Mutual Daily Mutterings
Quote of the day…
“I’m writing a book. I’ve got the page numbers done…” – Steven Wright
Chart du jour: weekly & monthly spread changes…
Source: Bloomberg, Mutual Limited
- Overview – Friday data (US) was constructive, with consumer sentiment and Chicago’s PMI coming out better than expected. Nevertheless, investor sentiment soured a touch with stocks ending the day on a weaker footing. FOMC outcomes and commentary added fuel to the simmering reflation trade, with bond yields inching higher. The Fed see’s inflation as transitory and if it does get a little heated, hey forget about it, we’ve got it covered. Talking heads…”what they’re saying is, we want inflation and growth to run sizzling hot. We aren’t worried about inflation because we can deal with that if we have to…so it’s a free pass to inflationary pressures and pressure on the long end.” Why the softer close, i.e. despite continued buoyancy in data and earnings? As they did around the middle of February, investors are questioning whether the return of inflation will ruin the party and eat into corporate profits. It’s not all one way though, Fed member, Kaplan (non-voter) spoke last week and in contrast to Chair Powell’s recent comments, he is “observing excesses and imbalances in financial markets” and so “at the earliest opportunity I think will be appropriate for us to start talking about adjusting those purchases.” According to a recent Bank of America survey, as referenced on Bloomberg, “accelerating prices – and fears the US Fed will tighten policy to tame them – top the list of money manager’s concerns.” Input costs are rocketing, with a Bloomberg gauge of commodity prices up +15.5% YTD, or +48.1% over the past 12-months. We’ve all seen the anecdotal headlines on this, shipping and transport costs, copper at over $10,000 a tonne, iron ore at $1,200 – $1,300 a tonne (+82% YoY), and oil up +150% YoY (Brent) etc. The question is then, will companies absorb these rising costs (unlikely) or pass them on to their customers (likely), and then the question becomes….is this a once off structural reset, with inflation plateauing after the initial move higher (Fed view), or the start of a more meaningful inflationary cycle with continue prices increases (market view)? No answers here, just questions for now. US earnings season is now past the half way mark, with 60% reported. Aggregate sales are up +11.3% vs pcp, while earnings are up +50.6% vs pcp.
- Offshore Stocks – a soft’ish close to the week in the end, and over the week stocks did little. Some modest gains here, some modest losses there. Friday’s trading saw a fairly broad-based sell-off, with three-quarters of the S&P 500 stocks down on the day, and only a handful of sectors were able to close up – Utilities (+0.76%), REITS (+0.62%), Discretionary (+0.30%) and Staples (+0.04%). The main culprits on the dour mood were Energy (-2.72%), Tech (-1.43%), Materials (-1.07%) and Financials (-0.96%). While the S&P 500 gained only +0.02% on the week, only three sectors were in the red, Tech (-2.12%), Healthcare (-1.90%), and Staples (-0.06%). On the weekly podium were Energy (+3.58%), Telcos (+2.88%) and Financials (+2.38%). Over the month, offshore stocks rose +2.00% – 4.00%, with US markets generally outperforming EU markets, while Asian markets closed lower on the month. Futures are in the red.
- Local stocks – a down day for local markets also, with 69% of stocks closing lower and only two sectors able to keep their noses above water, Utilities (+0.36%) and Industrials (+0.23%). At the back of the bus, we had Energy (-1.74%), Tech (-1.44%), Materials (-1.33%). On the week the index (ASX 200) was down a touch, led by Staples (-3.44%), Tech (-2.26%), and Discretionary (-1.52%). Over the month, decent gains, up +3.46%, let by Tech (+9.68%), Materials (+6.83%), Industrials (+4.26%), and Financials (+3.14%). Weaker leads from offshore is reflected in futures, which are down a touch. Some news flow expected this week, with WBC (today), ANZ (May 5th) and NAB (May 6th) reporting interim results. Equity investors will be looking for provision write-backs, or guidance thereof, as a potential catalyst for further price buoyancy.
- Offshore Credit – a modest week of issuance in US IG markets, with issuance just under US$13bn vs forecasts of US$25bn – US$30bn. Friday was a quiet day. Bloomberg is reporting that 60% of IG bonds raised last week are tighter in secondary, although it hasn’t been all smooth sailing with some wallowing around reoffer levels, some wider. A stronger week expected this week however, forecast at least, with US$35bn expected. It was a buoyant April though, US$110bn issued vs forecasts of US$95bn, dominated largely by the banks (52% of issuance). Projections for May is a chunky US$150bn. European markets were subdued on Friday, but busy over the week with €35.8bn priced, taking April issuance to €152.1bn.
- Local Credit – in the words of one trader, an “underwhelming” end to the month, with “little to disrupt the prevailing malaise.” April was characterised by subdued volumes and spreads generally stuck in a tight trading range, somewhat directionless. Short of a left field negative surprise, interim bank results (WBC, ANZ and NAB) will have very little impact on credit spreads. Speaking of which, major bank senior paper closed the week unchanged on the day, with the Jan-25’s at +34 bps (+1 bps on the week) and the three-years at +25 bps (unchanged on the week). In tier 2 space, continued selling in the domestic space – I can only guess its to make room for primary, and unfortunately for spread stability, the street is “showing some bid-side fatigue.” Ironically, this selling might stay the hand of treasurers considering issuing…might, but unlikely. On the day, the 2026 callable lines were a basis point wider and +2 – 4 bps wider on the week. While we’re at it, the Jan-25’s (senior) closed unchanged on the month, while the tier 2’s (2026 calls) are +4 – 6 bps wider over April.
- Bonds & Rates – back-end yields have come under pressure again with US ten-year yields +9 bps over the last week and a half of April, although on the month are down -11 bps. “As the US economic rebound continues to dazzle, the mood music in the world’s biggest bond market is getting darker” (Bloomberg). The US$12bn iShares +20 Year Treasury Bonds ETF (ticker: TLT) recorded US$1bn of outflows last week, while short interest in the ETF has reached 25% of shares outstanding, which is the highest it has been in four years. TLT delivered investors a +16% total return through 2020 as the COVID pandemic and resulting monetary policy response saw yields plummet. However, YTD the ETF has slumped -12% as markets price rising inflation risk, with scope to fall further given the outlook for yields. It’s not all negative – shorter dated treasury ETF’s are performing well. Talking heads “for those looking at TLT as an equity downside hedge, the belly of the curve can now serve this purpose…if there was to be a macro problem, these hikes would be quickly priced out, and the five-year would generate a capital gain.” Locally, we’ll follow the US’ lead. Tomorrow we have the RBA board meeting, but no change to official rates expected. Later in the week the RBA releases its Statement of Monetary Position (SOMP), which will include an update to its macro forecasts.
- Macro – local private sector credit growth (March, RBA data) came out on Friday, reflecting growth of +0.4% MoM, beating consensus estimates of +0.3% MoM, while annual data reached +1.0% YoY vs consensus +0.8% YoY. Housing credit continues to gather momentum, +0.5% MoM (vs +0.4% in February) and +4.1% YoY. Owner-occupied growth was +0.7% MoM, while investor credit growth gathered some momentum also, +0.2% MoM. Interestingly, personal credit growth turned positive (+0.2% MoM) for the first time in three-years, but remains down -10.7% YoY. This could suggest positive wealth effects from rising house prices.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907