Mutual Daily Mutterings
Quote of the day…
“The early bird gets the worm, but the second mouse gets the cheese” – Steven Wright…
Chart du jour…Global spread changes…
Source: Bloomberg, Mutual Limited
Overview…”back to the well …”
- Just as markets had been fretting over the end of ‘easy money’, albeit it briefly after numerous Fed speakers made calming cooing noises post the FOMC meeting, in comes President Biden on a gleaming white stallion with some new fiscal Red Bull to keep the party going. Stocks climbed on news Biden had reached an agreement with a bipartisan group of senators on a US$579bn infrastructure plan that would fulfill one of his top priorities. Don’t get too excited…oops, too late. Successful passage of the program through the system is by no means assured with the bill set to move in tandem with a much larger package of spending and tax increases that Republicans oppose. Bond reaction to the headlines was muted.
- While the Republicans oppose further fiscal spending, of this size and nature, some Fed speakers (Bostic and Parker) were out and about spruiking the need for more spending on infrastructure investment – noting that it could boost U.S. productivity and growth. The positive short-term bump in risk sentiment on the back of this is understandable, especially coming on the tail of last week’s hawkish tilt from the Fed. But, it’s just another sugar hit and fiscal spending of this scale is unsustainable.
- Talking heads…“infrastructure spending strengthens an already very strong economic growth outlook”…..“and should bolster the outlook for corporate profits and should keep this bull market going strong well beyond 2021.”
- While inflation is a near term risk, a fiscal cliff in the not too distant horizon remains a risk. Consequently, rates and yields could head lower again, especially given a large portion of US household incomes are still being meaningfully supported by the US government. The risk to the dominant inflation view is that it’s proven to be transitory, and the growth outlook overstated given a large chunk of the US economy is being fuelled by stimulus spending. The economy doesn’t seem to be standing on its own two feet, at least not sustainably. Just look at real yields, still deeply negative suggesting the growth outlook is well and truly overstated. All said and done, these are strategic concerns – not tactical, just thinking aloud.
- Offshore Stocks – new all-time highs for the S&P 500 as concerns about rate hikes, tapering and a more hawkish Fed were squashed, for now, by fiscal spending hopes. It was a broad-based rally with three stocks up for every one down and all but two sectors gaining. Financials (+1.2%) led the charge, aided by the prospect of dividend increases and buybacks as the Fed’s stress test results are released, with all big six banks expected to pass. Other sectors to gain were Energy (+0.9%) and Telcos (+0.8%). REITS (-0.5%) and Utilities (-0.1%) were the only two sectors to let the side down. E-mini’s maintained the rage after market close.
- Local stocks – a modest down day on not much news or data. Uppers vs downers at the stock level were broadly even, while volumes were a smidge below recent-averages. Only three sectors were able to gain ground, let by Staples (+2.6%), Tech (+2.1%) and Materials (+0.3%). Leading sectors in the red, we had Healthcare (-1.8%), Energy (-1.2%) and Financials (-0.7%). Futures are point to decent gains on the open.
- Offshore Credit – US IG saw four deals for just under US$3bn priced, which takes week to date issuance to US$21.6bn, at the high end of initial projections for the week. EU IG was just shy of €10bn and €37bn on the week. Spreads in secondary are marginally tighter, but there’s not a lot in it. CDS is similarly a fraction tighter.
- Local Credit – to somewhat paraphrase Elmer Fudd, local credit markets were “vewy, vewy quiet”. Spreads unchanged across senior and sub, flows reported as very low and quiet by traders. I’ll conserve ink and leave it at that.
- Bonds & Rates – not a lot of movement in local bonds yesterday, or offshore overnight for that matter. As expected after the initial Fed-hawkish-tilt-tanty, yields seemed to have settled. So, some technical observations on recent curve flattening. If you’re one to believe in relative strength indicators – and I kind of am to some degree – such indicators are suggesting further flattening of the curve may be more challenging going forward. With the 2s10s curve ~25 bps flatter in the in the past month, RSI’s are stretched toward extreme momentum levels. Although, the 5s10s curve flattening appears the most acute, at an RSI of 23.3. Outright, only the 2’s are at extremes though, with RSI’s exceeding 70 (74) through the post-FOMC selloff. This suggests it may be more difficult for the front-end to sell off much further in the short term.
- Macro – a raft of US data out last night, some hits and misses, but net-net not really moving the risk-dial in either direction, generally supporting the prevailing recovery narrative. Tonight, we have the PCE deflators, the Fed’s preferred measure of inflation – table below details consensus expectations vs last readings. Any meaningful surprises to the upside – and upside inflation surprises have been the trend in the US recently – will likely see further flattening of the curve, driven by the front end (i.e. above technicals to be proven meaningless).
Have a good weekend….
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907