Mutual Daily Mutterings
Quote of the day…
“Inflation is like toothpaste. Once its out, you can hardly get it back in again”.…Karl Otto Pohl
Chart du jour…had to include this one…
Overview…”wild bonds …”
- Another choppy session in US stocks, while Europe was just moody all day, closing modestly in the red. By day’s end, US markets closed ‘mixed’, with the NASDAQ gallantly fighting a rear-guard action (and hitting record highs), while the S&P 500 tried to keep its head above water, but failed and closed modestly in the red as investors digested earnings reports. Oil slid after reports surfaced that Iran and the EU agreed to restart negotiations on a revival of the 2015 nuclear deal by the end of next month. That means we may be seeing more supply come onto the market soon enough.
- A wild and woolly night for rates. Treasury yields plunged, and the curve flattened, with thee 10’s dropping -7 bps to 1.53%, and down -10 bps at one stage. The moves likely reflecting expectations central banks will begin cutting supply of bonds – the UK Debt Management Office overnight cut gilt supply for the rest of the fiscal year by more than analysts expected. In a week’s time, the US Treasury may announce a cut in supply on the same day the Fed announces the taper. And, the BOC unexpectedly ended its QE program (2Y yields +20 bps), potentially accelerating the timing of its first-rate hike amid inflation concerns.
- Two-year treasury yields closed higher on evolving rate hike expectations, with growing concern the Fed (and other CB’s) are falling way behind the curve. Markets are adjusting to expected normalisation of monetary policy settings with central banks to step away from their more extreme accommodative monetary weapons of mass destruction sooner than previously signalled. In a long-term context, these moves are minor, i.e. the post GFC average for two-year treasuries is 0.91%. However, the big difference now versus then however, is the sheer scale of debt outstanding. Having said that, it’s more a headwind than a hand-break as it impacts the marginal cost of debt, not necessarily the servicing cost of the back book. Nevertheless, credit creation goes hand on hand with economic growth, so rising yields are a headwind in this regard.
- Offshore Stocks – while daily losses on the S&P 500 were modest, the scale of stocks closing in the red was meaningful, just 17% of the index was able to get out the gates on the day. Only two sectors showed any spunk, Telcos (+1.3%) and Discretionary (+0.3%), the latter aided by strong gains in Amazon and further gains by Tesla. With oil puking -2.5% it’s no surprise to see Energy (-2.7%) as the largest soiler of beds, followed by Financials (-1.7%), and Materials (-1.4%). Reporting season continues with 192 / 500 of the S&P 500 now reported. Aggregate sales have advanced +15.1% on the pcp, with 86% of companies reporting growth. In earnings, the aggregate is running at +38.1% growth, on the pcp, with 83% of companies reporting growth. At this stage, only one sector, Utilities, has failed to report aggregate growth across sales or earnings. Against consensus estimates, aggregate sales are up +1.8% and aggregate earnings are up +11.0%. No disappointments on the earnings side, while on the sales side, Utilities have disappointed significantly (-19.0%).
- Some single name commentary form the past 24 hours….”Google parent Alphabet Inc., Amazon.com Inc. and Tesla Inc. pushed the tech-heavy Nasdaq 100 higher for a third day. The S&P 500 and Dow Jones Industrial Average fluctuated between gains and losses after setting closing record highs Tuesday. McDonald’s Corp., and Coca-Cola Co. climbed after positive results. Microsoft Corp. also advanced after upbeat reports late Tuesday. Robinhood Markets Inc. slumped after missing revenue estimates. Visa Inc. and General Motors Co. also declined.” On the Robinhood comment above, some trading statistics published overnight are worth noting. As has been commented a lot in the narrative over the past couple of years, the retail punter, the arm chair expert, has been a key support for stocks. Particularly while buying the dip with their fiscal support payments. Data published by Bloomberg indicates said punters are a shrinking share of US equity trading volumes, 19% of Q3 volumes, down from a peak of 24% in Q1 and an average through 2020 of 20%.
- Local stocks – another session of not doing much at all. A smidge over half of the stocks in the ASX 200 advanced, as did six of the eleven main sectors. Telcos (+1.9%) ruled the roost, followed by Healthcare (+1.1%) and Financials (+0.5%). Further down the pecking order, at the bottom we had Staples (-2.0%), Utilities (-10.2%) and Materials (-1.1%). The damage in Staples coming from a2 Milk (-12.0%) after flagging a slow down in China label infant milk formula sales. Woolworths (-3.2%) was also a drag following a significant drop in quarterly sales relative to the prior corresponding period, down -10% YoY. While offshore leads were modestly lower, I suspect the local market will face more downside pressure given US financials and materials came under particular downside pressure – the local markets two biggest sectors. Futures are down -0.5%.
