Mutual Daily Mutterings
Quote of the day…
“A computer once beat me at chess, but it was no match for me at kick boxing.”– Emo Philips…
Chart du jour…Gold
Source: Bloomberg, Mutual Limited
“Going Nowhere Fast…”
Overview…”what goes down, must come up …”
- After last week’s histrionics, a sense of calm and contentment returned to markets overnight. Stocks rose, bond yields rose, curves steepened, and commodities gained…generally a risk-on session. The narrative shifted with a growing belief that any tightening by the Fed will be gradual and relatively painless. As I’ve said in the past (no, honest I did), any tightening in policy is digestible and with minimal bloodshed, if it’s gradual and well telegraphed, and not sudden or aggressive. Talking heads…. “The way back up in terms of rate hikes may be much more gradual, and that might allow economically sensitive stocks to perform well”
- Fed speak…a number of influential Fed voices were out and about overnight spruiking growing mantra that the central bank’s monetary policy settings needs to be more attuned to inflation risks. And, this is where the market collectively goes, “well duh!” Dallas Fed’s Kaplan said he would prefer to start tapering “sooner rather than later,” a view generally supported by Bullard (St Louis Fed), “we have to be ready for the idea that there is upside risk to inflation and for it to go higher.”
- But wait, there’s more…Fed speak…Williams (New York Fed) rocked the boat a little, predicting inflation will fall from around 3.0% this year to close to 2.0% over the following two years. If he’s correct, then bond yields ain’t going nowhere, although he does admit there is a “a great deal of uncertainty” around the inflationary outlook.
- And it’s the ‘Festival of the Fed’, more Fed speakers out today (tonight), with the grand-daddy of all Fed Speakers, Chair Powell testifying at a House Sub–Committee hearing on the Fed’s pandemic emergency lending and its asset purchase programs.
- Either way, short of some non-consensus event transpiring, monetary policy is likely to tighten at some stage this year, in some shape or form. As for the most likely ‘non-consensus’ event, I see David Rosenberg’s ‘fiscal cliff’ concerns as the most credible. His research suggests the US economy is being largely fuelled by government fiscal stimulus programs, including household income support. When the faucets are turned off, and they have to at some point, the US economy won’t be able to stand on its own two feet, limiting monetary policy tightening.
- Offshore Stocks – a solid, broad-based rally across US stocks, while European gains were more modest – but the sell-off last week was also relatively modest also. Volumes were higher than average. Within the S&P 500, almost every stock (95%) gained on the day, while every sector advanced. Leading the charge into redemption was Energy (+4.3%), followed by Financials (+2.4%), and Industrials (+2.2%). Dragging the chain at the bottom of the tables, but still advancing, were Tech (+1.1%), Telcos (+0.9%) and Discretionary (+0.5%). E-mini’s are firmly up in after close trading.
- Local stocks – trousers down, six-of-the-best…the ASX 200 copped a belting yesterday, dropping -1.8% with 80% of stocks wallowing in their own self misery (down), although the index closed off its lows (-2.0%), just. Only two sectors, Staples (+0.2%) and Tech (+0.2%), were able to put up a fight and gain ground. Leading the market down into the fiery abyss was Financials (-3.4%), contributing over half of the ASX 200 downdraft, ably assisted by Materials (-1.8%), accounting for just over 20% of the market’s losses. Utilities (-2.0%) and Energy were also complicit in the day’s losses. Futures are suggesting sunshine and lollipops today.
- Offshore Credit –with the firmer risk tone across markets, US primary kicked into gear with seven issuers pricing US$11.4bn. Average deal metrics were constructive with a modest new issue concession of just a basis point, while books on were 2.5x covered. Spread compression from launch to final price came in at -23 bps vs YTD average of -24 bps and 2020 average of -30 bps. A busy start to the week also in EU primary. Only marginal moves in secondary spreads in the US, a partial retracement of last week’s widening, which itself was minor (+2 bps). High yield paper was better bid. EU spreads were marginally wider in secondary.
- Local Credit – focused on broader market sentiment and gyrations, but traders are telling us conditions remained relatively calm…some ‘enquiries’ from regional investors, but no discernible sell bias that might accompany a sustained risk off narrative. Last night’s action should calm the more nervous investor in the near term, so business as usual tactically. In the major bank space, senior paper is unchanged with the Jan-25’s at +32 bps and generic 3-year paper around +24 bps. Spreads also unchanged in the tier 2 space. The 2026 callable cohort is ranging around +126 – 130 bps, while the 2025 callable paper are around +119 – 122 bps. Just over a week until the RBA’s TFF is taken off the menu with a little over $61bn left to be drawn, that’s around half the average annual wholesale funding needs of the majors under normal operating conditions (~$120bn – $130bn)…it’ll be a busy week with expectations all this will be hoovered by the banks. Add to this, the masses of ES balances, which are approaching $300bn (+62% YTD), the banks are flush with liquidity…all dressed up and nowhere to splash the cash with aggregate lending growth still anaemic at +0.3% – 0.4%. Nevertheless, primary supply will come back eventually…but I’d say only gradually, so minimal spread impact.
- Bonds & Rates – the belief entering the narrative that any Fed tightening will be gentle, caring and understanding, has seen bond yields on the rise again overnight, and curves steepen…i.e. supporting the unhindered growth narrative. Whether that is sustainable remains to be seen. Anecdotally, there are signs of rampant inflation everywhere, and the data is beginning to reflect it…albeit gradually, at least locally – more an issue in the US. The question is. is this sustainable? Will prices keep rising, and if so, by how much and for how long? Either way, yields will continue to rise, but the extent of increase will be capped, out the back end, by the impact on growth from expected higher rates (a bull flattener)…kind of like a dog chasing its tail. Or, as many suggest, inflation is transitory, driven by post pandemic demand normalisation and supply chain bottlenecks? Under this simple scenario, any front-end normalisation will be gradual and supportive of longer-term growth, which will likely see the back-end rise quicker than the front, a bear steepener. Either way, if you’re wrong in fixed rate positioning, it’ll hurt you more in a capital sense than if you’re wrong in floaters…yes, I’m talking our book here. Local bonds to sell-off today, maybe +3 – 5 bps at a guess (in the 10’s).
- Macro – retail sales out yesterday, underwhelming against consensus expectations, but the figure can’t be too much of a surprise with Victoria in a two-week lockdown. I’ve pilfered NAB’s commentary here…”preliminary Retail Sales rose +0.1% MoM in May (consensus +0.4% MoM) with Victoria’s lockdown weighing heavily on the headline pace of growth. Victoria saw a -1.5% MoM fall in sales with the Victorian lockdown from May 28th and Melbourne through to June 9th restricting physical store sales. This effect will also be seen in next month’s June data. In contrast, sales rebounded strongly in WA (+1.5% MoM after -1.5% MoM in April) as it came out of lockdown in late April, while QLD (+1.5% MoM) also saw a sharp lift in sales. Given yesterday’s data was preliminary, there was limited industry detail. The ABS noted that Household Goods (-1.0% MoM) and Clothing, Footwear and Personal Accessory Retailing (-1.5% MoM) fell. Food retailing in contrast rose +1.5% MoM, driven by a +4.0% MoM rise in Victoria as consumers stockpiled in anticipation of the lockdown”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907