Mutual Daily Mutterings
Quote of the day…
“The government is a greedy piglet that suckles on a taxpayer’s teat until they have sore, chapped nipples”…Ron Swanson
Chart du jour… US inflation expectations…
Source: Bloomberg, Mutual Limited
“Bad News Bears…”
- A low volume day across US stocks, but the tone was moderately optimistic with the main indices inching higher ahead of the Fed’s get together over the next couple of days. The S&P 500 and NASDAQ both notched up new record highs. Treasury yields were a little friskier than usual (vs recent trends), with a modest bear steepening in the tin, while oil continued its resurgence, up over +10.0% since Friday’s lows.
- For US stocks, reporting season (company earnings), expanding vaccination rates and continued support from monetary policy settings have helped repair sentiment in the face of climbing Delta variant cases. But, the elephant in the room is the pace of the Fed’s tapering plans, and remains a key overhang, at least over the near term. Markets will be looking for clarity when Fed Chairman Jerome Powell speaks virtually on Friday.
- On the matter of tapering, over recent weeks investors have been “flip-flopping in the USAAAA” (sung to the tune of the Beach Boys, “surf’n in the USA”) over whether the Fed will formally table their tapering plans at this week’s Jackson Hole meeting, which won’t actually be held in Jackson Hole (being done virtually). A shame, it’s a beautiful place, and great skiing – not that there is any snow at this time of the year. Current consensus is the Fed will delay any tapering announcement until September, possibly later, given rising Delta cases.
- Delay or not, Fed tapering is coming, be it in one month, two, possibly three. The challenge for Powell and his posse of monetary policy wonks is to clearly articulate a timetable for tapering without triggering a tantrum a-la 2013. So far so good. The mere mention of the word ‘tapering’ in 2013 saw markets in a real tizz. Bonds wore most of the pain, less so stocks. US 10-year yields rose over +130 bps between Apr and Sept of 2013, while the S&P 500 had a short sharp -5.0% tumble, before reacquiring an upward trajectory. From memory US spreads were +20 – 30 bps wider pretty quickly also, over about a month, but as with stocks, bounced back just as quickly as markets had time to digest the concept of tapering.
- Offshore Stocks – European markets drifted, while the US indices crawled higher, tripping yet another record high. News and data was light with the main focus on the Fed. Despite gains being modest, they were pretty broad with 71% of the S&P 500 advancing and only four sectors went backwards – namely Health (-0.3%), REITS (-0.2%) and Staples (-0.1%). Leading the outperformers were Financials (+1.2%), buoyed by steeper yield curves, and then Energy (+0.7%), with gains coming on the back of firmer oil prices, and lastly, Industrials (+0.6%) rounded out the top three. Talking heads…“there are not that many bears left…pullbacks like last weeks are becoming shallower and shallower as more people buy the dip….there is very, very strong buy-the-dip mentality.” Can’t argue with that, but I’d throw it out there that the ‘dip buying theme’ has an expiry on it, and at one stage in the not-to-distant future, the dip buyers will fail to materialise. It won’t necessarily be the next pull-back, or the one after that (they seem to be running to a monthly timetable), but…well, let’s just say the next 12 months gains will require more graft than the last 12 months. Having said all that, even with tapering on the table, monetary accommodation will keep expanding (QE) for potentially another 12 months, it’ll just be at a slower pace. And then there is the fiscal stimulus coming down the pipeline in the US, trillions of the stuff.
- Local stocks – modest gains in local markets yesterday with the ASX 200 up +0.4% with 60% of stocks advancing, while five out of eleven sectors were able to close higher on the day (ipso facto, six sectors closed lower). Tech (+1.9%) carried the flag, supported by Materials (+1.4%) and Health (+0.6%). At the other end of the scale, Telcos (-1.5%) had a softer session, as did Utilities (-0.9%) and Staples (-0.6%). Despite the modest gains in offshore markets, local futures are pointing to a modestly weaker open in the ASX 200.
- Offshore Credit – US IG primary markets have pretty much put the cue back in the wrack for the last week or so of the traditional US summer holidays. EU IG markets were a little more active, with eight borrowers pricing €6.5bn of new paper. Synthetics (CDS) are at or near their 3-month lows with the CDX (US) at 58 bps (47 – 53bps) and the MAIN (EU) at 46 bps (46 – 52 bps).
- Local Credit – traders…”speculation that an easing of NSW state lockdown conditions (details unknown, report on Sky News) provided some excitement, though clearly the details need to be scrutinized rigorously. Spreads remain in a holding pattern supported by favourable technicals. Difficult to see what forces spreads materially wider here? Most likely candidate remains a couple of very strong US employment reports which provoke a FED taper…”, I concur good sir, I concur. On the financials…”mostly quiet though a theme seems to be developing: better selling of major bank senior / better buying of major bank fixed / better buying of regionals in both fixed and floating. We can see the logic here, though would comment on the lack of availability of both major bank fixed paper and regionals. Regionals have been a solid performer in recent months and at low double digits over majors we think they are starting to look a little rich”.
- Bonds & Rates – nothing done yesterday in a movement sense, again not surprising with all eyes waiting in the Fed later this week. ACGB’s continue to outperform their US counterparts as expectations build that the RBA may pause its tapering plans (I’m in the, ‘they won’t pause’ camp). US treasuries bear steepened with the 2’s +2 bps to 0.24% and the 10’s +5 bps to 1.34%, mainly on the back of improved sentiment and some primary activity with a 5 year auction meeting solid demand, signalling also that perhaps that markets are undeterred about the prospect of a tapering announcement from the Fed tomorrow. Some colour also from NAB…”taking a closer look at the US 10-year bond, the overnight sell-off has come from both a re-pricing in the BEI and real yield but, at least for this week, it remains the former which is the dominant driver of the sell-off with the 10y BEI back at 2.35%, having traded as low as 2.26% last week.”
- Macro – a raft of US secondary data prints out overnight, including July durable goods orders, which beat estimates, -0.1% MoM vs -0.3% MoM consensus (and +0.9% MoM last). Capital goods missed to the downside, 0.0% MoM vs +0.5% MoM consensus (and +0.7% MoM last). GDP and jobless claims out tonight. Locally we have payroll data and private capex for 2Q, with consensus at +2.6% QoQ vs +6.3% QoQ for Q1.
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