Mutual Daily Mutterings
Quote of the day…
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies”…Groucho Marx
Chart du jour…spread changes
Source: Bloomberg, Mutual Limited
Overview…”all about the Double-D’s…Delta and Data”
- With the Fed keeping the tapering cue in the wrack for another month, stocks reached new record highs again on Friday. The USD dollar dropped (and AUD gained), as did Treasury yields. Oil advanced with intent, and gold was firmer. Commodities gained ground again, +5.7% for the week (Bloomberg Commodities Index), the most since 2009, and reaching a six-year high. With a month now to the next Fed meeting, where tapering will again be in focus, the next risk factors for markets to chew on are likely to come from data prints, and not the Fed itself.
- So, what did the Fed do or say. Powell reinforced the message that it’d be appropriate to start tapering before the end of the year, but they won’t be in a hurry to start raising rates thereafter. The lack of progress on tapering was somewhat of a surprise. Not a knock me to the floor surprise, more a raising of the eyebrows surprise. Debate is now ‘raging’ amongst Fed commentators on whether September is live, or October…some even think as late as November. December is always possible, but that would be abrupt vs the end of year signalling and counter to the Fed’s ‘no surprises’ focus.
- Further takeaways: in his speech, Powell expressed the view that the economy has now met the test of “substantial further progress” toward an inflation objective that had been seen as a precondition for tapering, and that the labour market has made “clear” progress. Note the difference, between the inflation progress and labour progress. The latter is lagging, and here’s the crux, will “substantial further progress” be made in labour markets before inflation starts flashing hot? Powell also said policy makers will be “carefully assessing” data and risks around the delta variant, and stuck to the message that current inflation is transitory.
- Fed speak…. Raphael Bostic was on the wires saying that it’s reasonable to trim bond-buying in October if job gains continue. He sees the first interest-rate hike at the end of 2022. He said delta had not yet had a material impact on the outlook. James Bullard told Fox Business he’s looking for a “relatively rapid” speed of cutbacks, citing a pace of $20bn per month on Treasuries, $10bn per month on MBS. Currently $120bn is being bought per month.
- Offshore Stocks – here’s one you probably haven’t heard, the S&P 500 hit new record highs, again, on Friday. Obviously, a high degree of sarcasm in that statement, but with the Fed holding fire on any formal tapering announcement, equity bulls got their groove on. Almost nine in every ten stocks within the S&P 500 closed higher on Friday. Across the eleven core sectors, nine advanced, led by Energy (+2.6%), Telcos (+1.6%), and Materials (+1.3%). Only Healthcare (-0.2%) really retreated, and even then, it was very modest. On the week, the DOW closed +1.0% higher, lagging behind the S&P 500 (+1.5%) and NADAQ (+2.8%). The EU STOXX (+0.8%) gained ground also. Forward EPS expectations have increased +1.4% over the month and forward PE’s are at 22.3x, well ahead of the pre-pandemic 5-year average of 17.8x (14.3x – 20.1x range). If we snap the fingers and see a return to historical averages, we’re looking down the barrel of a -15.6% correction in the S&P 500 to 3805 from current levels (4509). Not saying that’s on the cards, the Fed is keeping the monetary backdrop accommodative enough right now for that not to happen. However, as recent history has shown, markets are like a toddler with an ice-cream. Try and take it away and there is a tendency for thy dummy is spat squarely across thy room.
- Local stocks – on the eve of the Fed’s Jackson Hole virtual monetary policy hoedown, local markets did very little in aggregate, let’s just call it unchanged. Stocks that rose were equal in number to stocks that retreated, and across the eleven main sectors, five fell, and six gained. Leading the charge at the top we had Industrials (+1.1%), Utilities (+0.7%) and Healthcare (+0.6%). At the other end of the spectrum, we had Discretionary (-1.6%), Tech (-1.2%) and Materials (-0.5%). The local index has been in a reasonably tight trading range since the beginning of the month, 7392 – 7628, and was able to claw out very modest gains over the week (+0.4%). These gains came despite consensus aggregate forward EPS figures declining -2.1%, from $427 per share to $418 per share (but forward EPS expectations are up +16.0% this financial year. Forward PE’s are running at 17.9x, which is ahead of the pre-pandemic 5 year average of 16.2x (14.1x – 18.2x range). If we snapped our fingers and reverted to average, the ASX 200 would be at 6811, or -9.0% from current levels (7488). Futures are indicating modest gains this morning in the ASX 200.
