Risk of +50 bps rate hikes is not a new thing, but rather now investors a fretting over the number of +50 bps hikes, and how quickly.  Markets are now pricing in a third +50 bp rate hike in July, with a sniff of perhaps a +75 bp hike in May or June.
  • Talking heads…”it’s hard for me to imagine a recession with consumers in as good a shape as they currently are…the best shape they’ve been in in years and most recessions start with the consumer not in great shape. So, I think, any recession, if there were to be one, I think given the current circumstances, would be mild.
  • US Q1 reporting season is underway with just under 20% of the S&P 500 reported.  Aggregate sales growth is running at +7.6% on the pcp, while aggregate earnings are down -2.8% on the pcp.  Not surprisingly given commodity price action, Materials are shooting the lights out.  Elsewhere it’s a mixed bag, although with just 1 in 5 companies reported across the whole index, it’s too early to be calling any trends.  Relative to estimates, 80% of companies that have reported so far have outperformed.

The Long Story….

  • Offshore Stocks – under the pump now as the Fed is expected to go hard on rate hikes, which will weigh on growth expectations and in turn earnings growth.  The S&P 500 dropped -1.5% overnight, outperforming the NASDAQ (-2.1%), but underperforming the DOW (-1.1%).  Within the S&P 500, some 82% of stocks retreated and all sectors closed in the red.  Energy (-3.1%) performed worst despite oil price gains – growth concerns being the driver here, slowing growth implies lower energy consumption.  Second worst was Telcos (-2.4%) and then Tech (-1.7%).  At the top of the tables, it was Staples (-0.1%), REITS (-0.6%) and Industrials (-1.0%). The S&P 500 is now trading below its 50D, 100D, and 200D moving average.  Forward PE’s are down to 19.3x vs pandemic averages of 21.0x – 22.0x.  The pre-pandemic 5-year average was 17.6x, suggesting stocks are still overvalued cyclically, if growth risk materialises following aggressive rate hikes.  This is very much priced into yields, the curve is flat as a mill-pond from 5-years out…2.78% to 2.93% for 30Y.
  • Local Stocks – modest gains yesterday in the ASX 200 (+0.3%) with just over two-thirds of stocks gaining ground.  Only three sectors failed to advance, Tech (-2.6%), Materials (-1.6%) and Telcos (-0.1%).  Top of the pops was Industrials (+2.2%), REITS (+2.1%) and Utilities (+1.6%).  Financials (+1.1%) were middle of the pack.  Unlike its US brethren, the ASX 200 is well north of its 50D, 100D, and 200D average with relative strength indicators on the cusp of overbought territory (RSI 68.9).  The index is less than 0.5% away from all time highs…despite imminent monetary policy tightening, rising inflation and deteriorating geopolitical stability.  Forward PE’s are at 16.2x, well below pandemic ranges of 17.5x – 18.5x, and broadly in-line with pre-pandemic averages (2014 – 2019) of 16.1x.


  • ASX 200 Relative Strength Indicators

Source: Bloomberg


  • Offshore credit – in a word, wider.  Since I’ve been away, a little over a week, US IG spreads are +4 – 6 bps wider, while EU IG is +3 – 9 bps wider.  Despite this widening, a reasonable volume of paper was printed in US IG overnight, US$12.5bn from two issuers, which took weekly issuance to US$55bn, +15% more than highest estimates.  Deals were well covered at 1.7x – 3.8x, and spreads compression vs guidance sold (-15 – 30 bps).


