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Mutual Daily Mutterings


Quote of the day…


“If kids knew what they wanted to be at age eight, the world would be filled with cowboys and princesses.  I wanted to be a pirate.  Thank God nobody took me seriously and scheduled me for eye removal and peg leg surgery” – Bill Maher













“Softly, softly…maybe.”





Overview…”bad news is good for risk again…”



  • Moves: risk on… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • US stocks ended the offshore session higher after digesting Fed Chair Powell comments and weaker macro data.  The S&P 500 rose almost +1.0% higher after meandering between intra-day gains to losses through the day.  The index has now clawed back some of its recent losses, +3.0% in the past three days.  US jobless claims printed marginally weaker than expected, and data signalling that manufacturing and services activity had cooled considerably was also published, early signs that perhaps Fed’s rate hiking actions are beginning to bite.  Despite the weakening labour data, Fed Chair Powell noted in Senate testimony that “we have a labour market that is sort of unsustainably hot and we’re very far from our inflation target.”
  • Treasuries rallied to back below 3.10% just a week and a bit after spiking to a bum’s hair shy of 3.50%.  Growth concerns are sending cash toward safe haven assets, which has driven yields lower.  Markets are now moderating odds of rate hikes beyond the December FOMC meeting.  Around +175 bps of additional rate hikes are priced into year-end, and markets have also brought forward the timing of where the current cycle will likely peak — to Q1’23 with a terminal rate of circa. 3.4%, versus almost 4.0% by Q2’23 just a couple of weeks ago.
  • ACGB’s have also rallied strongly over the past week or so, down -35 bps to 3.85% after peaking at 4.20% earlier in the month.  The terminal rate being priced in by markets has also come in aggressively, now peaking at 3.94% by mid-2023 vs 4.40% just a week ago – no meaningful change in timing of peak cash rates however.
  • Talking heads…”the problem is, if the Fed does pivot earlier than people thought it’ll only be because the economy is a lot weaker than people thought and the stock market is a lot lower than people thought.  So, people need to be careful about looking for a Fed pivot early. If the Fed pivots early it will be because we’re in really rough shape, and that’s not bullish.
  • Fed speak…Fed Chair Powell was into his second day of testimony before the Senate, with the tone still hawkish.  One of the key outtakes from his comments is that he does not see a recession “inevitable”, the economy is very strong and the Fed is focused on “preserving a strong labor market.”  An important comment, highlighting how intense their focus is on inflation, which has been call “unconditional”….“we’re gonna want to see evidence of it really coming down before we declare any victory, so I think we’d be reluctant to cut.


The Long Story….

  • Offshore Stocks – European stocks ended lower by around -1.0% on average, while US stocks ended the day higher.  It wasn’t all one way with the S&P 500 down -0.4% midway through the trading session, but then rallied over the latter half of the day to close up +1.0%.  Two thirds of stocks in the S&P 500 advanced and all but four sectors were sporting a greenish tinge.  Utilities (+2.4%), Healthcare (+2.2%) and REITS (+2.0%) topped the performance tables.  Energy (-3.8%) was the primary drag as oil prices continue to soften.  The S&P 500 is trading at forward PE’s of 16.6x, up from 16.1x a week ago.  Well below recent (2 year) averages, but closer to longer run (pre-pandemic averages).  Unfortunately, we haven’t really seen a meaningful adjustment to street earnings expectations, which remain elevated given recessionary concerns.  Forward EPS expectations are at $228/ps, up +1.1% on the quarter and +3.7% vs early January expectations…over the same period the index has fallen -20.8%.


  • S&P 500 relative strength indicators…

Source: Bloomberg, Mutual Limited



  • Local Stocks – modest gains in the local (ASX 200) index, although the winners vs losers columns are almost evenly matched, s smidge more in the winners column.  Only two sectors retreated, but one of those was Materials (-1.5%) which weighed heavily on the broader index because of its weight.  Energy (-2.1%) also weighed heavily with the two sectors accounting for ~30% of the index.  Top of the tables was dominated by REITS (+2.6%), Healthcare (+2.0%) and Staples (+1.6%).  Relative strength indicators are still suggesting the index is ‘oversold’…futures are down a smidge, -0.1%.