- Offshore Credit – not a lot happening on the issuance front for obvious reasons, the Fed. On the week spreads were mixed globally. US corporates tightened -2 bps, and financials -1 bps. High yield had a good run, -28 bps tighter to +325 bps, but still +30 bps from YTD lows. High yield spreads are well down on pre-pandemic levels. The iShares IBOXX HY Corporate index averaged +404 bps between 2016 and the eve of the pandemic, with a range of +335 – 554 bps.
- Local Credit – not a lot to report here, tone was consistent for most of the week. Didn’t see much movement in major bank spreads, across senior or tier 2 paper at week’s end. The recent NAB Aug-26 senior line closed at +39 bps, -2 bps from issuance levels (+41 bps). The most recently issued tier 2 line, CBA’s Aug-26 call, closed the week at +128 bps, -4 bps from issuance levels (+132 bps). Like life itself at the moment in lockdown, it’s a grind.
(Source: Bloomberg, Mutual Limited)
(Source: Bloomberg, Mutual Limited)
- Bonds & Rates – “bond markets have sold off and steepened a little further on Friday, with moves around 2 bp. Most of these moves were in the overnight session. Yields began the day a little higher and they close the day a little higher. In between, not a lot happened. With the local economy mostly moribund due to lockdowns and the global markets waiting patiently for this evening’s speeches from Jackson Hole, there was very little to move markets during the Australian time zone” (CBA Daily Wrap). The Fed meeting on Friday was pretty much a non-event from a bond perspective, modest moves in treasury yields. US two-year yields dropped -2 bps to 0.25%, while ten-year yields fell -4 bps to 1.31%, which is the middle of the top half of its 30-day trading range (1.17% – 1.36%). None times out of ten ACGB’s follow the beat of the treasury’s drum directionally (over the long term), so we’ll most likely see local yields decline today.
- Offshore Macro – US personal spending growth moderated in July, reflecting a slowdown in outlays for merchandise, while the Fed’s favoured inflation gauge, the PCE Deflator remained elevated. Purchases of goods and services rose +0.3% MoM following a revised +1.1% MoM increase in June. The PCE price gauge climbed +0.4% MoM (in line with consensus) and +4.2% YoY, a smidge more than expected (+4.1% YoY). Consumer sentiment remained weak as inflation concerns linger and the persistent spread of the COVID Delta variant. The University of Michigan’s final sentiment index fell to a near-decade low of 70.3 during August from 81.2 in July.
- Local Macro – a pretty busy week for local data releases. The two most anticipated for mine are July credit growth and Q2 GDP data, although the latter is probably a tad redundant given the country’s two largest economies have been in lockdown for much of Q3. Any trend value in the data is lost, with consensus expecting a contraction of varying degrees in Q3. Private Sector Credit growth is forecast to have advanced +0.5% MoM over July (vs +0.9% MoM in June) and +3.5% YoY for the year to the end of July (vs +3.1% YoY to the end of June). We haven’t seen this annual run rate in credit since March 2019. For what it’s worth Q2 GDP is forecast to come in at +0.5% QoQ (vs +1.8% Q1) and +9.2% YoY (vs +1.1% YoY at the end of Q1). The data likely reflects continued recovery from the effects of last year’s lockdown and highlighting a reasonably robust core economic pulse. This should provide some confidence that when we’re finally freed from our current state of incarceration, the economy should re-engage with that recovery momentum promptly. My concern, and this is more political, is that states – especially Victoria, will find reason to lock the state down again despite an in principal commitment to remaining open once vaccination rates hit 80%.
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Scott Rundell, Chief Investment Officer
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