  • Offshore Credit SpreadsHistorical


Source: Bloomberg, Mutual Limited


  • Local Credit – liquidity in secondary markets remains strained.  Traders are reporting that most investors are sitting on their hands and many hoarding cash.  Fear of an aggressively tightening Fed trying to catch up with the curve a primary driver of investor angst.  I caught up with some traders in Sydney on Wednesday and the sense was one of caution.  They noted a lot of short end paper sloshing around the system, with most trading activity in the 4-year plus part of the curve.  Some speculation also on a new major bank tier 2 deal in coming weeks, which shouldn’t be too much of a surprise given NAB, ANZ and WBC come out of black out soon.  Said bank was apparently poised to issue a few weeks ago, but CBA cut their lunch.  Tier 2 spreads have drifted of late, again with liquidity somewhat constrained.
  • Bank of Queensland (‘BOQ’) hit the market yesterday for some 3.5 year funding, which priced at +110 bps, at the bottom of guided ranges (+110 – 115 bps).  Demand was sound, but it wasn’t a stampede.  FRN’s were preferred, with $500m printed, but there was enough demand for a modest $150m fixed line.   BOQ’s recent floaters have been around $600m – $675m in size.  The FRN line is quoted around reoffer on Bloomberg, and offers a couple of basis point pick up vs Bendigo’s Dec-25 at +108 bps.  The deal was fairly priced, offering a +40 bps pick up over the major bank senior curve, which is toward the top end of historical ranges.
  • A$ spreads resilient in the face of offshore volatility...although there has been a modest widening trend as ADI’s return to the market to begin funding TFF maturities, which was expected…


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – hawkish comments from Fed Chair Powell gave treasuries a kick in the pants yesterday, with US 10’s inching closer to 3.0%.   At last night’s close of 2.91%, the 10’s are within spitting distance of post pandemic highs (previous high being earlier in the week).  The last time yields were at these levels was late 2018.  Locally, ACGB 10s are north of 3.0%, seemingly trading in a 3.0% – 3.10% range for the time being, although I expect we’ll break through the high side of this range today.  While I think the 10s have gone too far given recession risks, I suspect as the RBA kicks of its rate hike cycle (I’m in the June camp), we’ll likely see further upward pressure across the curve.  Historically ACGB 10s have traded at a spread to cash rates of ~90 bps (median of ~80 bps).  The current spread is ~300 bps.  Not the highest it’s ever been, that was 523 bps (early 1990’s), but still a fat tail level (3 standard deviations).  While history doesn’t always repeat itself, it often echoes, so if we see cash rates at say 3.0% within the next 12 – 18 months (market pricing), then we could conceivably see 10s at 4.0%…not calling it, just saying.


  • ACGB 10-Year yield vs RBA Cash Rate…

Source: Bloomberg


  • Macro – ripping today’s comments off from ANZ…
  • Easing: Jobless claims fell marginally in the latest US weekly data but were still a tad higher than expected. Continuing jobless claims are easing.
  • Weakening: The US Philadelphia Fed Manufacturing Index was considerably weaker than expected, falling to 17.6pts in April (down from 27.4 in March) and well below expectations. Weakness was led by shipments which dropped to 19.1 vs 30.2 while new orders fell to 17.8 vs 25.8. Employment was stronger at 41.4 vs 38.9. The inflation data rose, prices received rose to 55.0 vs 54.4 and prices paid were 84.6 vs 81.0. Despite the sharp fall the index remains above its long-run average level.
  • No surprises: The US leading index fell to 0.3% in March which was in line with expectations. This was also the figure that was initially published for February but that was subsequently revised up to 0.6%.
  • Up … but less than expected: European inflation measures for March were slightly weaker than expected but still very strong. On an annual basis headline inflation is running at 7.4%. Core inflation lifted slightly to 2.9%y/y, which was slightly lower than the previous estimate. Energy was the main contributor to inflation which is expected to ease in April but inflation in services will continue to rise.
  • Improving: Confidence levels amongst European consumers is better than expected which is a tad surprising given the Ukraine situation. The April data recorded confidence at -16.9pts which is slightly better than the -18.7pts attained the previous month


  • Charts…


Source: Bloomberg, Mutual Limited


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



Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.40%
MIF – Mutual Income Fund
Gross running yield: 1.44%
Yield to maturity: 1.39%
MCF – Mutual Credit Fund
Gross running yield: 2.80%
Yield to maturity: 2.29%
MHYF – Mutual High Yield Fund
Gross running yield: 5.81%
Yield to maturity: 5.73%