Mutual Daily Mutterings
Quote of the day…
“I’ve never lost a game. I just ran out of time” Michael Jordan
Chart du jour…US CPI vs Unemployment Rate
Source: Bloomberg, Mutual Limited
Overview…”No taper yet … ”
- Anyone been on a long drive with children? Most of us have in some shape or form. Anyway, we’re all familiar with the “are we there yet” bellowed from the back seat, usually coming an hour into a five hour plus drive. It’s very much the same with the Fed and tapering, although it’s not the first hour of the journey, its much further down the line, and Powell’s using less fruity language in his response than I usually use…“we’re not there. And we see ourselves as having some ground to cover to get there.”
- The Fed maintained the line overnight, holding interest rates in a range near zero and maintained asset purchases at US$120bn a month until “substantial further progress” was made on employment and inflation. The language on the latter continues to push the transitory line of thinking. The COVID situation warranted a mentioned, “as long as COVID is running loose out there, as long as there is time and space for the development of new strains, no one is finally safe.”
- Taper discussions were held, but no decision made, as expected by most. Game on for another month at least. Talking heads…”the Fed is starting the clock on tapering. It is not happening now or even in September, but expect the pace of asset buying to slowdown late this year or early next.”
- For markets, the Fed offered something for everyone, for the doves and the hawks, which contributed to some interesting intra-session moves. Yields fell initially, then rose sharply, but eventually settled back where they started with a plus or minus 2 – 3 bps intra-day range. Ignoring Europe for the moment, US stocks bounced back from their worst levels of the day (only -0.3%), as the tech-heavy NASDAQ gained and the S&P 500 swung between gains and losses, with the latter (losses) gaining ascendency in the end…only just.
- A new (ish) risk has entered the global narrative. According to Bank of America, credit distress in China is the most significant risk to global credit markets now. A fair point given China is the second-largest USD corporate bond market in the world with $425bn in bonds outstanding and the second-largest domicile of dollar high-yield debt at US$103bn. “And so, when 15% of it is trading at distressed levels, we pay attention.”
- Offshore Stocks – European stocks gained, buoyed by reporting season, and yesterday Chinese markets staunched their recent haemorrhaging, partially reversing some of their recent losses. US markets were mixed, oscillating between gains and losses as markets digested the FOMC outcome and Powell’s subsequent speech. In the end, the DOW (-0.4%) down a touch, the NASDAQ up a touch (+0.7%), and the S&P 500 somewhere in the middle, largely unchanged (-0.02% to be exact). In the S&P 500 some 55% of stocks retreated, and only four sectors were able to advance: Energy (+1.0%), Telcos (+0.8%), Healthcare (+0.4%) and Materials (+0.3%). The back of the bus hoods were headed up by Staples (-0.9%), with Utilities (-0.7%) and REITS (-0.6%) being fellow enablers. E-mini’s are mirroring moves in physicals.
- Local stocks – all pretty much one-way traffic yesterday with 70% of the ASX 200 in the red, and only one sector able to duck and weave enough to get some points on the board, REITS (+0.9%). Everywhere else, it was a sea of crimson. Tech took a nasty gash to the head, down -2.1%, while Energy (-1.4%) was bleeding freely. At the end of the day Telco’s (-1.0%) were also in need of some good stain remover. Futures are up a touch this morning, +0.3%.
- Offshore Credit – pretty quiet given the FOMC, steady as she goes, although the situation in China – as per above – is garnering some airplay, which could threaten high yield spread stability, and in turn may bleed into IG markets if sustained. One to watch.
- Local Credit – after the massive ‘gapping’ in major senior paper yesterday (sarcasm by the way), spreads and curves were largely unchanged for the majors yesterday. Some follow through on the tightening in tier 2, however, with another basis point taken off the table in the 2026 callable lines, now +121 – 123 bps. Trader commentary…”senior spreads unchanged today with the recent tightening of recent days not enticing any sellers. Flow light, circa $50m turnover, with the bulk of this in the front end. Regionals remain better bid, lagging the move tighter in majors which in not unusual. To reiterate a point we made yesterday, we would not expect a new 5yr senior deal from one of the majors to unsettle the prevailing secondary curves of majors or regionals, assuming the prices in the context of our expectations, which is a touch inside DM+50 bps”.
- For what it’s worth on the primary front…by my very simple calculation, the major bank 5-year linear curve is around +33 – 38 bps, with the Jan-25’s (3.5 years), is at +28 bps. From there, final potential pricing comes down to how much of a ‘new issue premium’ investors ‘demand.’ If we use the 10 bps per annum rule of thumb, the likely new issue spread would be around +43 – 45 bps, but that’s under ‘normal’ circumstance, which I’d say are not overly relevant here and now. Keep in mind, the local market has lost some $30bn of FRN paper in the last 18 months through ADI absence (thanks you TFF!). There remains another almost $10bn of major bank maturities over the next 18 months, and demand for paper has subsided. And lastly, offshore markets are cheaper at the moment for the majors – WBC Jun-26 US$ senior deal is swapping back at +33 bps. For mine, based on the existing curve, a new deal should come with +40 – 45 bps initial guidance, but likely price +35 – 40 bps range.
- Bonds & Rates – apologies, took the screen shot too late and daily changes below wiped. Basically, yields fell again, with the Aussie 10-year yields dropping to five-month lows, likely on the expectation the RBA will hold off on it’s planned tapering, and perhaps even tip in more after the NSW government extended the Sydney lockdown a further four weeks as they struggle to contain Delta infection rates. They should really speak to Dan, he locks a state down like no other. He can’t run a quarantine program to save himself, but when there’s a lockdown to be had, ooh, he’s in his element, and don’t worry about viable alternative measures distracting him, nope, ignore’em and lock’em down Danno! As for US treasuries last night, up, down, sideways, and in the end, little change in nominal rates, while real rates rallied -8 bps to be at new all-time record lows (-1.18%). Ten-year break evens are +4 bps higher at 2.40% (month to ta date trade range or 2.24% – 2.41%.
- Local Macro – market’s didn’t budge on the CPI data. I was watching bonds leading into the release and there was a brief +1 – 2 bps spike in 10-year yields, but then reverse that, and more, once the number came out. While the core number was above consensus, it was only just so, and the trimmed mean figures (below) were bang on consensus.
- Offshore Macro – US reporting season is closing in on the half way mark with aggregate sales beating estimates ny +4.7% and aggregate earnings by +19.4%, and no sector has failed to surprise. On the earnings side, 89% of companies reported have beaten estimates, and 91% of companies have reported earnings growth (89% have reported sales growth). US Q2 annualised QoQ GDP due out later tonight, and jobless claims, with consensus expectations for both tabled below:
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907