Mutual Daily Mutterings
Quote of the day…
“When I was a kid my parents used to tell me, “Emo, don’t go near the cellar door!” One day when they were away, I went up to the cellar door. And I pushed it and walked through and saw strange, wonderful things, things I had never seen before, like… trees. Grass. Flowers. The sun… that was nice… the sun..…” – Emo Philips
Chart du jour…higher ground
“A Grimm Picture…”
Overview…”inflation surges back into the narrative…”
- A solid and broad-based risk on session, with stocks climbing on the back of better-than-expected corporate earnings, which took the focus off concerns about the economic impact of coronavirus flareups around the globe. The S&P 500 has had its strongest back-to-back rally in two months. Yields bounced off recent lows as the narrative switched firmly to the inflationary outlook, which dominated earnings calls. Curves steepened. Oil surged again, the most since mid-April amid the generally firmer risk tone and after a US government report showed declining fuel stockpiles during the high-demand summer driving season. Beyond US earnings season, news and data flow was light, certainly not game changing.
- Within earnings calls many executives have highlighted greater pricing power. And, business surveys continue to show elevated input costs as supply of both materials and labour lags behind solid demand. Spot commodities prices remain elevated and wage pressures are building. Almost 74% of the firms surveyed recently by the Philadelphia Fed indicated increases in wages and compensation costs over the past three months, and 57% indicated they were planning to boost pay by more than originally planned. The median expected increase in wages this year was 4% to 5%, though more than 21% of respondents said they could rise 5% to 7.5%.
- Last week, Fed Chair Powell said…”we think that those things are clearly temporary…we don’t know when they’ll go away. We also don’t know whether there are other things that will come forward and take their place.” Countering that view somewhat, from, JPM’s CEO …”I think it will be a little bit worse than what the Fed thinks….I don’t think it’s all going to be temporary, but that doesn’t matter if we have very strong growth.”
- A little stale, but this comment from JPM strategists recently is worth re-reading …”reopening of the economy is not an event but rather a process, which in our opinion is still not priced-in, and especially not now given recent market moves….this does not signal the beginning of a down cycle.”
- Offshore Stocks – solid gains across offshore markets, especially the European STOXX (+1.7%), with over 90% of stocks flashing green and no sector in the red. Energy (+2.9%), Financials (+2.6%) and Discretionary (+2.3%) outperformed on the day. In the US, focus was all on reporting season, with markets buoyed by what they saw. The NASADAQ (+0.9%) pipped the DOW (+0.8%) and S&P 500 (+0.8%) for line honours. Within the S&P 500, almost 75% of stocks climbed, while only three sectors were seeing red, Utilities (-1.1%), REITS (-0.4%) and Staples (-0.1%). Meanwhile, in the first-class lounge sipping bubbly we had Energy (+3.8%), Financials (+1.7%) and Materials (+1.1%). So far, 86% of companies reporting have exceeded estimates. But it’s early in the season — less than 15% of the S&P 500 reported — and there is concern earnings have reached peak growth. Many big banks disappointed. And rising inflation and raw material shortages are emerging as headwinds in the second half. With earnings season in its early days, it’s a bit premature to call a restart to the cyclical boom but there are some upbeat signs surfacing.
- Local stocks – a firmer session yesterday following bounces across US and EU markets. The ASX 200 closed with 61% of its stocks in positive territory, and only two sectors failed to fire, Industrials (-0.7%) and Tech (-0.5%). Leading sectors on the day included Healthcare (+1.1%), Materials (+1.1%), and Financials (+1.0%), with the latter two accounting for 65% (ish) of the broader index’s gains. The index peaked at +1.4% intra-day, but e-mini’s began to soften through the session, which took some wind out of the sails in our time-zone. Local futures are pointing to another solid open, +0.9%.
- Offshore Credit – a dull day in US IG primary markets, just two deals and only US$2bn priced. Only a touch better in EU IG markets, six deals for €3.3bn priced. In cash spreads – secondary – it’s a millpond, flat as a tac with the exception of US financials, which were able to eke out a -3 bps rally (at the index level). Elsewhere, across US and EU, IG and HY, there was nada, zip, zilch movement. In CDS, moves reflected the tone in stocks, the MAIN and CDX closed 1.5 – 2.0 bps lower.
- Local Credit – traders…”offshore markets recovered some poise overnight, yet it feels a fragile peace. In the absence of any tier 1 data we would expect near term sentiment to be set by equity markets. Domestic credit spreads pressured, but resilient.” No change to senior or sub spreads.
- Bonds & Rates – a solid sell-off in US treasuries as reporting season kicked into gear and a slew of reporting companies tabled stories of price pressures and their respective willingness and ability to pass these prices pressures on. Consensus is still expecting higher yields into year end, but we’re all collectively twiddling our thumbs, awaiting new catalysts and opportunities to get there. While one drink doesn’t make a summer, last night’s corporate reporting and commentary around price pressures could be that catalyst – still early days, but it’s unlikely the tune will change too much. Consensus forecast for US 10-year yields by the end of Q3 is 1.68%, +40 bps from last night’s close . As for AU rates, the focus has shifted to whether or not the RBA will follow through with its announced tapering (from September), halt it, or in fact buy more bonds, as some have suggested. Lockdown angst will weigh on recovery prospects – timing more than anything, evidence through the pandemic has shown that once let loose from lockdown, economies bounce pretty quickly. Nevertheless, near term the economy will remain supressed with 14 million, or 60%, of the population under house arrest, which will keep yields at the bottom of their recent trading ranges, and potentially setting new lower bounds. Having said all that, correlation between US treasuries and ACGB’s is very high, so we’ll likely see yields pressured higher today.
- Macro – June Retail Sales data out yesterday with a big miss to the downside of consensus, down -1.8% MoM vs -0.7% MoM (consensus). Obviously, the snap lockdowns across Sydney clearly weighed on this number, and with the scale of lockdown now expanded to three states, and the expected duration of these lockdowns (to end of July), it’s safe to say July won’t see a meaningful improvement. While the monthly data has deteriorated, the annual data is meaningfully better – but again, there’s a hefty base effect there. Nevertheless, retail sales are +11% above pre-pandemic Q4 2019 levels. Some wages data out today, but generally expected to be a quiet day – other than the daily dose of COVID headlines.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907