Mutual Daily Mutterings
Quote of the day…
“I cook with wine, sometimes I even add it to the food” – W. C. Fields…
Chart du jour…Global spread changes…
Source: Bloomberg, Mutual Limited
Overview…”navel gazing …”
- A day of reflection and soul searching, with not much done and minimal reaction to….well anything. A quiet news day and data prints did little to move the risk dial in either direction. European stocks were under the pump a bit, while across the pond US markets bumped along, moving from gains to losses as the day wore on. Value underperformed growth in the end, with companies tied to a broader reopening of the economy — such as retail and financial shares – outperforming. Tech also had a positive day with the NASDAQ setting a new record high. Moves in general were muted. Bonds were range bound with most of the new Fed mindset likely priced in now.
- Fed speak…comments from Atlanta Fed President Raphael Bostic got markets a little hot and bother, briefly. Bostic stated he expects the Fed will likely hike by the end of 2022 and could begin tapering in the next few months in response to a faster-than-expected recovery. “Given the upside surprises in recent data points, I have pulled forward my projection for our first move to late 2022,” and “the recent surge in inflation will probably last longer than expected but should ease after this year”. Fellow board member, Robert Kaplan, added his support to these views, saying he’s forecasting an increase next year and calling for tapering “sooner rather than later.”
- Data overnight was absorbed and digested by markets with little fanfare with US manufacturing activity expanding in June at the fastest pace in records dating back to 2007. Meanwhile, sales of new homes unexpectedly fell last month as elevated home prices continued to weigh on affordability. The reports came a day after Fed Chair Jerome Powell reiterated his views that policy makers will be patient in waiting to lift rates despite higher inflation.
- Talking heads….“You’ve got this inflation issue that has captured the imagination of investors for the first time in a long time….I don’t have a great case for why the market takes another leap forward here over the summer. It’s going to be more of a churn, and we usually do get a little bit more volatility because volumes are down.”
- Offshore Stocks – a day of navel gazing for US stocks, while European markets saw more meaningful down drafts. US markets oscillated between gains and losses, but never really strayed too far from home. Volumes were marginally down on recent averages, but nothing too material. By day’s end, more stocks had lost ground than gained ground, 60:40, while only three sectors were able to advance – Discretionary (+0.6%), Financials (+0.3%), and Energy (+0.3%). Meanwhile Utilities (-1.1%), Materials (-0.6%) and Staples (-0.6%) were the main trouble makers at the back of the bus.
- Local stocks – a modest down day in the local trenches yesterday with Utilities (-1.2%), Energy (-1.2%) Healthcare (-1.4% and Financials (-1.1%) the main offenders. The split between downers and uppers across the ASX 200 was 60:40, while volumes were a touch higher than recent averages. Only two sectors were able to keep their noses clean, Tech (+1.1%) and Materials (+0.8%). I’d suggest markets have sufficiently adjusted now to a more hawkish (slightly so) Fed and we’ll see a period of consolidation over the next couple of months – all other things being equal. The main tangible risks to markets (global stocks) from here are any meaningful signs that inflation is in fact here to stay and not in fact transitory, which will likely amp up market’s expectation (pricing) of tapering / tightening timetable, which will in turn be a growth headwind. Futures are trading down indicating a soft open.
- Offshore Credit – ripped from Bloomberg….”the rally in high-yield corporate bonds since the start of the pandemic has largely dried up, Pimco CEO Emmanuel Roman told Bloomberg’s Qatar Economic Forum. Investors should consider taking some profits and raising cash, he added. On the investment-grade front, JPMorgan warned that investors aren’t getting paid enough for liquidity risk — and it’s about to get worse as a summer slowdown kicks in”.
- Local Credit – not a lot to report, same-same…trader talk “a second consecutive risk rally in global markets, but again little feeding into domestic credit as we approach quarter and FY end. Much of the focus yesterday on supply, with deals across the ratings spectrum”. Deals included a couple of SSA’s and a couple of corporate deals. “Spreads in the wash again flattish on balanced flows, Subs/T2 outperforming senior spreads.”
- Bonds & Rates – local bonds rallied across the curve yesterday. Normal transmission seems to have resumed post the Fed hawkish tilt hissy-fit, but there remains scope for some minor after-shocks. It’s been a week since the FOMC meeting and markets have had to digest the Fed’s slight hawkish tilt. The net effect being a 15 bp bull flattening of the curve with the 2’s +6 bps higher at 0.26% and the 10’s -9 bps lower at 1.49%. In a recent historical context, i.e. the last 5-years the curve is still steep at +122 bps (vs average of +62 bps), however over a longer period, say 10-years, the curve is closer to the average +117 bps. But with a range you could drive a buss through (low of -5 bps to a high of +271 bps), the average is largely meaningless and for interest’s sake only. For the immediate term I’d suggest markets have adjusted to the new Fed mind set, and will range trade again for a few months pending any new catalyst – i.e. a meaningful change to the stickiness of inflation and / or actual decisions from the Fed on tapering. Having said that, the second half or the year will likely be volatile in rates.
- Macro – a big call yesterday from my old crew, with CBA boldly predicting the RBA will hike cash rates by November 2022, yes that is a 2 at the end, and no it’s not a typo….as for a summary of their rationale, “the Australian labour market has tightened at a phenomenal pace and underutilisation in May was at its lowest since early 2013. The forward-looking indicators of labour demand are very strong yet labour supply is constrained, which means the labour market will continue to tighten very quickly and wages growth will accelerate. We expect the RBA to begin normalising monetary policy in late 2022 and see the cash rate target at 0.50% at end 2022 and then peaking at 1.25% by Q3 2023.” This is an off-the reservation call with consensus still pegged at 0.10% by the end of 2022, although the last statement from the RBA did seem to drop the “no rate hike until 2024 at the earliest mantra”, which caused a few in the street to re-jig their rate hike expectations to 2023. Calling a 2022 hike is punchy, but CBA has some street cred here, last year November they were calling unemployment at 5.7% by year end (2021) and copped some shade from peers for being too optimistic. Unemployment is now 5.1%, so respect due. Offshore, a busy night in US markets tonight with a plethora of data prints – tabled below:
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Scott Rundell, Chief Investment Officer
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