  • ASX 200 RSI’s…’oversold’ still…

Source: Bloomberg



  • Offshore credit – despite the more conducive conditions, it was quiet on the primary front last night, and it’s been a quiet week.  In cash markets the broad trend is a widening drift on recessionary concerns.  Synthetics followed broader themes, CDX lower (-1 bp) and MAIN higher (+2 bps).  Not a lot to say here to be honest.


  • Global credit spread…12 months…

Source: Bloomberg, Mutual Limited



  • Local Credit – another muted session a week out from quarter end.  Traders are reporting some decent buying in the back end of the major bank senior curve with the buyer being active in recent weeks in the same space – offshore account I believe, with buying soaking up a decent amount of inventory from the street.  Indicative 5-year major bank senior spreads are now at +104 bps (-1 bps CoD), with a similar move tighter in 3-year spreads, to +83 bps.  Elsewhere along the curve was little changed.  I still have the 5-year curve at +108 bps and 3-year at +82 bps, unchanged from yesterday.  Further down the capital stack and traders are reporting tier 2 spreads have drifted wider over the past couple of days.  The CBA Apr-27 call (last priced) is at +243 bps, implying a sub to senior ratio of 2.34x, which has been relatively stable in recent weeks.


  • Major bank 5-year indicative spreads….

Source: Bloomberg, Mutual Limited



  • Bonds & Rates – a solid rally in local yields yesterday as markets begin to factor in policy error risk, that is the likes of the Fed, RBA, ECB etc tightening monetary policy too far and too aggressively, upending growth prospects.  While the RBA remains confident the Australian economy will dodge a recession, and we have history in this regard, elsewhere globally, risks of recession are arguably more pronounced.  It wasn’t only ACGB’s that rallied, BBSW rates also fell, with 3-month BBSW down to 1.78% (-8 bps CoD), a meaningful move in the context of recent trading ranges.
  • Despite the rally in rates yesterday we saw some heavy-hitter market pundit’s revise their terminal rate expectations, with WBC (Bill Evans) adjusting their peak cash rate view to 2.60%, up from 2.35% previously.   With 1- year ACGB yields at 2.52%, a safe bet at this stage.  Bill and his team are also expecting a +50 bp hike at the next RBA meeting (July) and then again in August, taking the cash rate to 1.85%.   Markets are now pricing terminal cash at sub-4.0% levels, moving more toward our own expectations. The market implied terminal rate last week was around 4.40%, which as I suggested a while ago was way too high and the curve too steep.  As such, the recent repricing of rate hike expectations is welcomed.
  • Treasuries rallied (yields lower) over night on recession risk.  US 2-year yields dropped -4 bps to 3.01%, while 10-year yields were -7 bps lower at 3.09%.  As recession risk grows, but with CPI yet to peak, it’s likely we’ll see further curve flattening, and risk of inversion.  The front of the curve is more sensitive to monetary policy decisions, while the back end (10-year) tends to be macro driven.  So, if markets are pricing a shorter rate hike cycle given growth concerns, then it makes sense that the long end will be somewhat bid.


  • Market cash rate pricing…

Source: Bloomberg, Mutual Limited



  • A$ Fixed Income Markets…

Source: Bloomberg



  • Macro – pilfering some comments from NAB’s morning mote…”S&P Global flash PMIs were the key data overnight. All-in-all, they were doing nothing to assuage fears of a slowdown. Of most note was numbers out of the euro area. The Eurozone composite measure fell to 51.9 from 54.8, sharply softer than the 54.0 expected, with S&P summarising the detail “Eurozone growth slows sharply to 16-month low in June as demand stalls and price surge continues.” The US read was also on the soft side of expectations , the composite measure at 51.2 from 53.6 and 53.0 expected. The detail reveals the first contraction in new orders since July 2020 and new export orders contracting at the steepest pace since June 2020, and while input cost pressures remain, the pace of input cost inflation slowed to its lowest in 5 months. US jobless claims for the week ending 18 June came in at 229K after 231K. Still above recent lows, but not signalling a material slowing in the labour market at these levels.”


  • 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: 0.78%
MIF – Mutual Income Fund
Gross running yield: 2.07%
Yield to maturity: 1.78%
MCF – Mutual Credit Fund
Gross running yield: 3.34%
Yield to maturity: 2.99%
MHYF – Mutual High Yield Fund
Gross running yield: 6.00%
Yield to maturity: 6.02%