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Mutual Daily Mutterings


Quote of the day…


“Every loaf of bread is a tragic tale of a group of grains that could have become whisky but didn’t” – unknown










“Whatever it takes…”





Overview…”Do two drinks make a party…?”


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


  • A second day of solid gains in US stocks on the back of some optimistic outlook commentary out of the retail sector, perhaps signalling the US economy is on ok shape and can withstand supply-chain snags and inflationary pressures.  Lower mortgage rates also buoyed sentiment.  Dare we dream of a better tomorrow?  Little movement in bond yields or credit markets.  While the saying goes “one drink doesn’t make a summer”, equally “two drinks doesn’t make a party”.  Just last week, two major retailers (Walmart & Target) cut their growth outlooks, so investors need to cool their jets a bit.  Despite the mixed messages, according to Fed data, US consumers still largely expect the inflationary shock to be temporary, and for price gains to be low and stable in the longer run.  US GDP data indicated the economy contracted an annualised rate of -1.5% YoY in Q1 vs -1.3% YoY forecast (and -1.4% YoY in the prior quarter.


  • Adding fuel to the overnight optimism party, US mortgages rates dropped for the first time in two-years, down from 5.25% to 5.01%…encouraging, but, keep in mind, mortgages rates were 3.11% just 18 months ago.  Despite the fall in mortgage rates, the US housing market is reeling from aggressive rate rises year to date.  New home sales have dropped -3.9% MoM in April, with the rate of fall nearly 2x consensus forecasts.  Mortgage application data released had already signalled muted demand. Higher interest rates are expected to curb housing demand.


  • Optimistic talking head…”although this was an expected and highly talked about potential ‘oversold’ rally, the underpinning for today’s market climb higher suggests that last week’s doom and gloom about the all-important US consumer may have been overdone.” Versus less than optimistic talking head…”yesterday was the fifth up-day for the stock market in the last fifteen. Most of those days are big percentage move days off the low-end of the Risk Range. The characterization of a bear market is when there’s a bounce on decelerating volume.”


  • China remains an area of concern for growth, both amongst global market watchers, but also local leaders.  Accordingly, I found some events over night highly amusing.  Chinese leadership in the form of President Xi and Premier Li yesterday and the day before respectively addressed thousands of party officials, the latter an impromptu address by all accounts (which is rare).  Basically, the boys at the top are pressuring local governments to a) squash COVID, and b) maintain economic growth at all costs.  Xi wants zero COVID, Li wants economic growth targets.  Kind of like having to choose your favourite child, a real dilemma given failure is generally not an option within China.  “He (Li) is being put in the impossible position of trying to rescue the economy without being able to adjust the one policy — zero-COVID — that is causing the most economic damage.”  Good luck with that.



The Long Story….


  • Offshore Stocks – a solid rally overnight across all northern hemisphere markets, with optimism from the get-go.  The DOW rose +1.6%, the S&P 500 +2.0% and the NASDAQ +2.7%.  Just shy of 90% of stocks in the S&P 500 advanced and only one sector spluttered, REITS (-0.1%).  Discretionary (+4.8%) was all guns blazing, flanked by Tech (+2.5%) and Financials (+2.3%).  The S&P 500 is now +4.0% off its recent lows.  Stocks should have some clean air for a few weeks, on the data / Fed front, which could underpin a continued modest bounce (or floor).  Nonetheless, meaningful strategic headwinds persist, most notably a tightening Fed, which will moderate any unfettered optimism.


  • After falling 15% this year, the S&P 500 is trading around 4,000. According to analysts tracked by Bloomberg, its members will earn a combined $248 a share next year. Divide price by earnings, and the result is a forward multiple of 16.0x — roughly in line with the three-decade average. So not dirt cheap, but perhaps reasonably priced.”  (Bloomberg).  In the world of the ‘Fed put’, you could argue 16.0x forward PE’s is cheap, but you could also argue the ‘Fed Put’ lacks the oomph of day’s past given monetary policy efficacy is running on fumes given inflation is running hot, which leaves the Fed somewhat hamstrung in its attempts to keep financial conditions constructive.


  • The three-decade forward PE data I dug up on Bloomberg indicates the average is actually 17.4x (charted below), and the prevailing level is 17.8x.  Perhaps it’s a different data set, or adjusted somehow.  Either way, markets have in the past been cheaper with less earnings uncertainty and more expensive with more uncertainty.  The last week or two signals to me that investors really don’t know which way to go, do they zig or do they zag?  Do they take the red pill, or the blue?  Until such time as there is more certainty that inflation has in fact peaked, and the Fed is close to finalising its tightening agenda, then any meaningful and sustained up-trend in markets could prove elusive.



  • Local Stocks – risk off yesterday in local markets with the ASX 200 dropping -0.7%.  Some 62% of stocks retreated and only one sector, Tech (+1.0%) advanced.  Staples (-2.5%) fell most, followed by Utilities (-1.2%) and Materials (-1.0%), with the latter doing the bulk of damage.  Financials (-0.4%) were also a meaningful contributor to the broader index’s fall.  With strong leads from offshore, local futures are up +1.0%.