- Local Credit – trader’s view of the world…”undoubtedly a rates story yesterday as CPI triggered an aggressive flattening of the curve and heightened volatility. Whilst this usually keeps local accounts on the sidelines, yesterday was somewhat of a different story and we facilitated a number of trades for those looking to capitalise on outrights”. Some modest selling in majors reported, but the curve was left unchanged, while in tier 2 “healthy two-way flow and in reasonable size. Activity was led by local real money with two accounts buying and one other selling, predominantly in the 31-26 major bank complex. With the direction of flow having been mostly one way of late, today’s buyers were met with strong offers.” Early 2026 callable lines were a basis point wider at +131 bps, while the rest of the curve closed unchanged.
- Bonds & Rates – the front of the local bond curve was smacked around the head by an overweight and somewhat rancid fish yesterday, I mean this fish had really let itself go. Even before the CPI print, we had three-year yields sporting a +7 bps rise vs the open. The CPI data was in line at the core level, but over shot on the trimmed figure, which sent three-yields parabolic. Yields broke through 1.00% initially, I think reaching highs of 1.02% before drifting back as the day progressed, hovering around 0.94% – 0.97% for much of the afternoon, or up +15 bps. The back end came in for some rough treatment also, with ten-year yields at +1.86%, or +5 bps at one stage before closing at 1.82%, largely unchanged. Back to the front end, the Apr-24 was feeling very much un-loved at 0.208% (+5.5 bps), more than double the RBA’s stated target. Before all the fun and folic, ANZ made the call “we think the 10bp yield target (YT) on the Apr-24 ACGB will remain in place so long as the RBA thinks the cash rate won’t change before 2024… if the RBA brings forward its timing for the first hike, then we think it likely the YT will be dropped, though an alternative is to also bring it forward.” Taking the days action in isolation, and lack of action by the RBA, that latter point must be front of mind. Given the offshore leads, we could see further front-end pain and curve flattening in ACGB’s today.
- NAB, in one of its morning notes today posed the question…”how far away from cash can short end rates trade before tightening begins?” Yesterday’s price action suggests an answer to that question must be getting closer. NAB notes that “the ECB could well surprise tonight at its meeting and reset its policy, typically such a decision is not made in an interim meeting between major quarterly updates and forecast reviews. The December meeting will be more important. Next week is shaping up to be another big one for central bank communication with the RBA, BoE and FOMC meetings all scheduled. The BoE is expected to tighten policy while the Fed will likely announce QE taper. What is probably less clear is the guidance the RBA provides as it provides updated forecasts in the SoMP”.
- Market pricing for rate hikes is charted below, with the change on the week…the first rate hike looks to be around June next year according to market pricing, well shy of the RBA’s 2024 rhetoric. As to specifics of the question, NAB noted “as the market prices in the risk of rate hikes short-end rates drift higher and the spread to cash widens. The bond to cash spread flattens once tightening begins. Back in the mid-nineties the 3-year to cash spread got out to over 350 bps before tightening began but in subsequent tightening cycles the peak in this spread was between 100-200 bps” The spread to cash is around 82 bps for the Apr-24 and +97 bps for the Apr-25.
- Local Macro – AUSTRALIA 3Q CONSUMER PRICES ROSE +0.8% QoQ (EST. +0.8%) and +3.0% YoY (EST. +3.1%). In line with expectations, but driven by a +3.3% QoQ rise in new dwelling, which suggests some of the downside pressure from Homebuilder is starting to unwind. New dwellings accounted for 9.9% of total CPI. Petrol was the largest contributor up +7.1% QoQ, or 4.3% of total. So, at face value, not too alarming, but markets seem to have reacted more on the trimmed figure, which saw a meaningful overshoot. AUSTRALIA 3Q TRIMMED MEAN CPI ROSE +0.7% QoQ (EST. +0.5%) and +2.1% YoY (EST. +1.8%). From the chats….”these data suggest underlying pressure in the nominal side of the economy is building and the outcomes were stronger than markets and the RBA expected”. The data print saw trimmed mean at its highest level since December 2013, and the annual figure above +2.0% hasn’t been seen since 2015.
- Offshore Macro – stealing some commentary from CBA’s FX strategy team…”today’s GDP and PCE deflator are the US highlights (11.30pm Sydney time). The risk is the GDP data shows economic momentum slowed because US consumption stalled in the quarter. However, with interest rate markets focused on the FOMC’s prospective tightening cycle, the PCE deflator will be more important than GDP. Our favourite measure of the US PCE deflator is the trimmed measure. The annualised monthly increase in the trimmed PCE has averaged 3% in the past two months. High US inflation is looking persistent rather than transitory. Therefore, there is room for US interest rates to adjust higher”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907