Mutual Daily Mutterings
Quote of the day…
“Before you judge a man, walk a mile in his shoes. After that who cares?… He’s a mile away and you’ve got his shoes!” – Billy Connally..…
Chart du jour…AU Credit Growth vs GDP Growth
Source: Bloomberg, Mutual Limited
Overview…”muted start to the month…”.
- “Global stocks are starting off the month near record highs, underpinned by a recovery from the health crisis and ample liquidity. Still, a raft of strong readings are stoking concerns of inflation and that central banks will withdraw support earlier than anticipated” (Bloomberg)…thematic du jour, and nothing has really changed, and will unlikely change for the next quarter or two, at least until we have some categorical evidence that inflation is truly transitory as the Fed is pushing, or the sleeping beast has been awakened.
- Lowering the eye’s a bit, a mixed session overnight with European markets firm, which gave US markets a good head start, but as the day wore on US markets quickly retreated, with a very modest value vs growth rotation. Bond yields rose a touch, but remain within recent ranges. US manufacturing data, topped estimates, which fuelled the inflation fear genie. Data also evidencing some weakness in employment figures. Reading the tea-leaves and chicken’s giblets, one gets the sense the economy wants to grow more rapidly, but supply shortages and labour constraints are lingering headwinds.
- Talking heads…”we’re going to see more jobs….it seems awkward to dismiss current data but really it’s not telling us anything we don’t already know. So, it’s really trying to anticipate what data’s going to look like five, six months down the road. I think it’s going to be very, very positive and this engine of growth is going to continue.” Assuming policies remain accommodative, markets should respond accordingly.
- Locally we have GDP data today with consumer spending and the surge in iron ore prices (+28% QoQ) underpinning modest growth in the economy over Q1’2021. Consensus is for a +0.6% YoY gain, up from a -1.1% drop over Q4’2020. Gazing off into the wide blue yonder, further gains are expected to be moderate as fiscal support has eased and the lagging vaccination rate threatens further lockdowns for Covid clusters. Note, the Victorian Cabinet met last night to vote on extending the lockdown, reports are they voted yes.
- Offshore Stocks – European markets gained around +0.8% on average across the main bourses, led by Energy (+2.6%) and Materials (+1.8%), and only one sector slipping into the red, Healthcare (-0.2%). Oil gained on the back of some optimistic outlook statements from key OPEC members, as well as an increase in production levels. With WTI up +2.6%, US energy stocks also rose (+3.9%), but weren’t enough to offset losses elsewhere and the S&P 500 slipped ever so modestly into the red. REITS (+1.7%) and Materials (+1.4%) also gained, while at the other end of the podium, in the ‘loser’s’ corner, we had Tech (-0.4%), Utilities (-0.6%) and Healthcare (-1.6%). E-mini’s are reflecting physicals, DOW up a touch, SPX and NASDAQ down a touch.
- Local stocks – not an optimistic start to the month with generally a down day for the ASX 200 (-0.3%), although the broader index was able to close off its intra-day lows (-0.7%). Almost two-thirds of stocks closed lower, and only two sectors were able to advance – Energy (+1.3%) and Materials (+0.3%). At the bottom of the gene pool, Financials had a dog of a day, down -0.7%, which contributed up to 80% of the broader index’s daily losses, ably supported (kind of), by Healthcare (-0.7%). ASX 200 futures are up a touch.
- Offshore Credit – a modest day of primary activity with US$4.7bn priced in US IG markets, across four borrowers – no deal statistics out yet, but suspect demand remains constructive given spread stability in secondary. In EU IG, a slightly busier day, €6.1bn priced across a handful of deals, with demand solid, reflected in a 2.6x coverage ratio. Spread compression was a little softer than YTD average, -13.5 bps. Synthetics are all tighter with CDX (US) -0.6 bps and MAIN (EU) -0.7 bps.
- Local Credit – trader talk…”a quiet day with RBA the focus for most. Domestic credit remains mostly firm, with flows light but skewed to better buying. The ongoing widening in swap spreads is keeping a portion of the SSA buy base sidelined and we envisage this dynamic persisting in the near term.” Major bank senior moved off the line a touch with the Jan-25’s reported at a basis point tighter on the day (+33 bps), while the rest of the curve remained unchanged. Tier 2 buying continues and the issuance tom-toms are beating with a bank of some significance sounding out investors on a potential tier 2 deal (name withheld to protect the innocent). Nevertheless, the 2026 calls tightened -1 – 2 bps into +127 – 130 bps. Heading down toward the bottom of the capital stack, ANZ announced a $1bn AT1 deal (Capital Notes 6), offering +300 – 320 bps. Not really in our wheel-house, but that looks to be relatively (and historically) cheap capital for ANZ.
- Bonds & Rates – as somewhat expected, yesterday’s RBA Board meeting and subsequent statement provided minimal change to monetary policy settings – although some have picked up on some wording changes, which has been interpreted by some as signalling possible tapering. On the day, a modest rally in yields. The tone of the statement was largely unchanged, with improvement in the fundamental outlook noted, and also the fact that inflation has yet to meaningfully present itself as a threat, within official figures that is…anecdotal evidence notwithstanding. Given the following statement, the July meeting will be closely….”As foreshadowed last month, at its July meeting the Board will consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. The Board is not considering a change to the target of 10 basis points. At the July meeting the Board will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September. The Board continues to place a high priority on a return to full employment”
- Local Macro – a flurry of local partial indicators out yesterday ahead of today’s GDP print, detailed in the Bloomberg table below. One outtake was Company Operating Profits, which fell -0.3% QoQ, a big miss on consensus expectations of +3.4% QoQ, but a meaningful improvement on the -6.6% reported in Q4 2020. The backing data to this is messy given COVID, but ..”sales revenue is clearly up, and up strongly, on increased turnover and higher prices (boosted by the 7.4% jump in the terms of trade). The wrinkle, the tapering of government support is denting profits”. (Westpac)
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907