Mutual Daily Mutterings
Quote of the day…
“The way my luck is running, if I was a politician I would be honest” – Rodney Dangerfield
- Moves: risk off… stocks ↓, bond yields ↑, curve ↑, credit spreads ↓, volatility ↑ and oil ↑….
- A modest down day to end the month in offshore markets, which left key US indices on or around where they started the month. The S&P 500 fell 0.6% overnight, but it was a volatile day, and month. During May, the benchmark index surged more than +8.0% after falling within a bee’s bum-hair of a -20.0% drop from a historical record, signifying a bear market. Inflation worries remain the persistent theme weighing on investor sentiment – will it be sustained, will it derail growth, and will it force the Fed to go harder on monetary tightening? May also saw heightened volatility across markets with the S&P 500 plunging more than -3.0% on three separate occasions
- Bond yields were on the march north again, but closed the month below where they started. Swaps show traders have almost fully priced in two +50 bps rate hikes in June and July, with even odds of a third such hike in September. Obviously, any deviation in Fed action, or data signals suggesting possible deviation from the markets road map and we’ll see more volatility across asset values going forward.
- Talking heads…”when you throw-in the likelihood that earnings estimates are going to have go be cut in a significant way as we move through the summer, it emboldens our view that the stock market will have to see lower-lows before the ultimate bottom for this decline is reached.” Cheerful thoughts. And…”“it’s times like these when investors need a crystal ball. We fully acknowledge how tough it is to see the bull case for stocks right now, and a retest of recent lows is certainly possible, but this week we lay out the bull case for the second half of the year. It starts with inflation.”
- Fed speak…”Federal Reserve Chair Jerome Powell is meeting President Joe Biden in a rare Oval office meeting on Tuesday to discuss inflation ahead of US payroll numbers later this week. The meeting follows comments by Fed Governor Christopher Waller on Monday, suggesting the Fed should keep raising rates in half-percentage point steps until inflation is easing back toward the central bank’s goal.” (Bloomberg)
- More evidence of global inflation with Euro-area inflation accelerating to an all-time high, placing pressure on the ECB to pull its finger out and raise rates. CPI rose by a consensus-beating +8.1% in May, driven by food and energy, while the core rate picked up to +3.8%. In other data, the US consumer confidence index dropped in May to a three-month low of 106.4, underscoring the impact of prices on sentiment.
The Long Story….
- Offshore Stocks – a modest sea of red with US stocks failing to sustain a rebound, falling in a volatile session amid concerns over persistent inflation. The S&P 500 declined -0.6%, having fallen as much as -1.3% and risen as much as +0.2%. DOW and NASDAQ were similar, as were European stocks, perhaps a slightly darker shade of red. On the day just shy of 80% of stocks in the S&P 500 retreated with only two sectors able to gain ground, Discretionary (+0.8%) and Telcos (+0.4%). At the bottom of the pile we had Energy (-1.7%), Materials (-1.6%) and Utilities (-1.4%). Over the month the S&P 500 was essentially flat in a straight-line sense, propped up by Energy (+15.0%), Utilities (+3.8%) and Financials (+2.6%). Weighing on the overall index was REITS (-5.1%), Discretionary (-4.9%) and Staples (-4.7%).
- Local Stocks – a reasonably sized down day for the ASX 200 yesterday, dropping -1.0% with around two-thirds of stocks retreating and no sector able to keep its nose above water. The closest to do so was Utilities (unchanged), followed by Staples (-0.2%) and Materials (-0.3%). It was Financials (-2.0%) that did all the damage. While almost all stocks in the sector retreated to varying degrees, there were some notable stand-outs. SUN (-6.4%) copped a belting after being downgraded by Morgan Stanley on climate risks, with IAG (-3.1%) and QBE (-2.3%) caught up in the jet-wash. The majors came under selling pressure with ANZ (-2.8%), CBA (-2.1%) particularly harshly dealt with, while regionals also worse some pain with BEN (-2.3%) and BOQ (-2.5%) materially lower. The selling seems to have come off the back of several bank leaders voicing concerns around the road ahead, particularly exposures to the construction industry and small business’ ability to survive in a rising interest rate environment. From ANZ’s CEO, Shayne Elliot…”there will be pain. Many smaller businesses have never run their business in a time of rising interest rates. The first thing it’s going to do is it’s going to flush out those business models which are not sustainable…there’s no doubt that ultra-low interest rates have supported a lot of businesses that possibly would not have survived otherwise and a lot of those are going to get flushed out.”
