Mutual Daily Mutterings
Quote of the day…
“The worst time to have a heart attack is during a game of charades.” – Demetri Martin
Chart du jour…US PCE vs 10Y Break-Evens
Source: Bloomberg, Mutual Limited
Overview…”there, there, it’ll be alright little one…”
- Another day of Fed speakers out and about spruiking their wares, making soothing sounds, peddling the view that yes inflation is still inflationary (we think), but remember, monetary policy will be highly accommodative for a meaningful period of time to come. Markets lapped it up. Stocks were firmer at the close, and bond yields dropped a smidge, while commodities were mixed.
- Fed speak…Chair Powell testified before a House Select Subcommittee. He said he has “a level of confidence” that prices will eventually come down, but it’s difficult to predict when bottlenecks will clear…assuming such is the main cause of temporary price spikes (probably is). He also went on to say that a 5% inflation environment would not be tolerated, or words to the effect, and urged patience at evaluating data on prices. It’s comments like that last one that have me worried about the Fed’s grasp on reality – asking investors and markets to be patient is foolish, may as well try and herd cats.
- And more Fed speakers (paraphrasing from Bloomberg)…New York Fed President John Williams said that a discussion about raising interest rates is still “way off in the future.” Meanwhile, his Cleveland counterpart Loretta Mester said very low rates for a long period of time and unconventional policy tools such as asset purchases can lead to too much risk-taking and financial-stability issues. Having said that, she also wants to see more job gains for several months before assessing whether the economy has achieved the “substantial further progress” required to adjust asset purchases. Even with “the most aggressive dot in the dot plot, we still have some time to go before we will think about interest rates.“
- The net effect of all this commentary is that September is likely a live meeting for tapering discussions to kick off…from NAB this morning “all point to September as the meeting when the Fed is, on current trends, most likely to declare that substantial further progress towards their goals has been achieved, or is being achieved, enabling them to give advance notice that the QE tapering process can begin in coming months. In our view, this is still most likely not until the start of 2022)”.
- Offshore Stocks – last week’s fun and frolic seems an age away with US stocks again testing all time dinky-di highs. The S&P 500 closed up at 4246, just shy of the 4255 all-time high. It was a shallow rally, with volumes down -20% on recent averages and with only 52% of stocks gaining. Notwithstanding, only two sectors dropped into the red, Utilities (-0.7%) and REITS (-0.4%). Carrying the flag at the opening ceremony was Discretionary (+1.0%), followed by Tech (+0.9%), which drove half the index’s gains, and then Telcos (+0.8%). One snippet of trivia, Microsoft’s market capitalisation hit $2 trillion for the first time, which for context is equal to 87% of the total market cap of the ASX 200. E-mini’s have maintained the theme post close, up across the DOW, NASDAQ and S&P 500.
- Local stocks – a decent rebound yesterday from Monday’s blues with the ASX 200 gaining strongly on the day, and back to levels seen just prior to the Fed’s hawkish swivel…last week. Over 80% of stocks gained with all but one sector advancing. Healthcare (-0.4%) was in the only sector in the naughty corner, with next worst performers still posting gains, Staples (+0.4%) and Tech (+0.4%). Top of the leader board was populated by Energy (+2.2%), REITS (+2.0%), Financials (+2.0%), and Materials (+2.0%), with the latter two contributing over 70% of the ASX 200’s gains. Possibly over-cooked it yesterday, with futures indicating a very, very modestly weaker opening this morning.
- Offshore Credit – a modest day in offshore primary markets with just $3.5bn priced in US IG, across six deals. A little more active in EU IG, but overriding themes are the same. In secondary, Bloomberg is reporting that 76% of EU deals launched in June are trading tighter vs reoffer. Elsewhere, minimal movement in the main indices.
- Local Credit – straight from the horses (traders) mouths…”with little over a week to go until the end of the TFF senior spreads remain resilient. The sporadic buying that we have seen over the last few months, predominantly from offshore bank balance sheets, has been sufficient to keep spreads in a tight range. Of course, the traditional buyers of this asset class have been mostly absent over this period, having sold down the majority of their holdings 3-6 month prior, leaving secondary spreads to grind gradually tighter in tandem with un-refinanced redemptions”. Spreads closed unchanged across senior major and regional and same for tier 2, nothing moving.
- Bonds & Rates – a reasonably meaningful sell-off in local bonds, following the initial lead from US markets (and others), although the severity of the sell-off was a little more than I had estimated ACGB 10’s are currently +10 bps to their US counterpart, which is just 2 bps short of the top of the 12-month bell curve, that’s fancy talk for saying the spread is around average. Some commentary from CBA’s EOD daily wrap yesterday…”the Australian curve is +8 bps steeper on the day with all of that being a move in the 10Y. The repricing (or flattening) was largely driven by the front end of the market in recent months. The ACGB Nov 24, which is widely expected not to be bought as part of the RBA’s YCT regime is sitting at 0.46%, or +36 bps higher than the Apr 24. Historically the 2Y/3Y or 3/4Y ACGB spread has not got much higher than this over a long period of time.” Forecasts for ACGB 10’s per Bloomberg figures are still punting on yield’s hitting 1.78%, so +18 bps from yesterday’s close, but those forecasts are stale, last updated on 26 May when the 10’s were at 1.67%. If correct (highly unlikely), then a long bond position is gonna hurt!
- Macro – nothing of real significance locally, while in the US we saw existing home sales (-0.9% vs -2.1% cons and -2.7% last). The Richmond Manufacturing Index came out stronger than expected, 22 vs 18 consensus and 18 last. The main focus was Fed Chair Powell’s testimony, with some additional commentary from CBA here…”FOMC chair Powell once again acknowledged the risk that reopening frictions on inflation ‘have been larger’ and ‘may turn out to be more persistent’ than expected. However, Powell said he has ‘a level of confidence’ that the lift in inflation will prove transitory and that 5%/yr inflation would be unacceptable. Indeed, trimmed inflation – which is a better gauge of underlying price pressures in our view – has only lifted modestly in the US (and most other economies we monitor). Subdued ‘trimmed’ inflation suggests price rises are not broad based and is consistent with the FOMC’s view the inflation will eventually return to its 2% target”
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