Mutual Daily Mutterings
Quote of the day…
“I know worrying works, because none of the stuff I worried about ever happened” – Will Rogers..…
Chart du jour…global credit spread changes
Source: Bloomberg, Mutual Limited
Overview…”range bound, consensus inflation priced in…”.
- US and UK markets shut overnight. US futures slipped along with European stocks. Investors await fresh catalysts to signal likely inflation magnitude and trajectory and in turn direct their marginal investment dollar, or even core dollar for that matter. Later in the week we have US jobs data, which is likely the next ‘key’ data point to potentially colour investor risk appetite. Consensus expectations are for +650K jobs to have been added vs +266K last month, and the unemployment rate to have dropped to 5.9% (from 6.1%). Any meaningful overshoot will likely fuel Fed tightening expectations, and cause a risk off tone, with stocks to ease and bond yields to rise.
- Oil climbed as OPEC and its allies forecast that inventories will fall sharply this year if the group sticks to its plan. Gold headed for the biggest monthly advance since July and most industrial metals gained.
- Chinese couples are being encouraged to get busy between the sheets. The government will now allow couples to have a third child. Up until 2016 Chinese couples were restricted to one child to control population growth, but the restriction was lifted to two to offset slowing birth rates and an aging population. That policy is being relaxed again. China has 1.4 billion people, or around 18% of the world’s population, the largest in the world.
- The OECD released their latest global economic forecasts US GDP is forecast to grow +6.9% YoY for 2021 and +3.6% in 2022, while PCE (inflation measure) is forecast to hit +2.9% YoY for 2021 and +2.6% YoY for 2022. Unemployment is forecast to reach 5.6% for 2021 and 4.3% for 2022. Australian OECD forecasts look broadly similar to local consensus numbers, although there is a decent gap between consensus GDP and OECD forecasts, with the latter expecting +5.1% YoY in 2021 (vs +4.5% YoY consensus) and +3.4% YoY in 2022 (vs +3.2% YoY consensus). CPI is forecast to reach +2.0% YoY for 2021, before dropping to +1.6% YoY in 2022 (broadly in line with consensus). Lastly, the Paris based economists expect unemployment to reach 5.5% for 2021, falling to 5.0% in 2022, vs consensus of 5.5% and 4.8% respectively.
- Offshore Stocks – nothing done in US physicals with the Memorial Day holiday, but futures were down -0.25% on average across the DOW, SPX and NASDAQ. In European trading the STOXX 600 eased off the gas, down -0.49%. Utilities (-1.1%) was the main drag on the back of Endesa (-5.7%) falling, which was impacted by reports the Spanish government is preparing to curtail windfall profits for power producers. Banks (-0.40%) eased a touch, with Deutsche Bank falling after the Fed admonished the Teutonic bank that its compliance programs weren’t adequate.
- Local stocks – the ASX 200 failed to maintain the rage from Friday’s strong showing, opening initially on a reasonably firm footing, but slipped into the red within the first hour of trading. I couldn’t see anything specific to drive the change in tone other than perhaps uncertainty around the RBA meeting today, with talk of early tapering discussions perhaps. US E-mini’s were a touch up on the day, so no real offshore influence of note. It could’ve been the lockdown SNAFU in Victoria, which is already getting old and given the rising number of cases, I seriously doubt we’ll be out on parole come Friday. In the end, the ASX 200 was down -0.25%, with 52% of stocks in the red and only two sectors up on the day, of any note, those being Healthcare (+0.5%) and Materials (+0.2%). At the other end, Energy (-1.6%), Tech (-0.9%) Financials (-0.6%), and Industrials (-0.7%) all cast a shadow across the day. Over the month the ASX 200 delivered a +1.9% return, boosted by Financials (+4.4%), Healthcare (+3.5%) and Discretionary (+3.5%), while at the shallow end of the pool, we had Energy (-1.8%), Utilities (-7.0%) and Tech (-9.9%). Futures are down -0.43%, pointing to a soft open.
- Offshore Credit – primary markets largely dormant for the day with the US and UK out. Secondary trading also on the sleepy side. Over the month it was a mixed bag performance wise. US IG saw corporates (-4 bps) outperform financials (-1 bp), while in EUR IG, both corporates and financials edge a basis point wider. In the high yield space it was the opposite, with US HY +17 bps wider, underperforming EU HY, which tightened -14 bps.
- Local Credit – traders talk…”yesterday was all about month end with the majority of flow accounted for by index extension trades. We also continue to see accounts add yield and both T2 and longer dated corporates benefited as a result”. Major bank senior paper closed the day and month largely unchanged, with Jan-25’s at +34 bps, and 3-year at +24 bps…actually a basis point tighter on the month for the latter. In the tier 2 space, the 2026 calls closed yesterday a basis point tighter across the NAB, ANZ and WBC lines, all pricing around +128 – 131 bps. Over the month these lines tightened -6 bps to -7 bps. Broadly speaking, A$ credit tightened across the board, fixed and floating, corporate and financials by around -3.5 bps, with 1 bp of that moving coming yesterday. The Bloomberg A$ Credit (Fixed) index generate monthly total return of +0.22%, taking YTD losses to -0.10%. The FRN index on the other hand delivered gains of +0.07% over the month for YTD gains of +0.22%.
- Bonds & Rates – nothing done in US treasuries, markets closed. ACGB 10-year yields inched a basis point or two higher yesterday to close the month at 1.71%, or -4 bps lower over the month. Bonds traded in a 1.63% – 1.81% range, averaging 1.73% through May. The Bloomberg ACGB index (all maturities) delivered total return of +0.28% for the months, partially clawing back YTD losses, which stand at -2.8%. In the Semi space, monthly returns were +0.26% and YTD losses have eased back to -2.1%. Consensus expect 10-yeay yields to hit 1.78% by month end, so not too far away from current levels, and by the end of Q3’21 consensus has 10-year yields higher at 1.95%.
- Macro – private sector credit growth (RBA data) for April released yesterday, total credit rose+0.2% MoM vs +0.4% MoM consensus, and +0.4% MoM in March. Annual data saw growth of +1.3% YoY vs +1.4% YoY consensus and +1.0% YoY as at the end of March. APRA banking stats also out yesterday, which highlighted cash and deposits with financial institutions retreated from recent high levels, reducing by $4.9bn or -2.0%, likely reflecting fewer ADI funds being placed with the RBA. Deposits grew again, with deposits from financial institutions and households, increasing by $4.5bn or +1.0% and $3.7bn or +0.3%, respectively. Lending assets grew +0.2% MoM, led by owner-occupied (+0.6% MoM) and Investment Lending (+0.3% MoM). Business lending assets grew +0.1% MoM.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907