Mutual Daily Mutterings
Quote of the day…
“If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it.…” – W. C. Fields
Chart du jour: there is a god, booze prices falling…!
Source: Bloomberg, Mutual Limited
“Fed sits pat, not moving…and you can’t make ‘em…!”
- Overview – the main event overnight for market watchers was the outcome of the FOMC meeting and subsequent comments from Je-Pow (aka Jerome Powell), both of which were largely as expected. On the former, there were no changes of note, policy rates were left unchanged at or near zero and the Fed committed to continued buying of assets each month (US$120bn). As for the economy, “amid progress on vaccinations and strong policy support indicators of economic activity and employment have strengthened.” And, Powell followed up by saying “inflation has risen, largely reflecting transitory factors” and ““we want inflation to run higher than it has been running over the last quarter century.” And what about tapering Jerome, what do you have to say? “It’s not time yet“, but rest assured, we’ll be the first to know when it is. Consequently, pricing of Fed policy tightening in the coming years was pared slightly. And the recovery? Well, that “remains uneven and far from complete.” With a slightly dovish tone and no change to rates, bond yields drifted lower, mainly after Powell’s comments, rather than the meeting outcome per se. Nevertheless, expectations for inflation continued to climb with the 10-year breakeven rate, a proxy for where investors see annual inflation rates over the next decade, almost hit 2.43%, but still at eight-year highs. Ok, so how did markets react to the meeting outcome and Je-Pow’s comments? Stocks did little in the US, a touch softer after being up a bit, but it was marginal. European markets were a tad firmer on the day. Still in the US of A, President Biden unveiled a US$1.8 trillion plan to expand educational opportunities and child care, which will be funded via tax hikes on the wealthy. This follows on from Biden’s $2.25 trillion infrastructure proposal and the $1.9 trillion pandemic relief package he signed into law last month. And don’t forget the COVID pandemic, a rise in cases across some regions globally has cast some doubt over global growth prospects, which is fuel to support policy makers rationale for remaining patient on withdrawing support. US reporting season is approaching half way, with aggregate sales up +10.55% QoQ, while aggregate earnings numbers are still showing some wonky outcomes on Bloomberg, i.e. earnings up over 200,000%.
- Offshore Stocks – more stocks down than up within the S&P 500, 54% vs 46%, while across the various sectors, the winners and losers (participants without medals) were reasonably balanced. The S&P was marginally down in aggregate. In the winner’s circle we had Energy (+3.35%) way out in front, followed by Telcos (+1.21%), and then Financials (+0.28%) and Materials (+0.21%). In the back seat of the bus, with all the rebels we had Tech (-0.96%), Healthcare (-0.35%), and REITS (-0.34%). E-mini’s (futures) are down a touch in aftermarket trading.
- Local stocks – modest gains yesterday in the ASX 200, with a reasonably broad-based rally. More stocks up than down 60% vs 40%, and only one sector, Materials (-1.04%) failing to fire on the day. The top teacher’s pet was REITS (+1.50%), followed by Financials (+1.06%), and Energy (+1.05%). The tone on the day firmed meaningly once the local CPI data came out, which missed to the downside (see below). Futures are up a touch this morning.
- Offshore Credit – not a major influence on local spreads at the moment, and no discernible trend in offshore markets other than primary remains robust and constructive.
- Local Credit – trader talk….”BQDAU taking IOIs for a 5yr FXD and /or FRN deal. IPT of +68 bps giving some insight into where a hypothetical 5yr major bank would trade 2 months before the stipulated end of the TFF. This deal will be closely scrutinised, with the composition of the order book providing insight into the appetite of domestic real money accounts. This particular investor class has been absent from secondary markets of late with most awaiting the onset of major bank senior supply, expected to be later this year. A lot of maturities between now and then, including $3.2bn NAB on the 12th May”. I expected the BOQ deal will likely price around +60 – 63 bps, noting the curve is at +57 bps at the time the IOI went out. Major bank senior spreads were unchanged yesterday, while in the tier 2 space “spreads a touch heavy as the street continues to digest recent sell flow. A fair probability of AUD primary issuance post major bank H1 results in May, which coincides with the maturity of the recently called ANZ 5-26/21 ($700m). Unlikely that we see spreads drift much further from current levels.”
- Bonds & Rates – ten-year treasury yields initially rose on the FOMC outcome, approaching 1.66%, but then fell back once Powell started speaking, to hover around 1.61%, down about a basis point. The crux of the matter being the Fed is not ready to start discussing plans to taper the existing massive bond-buying program. In local bonds yesterday, the ACGB curve ticked +3 – 4 bps higher in early trading, but then clawed it all back once the lower CPI data came out.
- Macro –borrowing some commentary from WBC on yesterday’s CPI print…”softer than expected & it’s not just the government subsidies (Justin Smirk). The +0.6% rise in the CPI was softer than Westpac’s +1.0% forecast and the market +0.9% forecast. And it was not just due to the unexpected decline in dwelling prices. Food prices were 1.0 ppt softer than forecast rising just +0.4% mostly due to much softer fresh fruit & vegetables. There was also the very surprising fall in tobacco prices (-0.6%), not a common occurrence but it did happen in Q1 2019 (-10.7%). All together this overall softness in price inflation was reflected in the modest +0.4% rise in the trimmed mean which saw the annual pace ease back to 1.2%yr to 1.1%yr; the six-month annualised pace lifted very modestly from 1.5% yr to 1.6% yr – still well below the bottom of the RBA’s inflation target band”. The data still includes element of government COVID policies, which is no doubt supressing certain price pressure points. I suspect Q2’21 will be more closely monitored given consensus is at +3.2% YoY – although this is stale and hasn’t been updated to reflect yesterday’s print yet.
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Scott Rundell, Chief Investment Officer
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