- ASX 200 relative strength indicators…
- Offshore credit – it was all about the Yankee issuers overnight (that’s the same as our Kangaroos, just over there) – this included NAB and WBC who both hit the US$ markets for some coin. NAB launched a three-part trade overnight and was rewarded with more than US$3bn (A$4.2bn) in overseas interest ($950m 3Y FXD / $750m 3Y FRN / $1.35bn 5Y). The 3Y line swaps back at BBSW+87 bps, which is in line with A$ markets. The 5Y on the other hand swaps back at BBSW+138 bps, +35 bps wide of where the most recent A$ 5Y deal is pricing. WBC priced a US$1.2bn (A$1.7bn) 5Y covered, which swaps back at BBSW+84 bps.
- Offshore credit indices, weighted average spreads compared to the A$ FRN index…
Source: Bloomberg, Mutual Limited
- Local Credit – traders…”reasonably active end to the month with Primary issuance and two way flow noted in financials and corporates. Sentiment remains weak, but some evidence of burgeoning re-engagement with secondary markets, mostly by offshore real money accounts with domestics happy to cherry pick primary supply.” In the major bank senior space some traders that had stubbornly kept their 5-year marks at +110 bps relented and dropped marks to +103 bps (-7 bps CoD). Sorry guys, but you were pushing the proverbial up hill on that one. Nevertheless, on the month 5-year major bank paper was +18 bps, while in the 3-year part of the curve it was a +20 bp month, closing at +87 bps (-1 bps CoD). Traders note…”nibbling from offshore bank balance sheets and the likelihood that forthcoming senior supply will be raised in offshore markets helped cauterise the drift wider. Leaves the curve looking very flat and we did see ongoing drip buying in 1year paper with the expectation that this may gain momentum. Flows remain on the light side, not helped by a tough month for spreads.”
- The main business of the day was primary, and the issuer was Macquarie Bank Limited with a 10-NC-5 tier 2 line. The deal launched with guidance of ASW/BBSW+275 bps, with a fixed and floating line on offer. Guidance was quite a bit wide of our initial thoughts, which were in the +250 – 270 bps range, a wide range, but that’s the state of markets at the moment, liquidity is constrained and difficult to gauge. Either way, demand was solid with a total book of $1.17bn with demand weighted toward the fixed line, a somewhat rarity in ADI paper. In the end, Macquarie printed a $500m fixed line and a $350m floating line at ASW / BBSW +270 bps. The coupon on the fixed line was a very enticing 6.08%, for 5-year BBB risk…just like the good old days.
- We liked the deal. I mean, what’s not to like? It was attractively priced. Unfortunately, the wide’ish print resulted in a swift, sharp kick to the soft and delicates of major bank tier 2 pricing. On the day traders were quoting CBA’s Apr-27 at +227 bps (+9 CoD), a very chunky +37 bps wider of where it launched (+190 bps) and pricing at $98.402 (-1.6% from issuance). Elsewhere along the curve the 2026 calls are at +211 – 217 bps (+8 – 10 bps CoD), and the 2025 calls are at +201 – 205 bps (+11 – 13 bps CoD). The new MacBank deal is quoted in secondary at +268 bps. Tier 2 pricing remains attractively priced, however the prospect of looming primary and eventuating issuance at attractive spreads is keeping upward pressure on spreads for now. Whether the success of the MacBank deal (in a volume sense) is enough to attract another major tier 2 remains to be seen, but it will no doubt weigh on investors minds for a time. If we have some respite in primary and the world doesn’t implode on itself (i.e. war, famine, pestilence, etc), then there is scope for tier 2 to be begin performing.
- Given yesterday was month end, some monthly performance details. The Bloomberg AusBond Credit Index (FXD) delivered a net loss of -0.58%, with yesterday’s sell-off in underlying bond yields accounting for -0.37% of that loss. Underlying bond yields rose +14 – 23 bps across the curve through May, while spreads rose +12 bps over ASW. YTD FXD credit is down -6.45%. In the FRN space, the index is down -0.08% on the month, or -0.41%. Spreads rose +8 bps, while BBSW 3M rose +46 bps to 1.17%, underpinning a return to ‘normal’ operating conditions for FRN funds.
