Mutual Daily Mutterings
Quote of the day…
“Son, looks like you’re spending too much time on one subject…” – in response to a player telling a coach that he had four F’s and one D. Simply building on the positives
Chart du jour…bank borrowing vs system credit
Source: Bloomberg, Mutual Limited
Overview…”new highs despite growth miss … ”
- European stocks rose to all-time highs on reporting season results, while Chinese stocks continued to claw back lost ground – following rumours the government will allow local firms to go public in the US. US stocks rose to new all-time highs after GDP data showed strong consumer spending over the second quarter, although overall growth trailed expectations and the GDP price index surged +6.0%, the most since the 1980’s. The miss in GDP was influenced by lower inventory and trade numbers, while investment was much higher than forecast. US jobless claims also came in weaker than expected, adding to the Fed’s concerns that labour is nowhere near pre-pandemic levels, thus their continued dovish tone. Despite the growth miss and jobless data, yields rose on the back of new supply. Oil rose on falling inventories, while base metals and gold firmed.
- Talking heads…”the disappointing jobless claims numbers put some fire-power behind Powell’s comments yesterday, emphasizing that we have a ways to go for the labour market to recover….the miss on GDP only puts a finer point on the fact that growth may be stalling.” To this point, Amazon reported after hours, with a lot of focus in the narrative around how online sales growth came in lower than expected, suggesting that consumer spending is waning. An alternative view is that consumers have ditched the tracky-dacks and the sofa, and perhaps actually stepped out into the real world to do their shopping.
- I like this comment from Bloomberg…“Federal Reserve meetings are steadily becoming Rorschach tests: Chair Jerome Powell says broad words and analysts decide how to interpret them”…seems a pretty apt description of markets at the moment, if it’s not a Rorschach test, it’s buzzword bingo. Recall, a Rorschach test, aka inkblot test, is the one where the shrink shows you an inkblot and you tell them that it looks like a squashed butterfly, exposing some long-supressed trauma resulting in deep seated psychological issues…that’ll be $200 please.
- Private sector credit growth out today, for June, as well as 2Q PPI data. Tonight in the US, we’re focusing on the PCE Deflator.
- Offshore Stocks – another record high for the key US (and European) indices overnight, although old school (DOW) outperformed new school (NASDAQ) as investors punished tech for meeting expectations through reporting season, how unreasonable, more likely investors are realising growth has peaked. Within the S&P 500, three-quarters of stocks strutted their stuff, closing higher on the day. Only two sectors really struggled to get out of bed, with Telcos (-0.9%) and REITS (-0.2%) both hit the snooze button…repeatedly on the day. Materials (+1.1%), Financials (+1.1%) and Energy (+0.9%) on the other hand were pumped and full of the go-go juice, topping the leader board. Similar themes from physicals have flowed through to e-mini’s in after-market trading.
- Local stocks – the ASX 200 closed a smidge below all-time highs yesterday, 7417 vs 7431, and up on the day. With a day left in the month the ASX 200 is sitting on MTD gains of +1.4%, lagging US markets, which are up +1.7% – 2.8% across its three key indices. European markets are on par with the ASX 200, while Chinese markets are still well and truly in the toilet, down -7.2% in the Shanghai Comp, or -8.7% for the Hang Seng. Back to local markets, it was a reasonably broad rally yesterday with 63% of the index closing higher. Tech (+2.6%), Materials (+1.5%) and Healthcare (+0.8%) led from the front, while REITS (-1.2%), Utilities (-0.5%) and Staples (-0.3%) were the only sectors to slip into the red. Futures are up a touch.
- Offshore Credit – lifted the following from NAB this morning… “US primary credit markets had a very busy session with over US$15bn priced. Leading the way was Apple (AA+/Aa1) with US$6.5bn spread across 7, 10, 30 and 40yr tranches. Also issuing in size was health care company Humana (BBB+/Baa3) with US$3bn of 2NC0.5, 5 and 10yr bonds, Synnex Corp (BBB-/baa3) with US$2.5bn of 3NC1, 5, 7 & 10yr and Blackstone (A+) with US$2bn of 7, 10.5 and 30yr deals”…and this “European primary markets remain very much locked into the summer holiday lull and outside the SSA sector, just the one issue priced last night – a €300m 5NC2yr deal from the education services provider, PeopleCert. Looking forward, Macquarie Group has hired banks to hold a fixed income investor update”
- Local Credit – not a lot to add, some activity reported by traders, with reasonably constructive backdrop. No meaningful change to spreads noted, with both senior and tier 2 largely unchanged, except the NAB Nov-25 callable sub-line, which was marked -2 bps tighter. Beyond that, nothing. Just spinning the wheels until we get some supply…and to be honest, I’m not expecting much, in senior at least. The banks simply don’t need it…yet. Circumstances will change if credit growth gets a wriggle on. For now, they’re flush with cash and liquidity.
- Bonds & Rates – if Jerome doesn’t know where bonds are going, what chance do I have…”we’ve seen long-term yields come down significantly…. I don’t think that there’s a real consensus on what explains the moves between the last meeting and this meeting.” A modest steepening on the back of the GDP data overnight, but not a lot in it, +3.5 bps in the 10’s to 1.27%, while the 2’s did little – actual pricing of Fed rate hikes has eased in recent days and weeks thanks to Powell’s soothing words, Delta variants and its insidious spread, and consequently the impact on the strength and path of the recovery. Locally, the situation in Sydney is weighing on sentiment – i.e. keeping bond yields low, not necessarily hindering investor’s love of stocks. Increasingly the street narrative is calling for the RBA to not only halt its planned tapering, but rather to add to its buying activity. WBC the latest to call for the RBA’s buying program to increase to $6bn a month from $5bn, vs the planned tapered amount of $4bn. The RBA meets next Tuesday.
- Local Macro – main point of interest today is the RBA’s Private Sector Credit Growth data, due out at 11:30am. If we’re ever to see the major’s issue again into the local wholesale market, we need credit growth. Perhaps a tad dramatic, but without credit growth, the banks marginal wholesale funding needs are marginal. Consensus is expecting +0.4% MoM for June, flat to May, and +2.4% YoY, up from +1.9% YoY in May. Optically a sizeable YoY jump, but June last year was a grim month with credit growth decelerating as the pandemic was at its worst. Not surprisingly, system credit outstanding and bank borrowing levels are closely aligned, with an R-squared of 0.96 over the past 10 years. How that translates into A$ issuance is a more nuanced and complicated issue (currency and basis rates being key considerations). But, between 2017 – 2019, A$ issuance averaged just shy of A$22bn by the major banks. In 2020 we had $6bn, much of this issued on the eve of the pandemic. Issuance YTD has been just $1.4bn, including a $1.2bn one-year ANZ deal (maturity profile management). The point being, the next deal, as long as its not stupidly priced, will result in an apocalyptic seagull onto a hot-chip spectacle.
- Offshore Macro – US GDP out last night, which on the surface was a miss, +6.5% QoQ vs +8.4% QoQ consensus, but personal consumption data was stronger than expected, +11.8% QoQ vs +10.5% QoQ consensus. US Initial jobless claims came in at +400K vs +385K consensus, but down on the +419K the prior period. Continuing claims rose to 3,269K from 3,236K and consensus expectations of 3,183K.
Have a good weekend.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907