  • Per Bloomberg data, ASX 200 forward PE’s are ‘cheaper’ than US markets, at least in a historical context.  The prevailing forward PE’s are at 14.7x, which is below the long run (2005 – now) average of 15.4x, and well below the pre-pandemic long run (2005 – 2019) average of 16.1x.  With the ASX 200 weighted toward Materials and Financials, I have more confidence in saying the ASX 200 is cheaper than say the S&P 500 all things considered.  The ASX 200 is better placed to benefit from continued commodity price inflation, and the local banking sector is more robust than the US counterparts.  Materials and Financials account for over half of the ASX 200, whereas the within the S&P 500 they only account for 15% of the index.


  • ASX 200 forward PE’s


Source: Bloomberg


  • Offshore credit – nothing of note in US primary on the eve of a long weekend (Memorial Day)“The spread on the Bloomberg U.S. Investment Grade Corporate Bond Index rallied -6 bps, the largest move in over two months on a percentage basis, to close Wednesday at +140 bps. It’s the third straight session spreads have narrowed, the longest such streak since April 5.” (Bloomberg).


  • Local Credit…traders thoughts…”a decent session for offshore credit (CDX IG -4.4bps) and equities overnight post release of the FED minutes, though little evidence of this optimism playing out in the local market. The domestic investor base remains largely inactive, with secondary participation deterred by the dramatic reprice from recent primary.”  Funny, at the recent KangaNews DCM conference there was what seemed universal agreement that spreads were attractive at current levels.  It’s like a bunch of kids deciding whether to jump off the peer into stormy waters, you go first, no you go first, I’m not going first, you go…etc.  You get the point.  I think we can all agree that spreads are attractive, but investors are still wary of the things that can go bump in the night, falling knives etc…especially investors who are benchmark aware.


  • In financials….“little movement in the curve, aside from the 3y point with the new NAB line settling 1 bp inside of reoffer. Again, we acknowledge the presence of a +105 bps bid at the 5y point but suspect this represents the cares of an index type buyer. We are of the view that the 3y/5y basis remains too flat and the long end of the curve has potential to drift further. Whilst we don’t anticipate any more immediate supply from the majors, as an offshore comp we note recent performance in the Westpac US$ deal has left the 5.25y and 3.25y lines middling at ~BBSW+90 bps and ~BBSW+123 bps respectively. No flow of note on the day.”  The trader’s caution on the +105 bps 5-year level is acknowledged, but, respectfully I would say if there is a bid at +105 bps, and you can hit the bid, then that is the market…in my not-so-humble opinion.   For the record, the most recent 5-year senior line, ANZ’s May-27 line, is quoted on Bloomberg (mid) at +103.7 bps.  In the tier 2 space, no movement of note.  Traders are quoted CBA’s Apr-27 call at +217 bps, yet on Bloomberg is middling +207 bps.  Where you trade it if you were inclined, and could find a buyer / seller is probably somewhere in between.  Rest of the tier 2 curve is unchanged.


  • Major bank 5-year senior vs Bloomberg AusBond Credit Index (FRN)…


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – a modest rally in local bonds, out the back end, mainly on offshore leads rather than any local news or data, although local capex data was weaker than expected (comments below under ‘Macro’), which would have exerted some downward pressure on yields.  ACGB 3-year yields closed largely unchanged at 2.723%, some -40 bps down on recent cyclical peaks (3.125%), which was only three weeks ago.  ACGB 10-year yields closed at 3.203%, down -36 bps from early May peaks.  The month to date rally was very much expected given we thought yields had run too hard and too fast in the face of growth uncertainties stemming from tightening monetary policy.  Current levels are closer to our fair value levels and expect to range trade subject to any data surprises.  No leads of any significance overnight, yields will likely drift sideways today, possibly a touch lower.


  • ACGB 3-Year relative strength indicators…



  • A$ Fixed Income Markets…


Source: Bloomberg


  • Macro – private capex plans (Q1) undershot expectations yesterday, -0.3% QoQ vs +1.5% QoQ consensus estimates, down from +1.1%$ QoQ in the December quarter.  “Firms want to invest, but are pushing out their timelines…capex plans for 2022-23 rose 11.8% from the initial estimate for the year, and are 15.4% higher than the corresponding estimate for 2021-22. The weak first quarter result is clearly not due to lack of demand, but difficulties in execution.  Capex and construction will both hit GDP in Q1. Construction activity and plans were downgraded as rain and supply constraints delayed work done.” (ANZ).  Q1 GDP data is scheduled for release next week (June 2nd), with consensus estimates at +0.7% QoQ (vs +3.4% QoQ in Q4) and +3.2% YoY (vs +4.2% YoY in Q4).


  • Offshore…”the US economy, as measured by GDP, contracted at a 1.5% annual pace in the March quarter (second estimate, survey:  1.3%). Initial jobless claims fell by 8,000 to 210,000 in the past week (survey: 215,000). Pending home sales dipped by 3.9% in April (survey:  2.1%). The Kansas City Fed manufacturing index eased from 25 to 23 in May (survey: 15).” (CBA).  “Trade was the main factor driving down the revision (to GDP). Personal consumption lifted to 3.1%. Prices for core consumer goods (excluding food and energy) lifted 5.1% during Q1, which was stronger than the previous quarter but a tad weaker than expected.” (ANZ)


  • Charts:





Source: Bloomberg, Mutual Limited



Click here 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: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%