- On the fundamental front, APRA banking stats out yesterday…borrowing some words from Citi..”updated bank statistics for April showed the continuation of most of the trends we have seen over the past months. Points we would like to highlight include the widening in deposit growth vs. loan growth, contrary to expectations, which has continued into the month with deposit YoY system growth at 10.16% vs. loans at 9.22%. The difference in growth rates has expanded over the last 2 months from its low in February (0.81%) to the current 0.94%. It follows a lag in MoM system growth for the loan market that fell from 0.95% to 0.84% vs. deposits which saw a pickup from 0.93% to 1.09%. ANZ continued to face headwinds in the owner-occupied segment with the only major to record a contraction (-1.64% YoY vs. previous -1.54%).”
- Major bank senior spreads – historical…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – a reasonably aggressive sell-off to end the month. ACGB 3-year yields rise +8 bps on the day and +14 bps on the month, closing at 2.84%, well above its 50D, 100D and 200D moving average. In the ACGB 10-years, yields rose +10 bps on the day and +23 bps on the month, closing at 3.35%. Yields are at the top end of my tactical trading range expectations, and will likely push further out given offshore leads. US 2-year treasury yields rose +8 bps overnight to 2.56%, while 10-year yields rose +11 bps to 2.84%. Over the month US treasury yields fell, down -16 bps in the 2-year and -9 bps in the 10-year.
- Duration managers were probably breathing a sigh of relief heading into month end, with yields trending lower, off from eight-year peaks following the RBA rate hike, only for yields to back up in the last session. As at the end of trading on Monday, the Bloomberg AusBond ACGB Index was down only -0.47% (I say only because YTD average monthly losses have been close to –00%). As of COB yesterday, the index was down -1.00% on the month, so a brutal day. At its worst, intra-month, the index was down -2.42%, which was post the RBA rate hike. Offshore leads suggest the pain for duration managers will continue into the new month.
- A$ Fixed Income Markets…
- Fixed income market monthly returns….
- Local Macro – yesterday…Australia 1Q Company Profits rose +10.2% QoQ vs +5.0% QoQ consensus, reflecting stronger than expected mining profits (up +25.3% seasonally adjusted) while manufacturing profits fell. Notably, wages measures remained subdued rising by +1.8% QoQ overall and inventories rose +3.2% consistent with strong demand. Credit growth (April) ploughed on, up +0.8% MoM (vs +0.5% MoM cons.) and +8.6% YoY (vs +7.9% YoY cons.). It is worth noting the credit growth data pre-dates the RBA’s rate hike, which may take a month or two to be reflected in data. Anecdotally, we have heard from one of the majors, who advised that mortgage applications had slowed since the RBA’s rate hike (which was passed on fully by the banks).
- Today we have Q1 GDP data with consensus at +0.6% QoQ (vs Q4 +3.4%) and +2.9% YoY (vs +4.21% Q4). “From a policy perspective, the strength in the GDP measure of wages will be key. While we’re yet to get all the inputs, today’s data suggest that the RBA’s preferred measure of wider labour costs – non-farm average earnings per hour – rose by a strong 2.6% in the quarter and more than 5% y/y, keeping speculation of a 40bp move at the June meeting very much alive. For Q1 GDP growth, the key partial indicators released today have caused us to lift our expectation for +0.8% q/q from our preliminary +0.6% forecast. Annual GDP growth is forecast to decline to 3.1% from 4.2% in Q4. This is a pretty solid result given the challenges of Omicron, as well as flooding and heavy rain through much of the quarter.”
- AU GDP….
- Offshore Macro – some colour on supply chain issues, which is a core contributor to prevailing inflation and associated concerns. “Manufacturers think it will take longer to get their supply chains fixed than they previously expected. That is likely to lead to more inflation, and more central bank tightening. Some 30.5% of Texas-based manufacturers currently experiencing procurement-related disruptions expect it will take a year or more for the supply chain to repair itself, according to the May Dallas Fed Manufacturing report. That is up from 14.7% a year ago and 25.8% just three months ago. Fed officials may take note of these forecasts as supply chain woes have already amplified inflation to the highest since the 1980s in the wake of the pandemic. In November, Fed Chair Jerome Powell elevated supply-chain reports to a new level after he admitted the Fed missed the mark on inflation by overlooking supply side problems.” (Bloomberg)
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
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