Mutual Daily Mutterings
Quote of the day…
“Don’t wear fur! Did you know, a single fur coat takes fifteen trees, just for the protest signs?” – Emo Philips…
Chart du jour…ACGB curves, MTD change…
Source: Bloomberg, Mutual Limited
“Myopic Risk Aversion…”
Overview…”no real surprises …”
- Stocks closed the week on a firmer footing generally last week, while bond yields steepened a touch on the day. Credit was stable and commodities continued to ratchet higher. It was a busy week of data in the US, all of which suggested, optically at least, that the US recovery remains on course, with Biden’s near US$600bn infrastructure bill additional fuel for the fire – potentially, it’s yet to be passed by the relevant layers of government. The main event on Friday, data wise, was the release of a range of the Fed’s preferred inflation gauges, which continued to accelerate through May.
- Fed speak…Kashkari (Minneapolis Fed) talked the PCE data down, saying “some of the prices we see right now — they’re not a surprise” and he suggested the recent decline in lumber prices indicates that price spikes will now “return down to normal.” Meanwhile, his Boston Fed colleague, Rosengren, warned that rising housing prices could pose a potential risk, though “I’m not forecasting that will happen.“
- The big six US banks are set to announce a range of dividend increases and stock buybacks after they comfortably passed their annual physical by the Fed. The regulator’s stress tests indicated the industry had built a stockpile of excess cash during the pandemic. The banks can now table plans for distributing capital after the market closes tonight, and the clean bill of health suggests payouts could be the largest historically with early street estimates indicating the big-six banks, which include JPM, Bank of America and Citigroup, could return more than US$140bn to shareholders. JPM and peers share price rose +4% – 7% over the week.
- The end of the financial year, for Australia, looms this week, although I doubt it’ll have much impact on markets, perhaps some last minute house-keeping. A handful of second tier macro data prints out this week, locally, including credit growth numbers for May (Jun 30). Consensus expect +0.3% MoM (vs +0.2% MoM last) and +1.6% YoY (vs +1.3% YoY last). Home loan value data is out also (Jul 2), with consensus expecting investor lending growth of +6.0% MoM vs +2.1% MoM last month, and owner-occupied +4.5% MoM vs +4.3% MoM last month.
- Offshore Stocks – value stocks trumped growth stocks on Friday, with DOW (+0.7%) vs NASDAQ (-0.1%), while the quasi-hybrid of the two, the S&P 500 was +0.3% higher. Over the week, US stocks were up +3.4%, 2.7% and +2.4% respectively across the three main indices. On Friday, almost 80% of the S&P 500 rose, while only one sector, Tech (-0.2%), failed to advance. The podium had Financials (+1.3%) taking the gold, while Utilities (+1.1%) and Staples (+0.8%) took the silver and bronze respectively. The S&P 500 value index rose +0.7% on the day, while the growth index was flat – unchanged. Over the month, growth (+4.4%) still has the edge on value (-0.9%). European stocks were moderately higher on the week also. E-mini’s last traded in positive territory.
- Local stocks – a moderately positive session with the ASX 200 up +0.4% on the day, but down -0.8% on the week, and a fraction below all-time highs, which was set almost two-weeks ago. Volumes were around average with almost three-quarters of stocks closing higher and most sectors making ground. Utilities (+1.2%) led the charge on the day, followed by Materials (+1.0%) and Discretionary (+0.7%). Dragging the chain, Staples (-1.1%), Tech (-0.7%) and Healthcare (-0.3%) all failed to fire. Over the week, more sectors down (6) than up (5), with Tech (+3.1%) and Materials (+2.3%) taking the gold and silver respectively, while Healthcare (-4.3%) won the wooden spoon. Financials (-2.7%) also had a tough week. Futures are a touch higher this morning.
- Offshore Credit – a quiet end to the week for US primary action, no borrowers entered the market on Friday, with weekly volume wrapping up at US$21.6bn, in line with projections for about US$20bn. June’s primary haul sits at US$100.8bn with a couple of days to go and with Independence Day approaching, preliminary estimates suggest a subdued week ahead with US$10bn to US$15bn forecasted. Over the week, US secondary spreads were flat to -3 bps tighter in the investment grade space, and similar month to date. In the high yield space, spreads were -20 bps tighter on the week, and -40 bps tighter month to date. European spreads underperformed, closing flat to +2 bps wider in IG and +11 bps wider in HY. Better month to date, -2 bps tighter in IG and -8 bps tighter in HY.
- Local Credit – from the traders…”a very quiet end to the week as Sydney adjusts to more onerous COVID restrictions. Very little appetite from buy side or sell side participants to move risk, spreads unchanged”. Eat, sleep, do nothing, repeat. No change in major bank senior or tier 2 on the week. The Jan-25’s are at +32 bps, while the generic three-years are at +24 bps. In the tier 2 space, the 2026 calls are at +126 – 129 bps and the 2025 calls at +118 – 122 bps. The AusBond Credit Fixed index closed the week +0.4 bps wider, of -0.3 bps MTD with a very tight 2 bps trading range. In the FRN space, spreads are +0.8 bps wider over the week and +1.0 bps wider MTD, and a similarly tight 2 bps trading range.
- Bonds & Rates – the US Treasury curve has re-steepened somewhat after the dramatic post-FOMC flattening the week before with 10’s now back above 1.50%, after hitting tactical lows of 1.43%. The 2’s closed largely unchanged at 0.27%, almost double where they were a couple of weeks ago. Month to date, much of the flattening (bull) action in treasuries has been in the belly of the curve, with 2s – 5s part of the curve +12 – 17 bps higher, while the 10’s are -7 bps lower. Locally, a broadly similar move MTD, although the back end has dropped more with 10’s -12 bps, while in the 3’s, we’ve seen a sizeable +18 bps move, but that is coloured by the realisation by markets that the RBA would not be extending its yield curve control buying from the Apr-24 out to the Nov-24.
- With the Fed dot plots changing last week, and the market reaction that came with it – a meaningful curve flattening, an observation from NAB’s morning note that is worth sharing…”there is no great forecaster of future dots. Since the FOMC meeting there has been much focus on Fed tightening (and RBA) following the revision to the Fed’s dot plot profile (and further gains in Aussie employment). As Powell noted in his press conference though, the Fed’s dots are “individual projections. They’re not a Committee forecast, they’re not a plan” while also noting that “the dots are not a great forecaster of future rate moves” because it is so highly uncertain and “there is no great forecaster of future dots”. Historical data supports these comments.
- Macro – US inflation data late last week was on or around consensus. The PCE deflator rose +3.9% YoY from +3.6% YoY a month earlier and the core measure hit +3.4% YoY vs 3.1% YoY a month earlier. Year on year data was bang on consensus, while the measures dipped month on month, and were a touch below consensus. Household spending was flat, after growing a revised +0.9% in April. Personal income fell for a second month as stimulus checks tailed off. A busy week head for US data this week also, including ISM data (expected to reflect continued US economic expansion), house prices (gains of near +15% YoY) and Non-Farm Payrolls (further drop in unemployment, from 5.8% to 5.7% consensus) on Friday. Locally, we have a range of second tier data, tabled below:
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907