Mutual Daily Mutterings
Quote of the day…
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” – Sam Ewing
“East, sleep, rally, repeat…”
- Overview – another positive risk session in offshore markets overnight, modestly so, with attention shifting, rightly so, from the ‘Reddit Rout’ to reporting season, which offered up a handful of beats across US markets, and better than expected ISM’s (58.7 vs 56.7) and PMI’s (58.3 vs 57.4). US reporting season is a touch shy of the half-way market, with aggregate sales +1.4% QoQ and aggregate earnings +4.8% QoQ. Data on a year ago is sobering, aggregate sales down -3.3% and earnings down -15.7%…and yet stocks are ↑1% (S&P 500) higher than a year ago. Treasuries continued to bear steepen, while commodities continued to drift higher (iron ore ↑1.6%, Brent ↑1.6%). European markets were also buoyed with headlines emerging the form ECB president, Super-Mario (aka Mario Draghi), seeking to form support to be Italy’s next prime minister. On the US fiscal front, President Biden indicated an unwillingness to compromise on elements of his US$1.9 trillion stimulus package, specifically the $1,400 cheques to households, which has seen some push-back from Republicans.
- Offshore Stocks – US stocks advanced again with the S&P 500 now a snifter below all-time highs, which were previously set last month at 3855 (vs 3841 close last night). The rally was relatively narrow however, with a smidge under half of stocks in the S&P 500 closing lower on the day and momentum into the close weaker. The index closed ↓4% off its intra-day highs. Gains in Energy (↑4.3%) and Telcos (↑2.1%) sufficiently offset falls across Consumer Discretionary (↓0.8%), Health (↓0.7%), and REITS (↓0.4%). Volumes on the day were a smidge under rolling 20-day averages and volatility eased for a second consecutive day, back toward post-pandemic lows. In name specifics, Google surged ↑9.1% after topping earnings estimates. Amazon dipped ↓0.7% as CEO Bezos’ announced he was stepping down as CEO. JPM (↑1.4%) and Morgan Stanley (↑0.2%) both issued bullish calls on the financials industry. Shares of GameStop jumped ↑14.8%…cray-cray. European markets were ‘mixed’, in that a couple of indices closed in the red, but in general the tone was modestly positive.
- Local Stocks – another solid rally yesterday, with a lift in bullish momentum buoyed by further gains offshore and a reasonably optimistic speech from RBA Guvna Lowe. The ASX 200 has now passed 6800 and is now at post pandemic highs, but still just under 5.0% below pre-pandemic and historical peaks (7162, 20-Feb-20). Banks drove the rally, up ↑5% and contributing just under half of the ASX 200 gains, followed by Health (↑2.0%, or 22.5% of ASX gains) and REITS (↑2.4%, or 17.7%). If momentum is maintained, which I suspect it will be, the ASX will be sporting new historical highs in coming weeks. Expectations of strong fiscal stimulus out of the US, continued accommodative monetary policy, and declining offshore infection rates should keep the bulls smiling for the near term. Further into the year, I suspect the bears will get an opportunity to strut their stuff, especially as some local fiscal stimulus programs roll-off, or evolve. Despite modest positive leads from offshore, ASX futures are down a touch (↓0.27%), possibly reflecting the new COVID case in Victoria.
- Offshore Credit – modest primary activity on the day, but cumulative volumes building with week to date issuance hitting $40bn in US IG. Deals all well supported and spreads in secondary continue to grind tighter. Not much to say on synthetics, a touch tighter.
- Local Credit – RBA Guvna Lowe addressed the National Press Club of Australia yesterday, talking to a speech simply titled “The Year Ahead”, which included an update on the bank’s macro forecasts (see below). Importantly for local credit players, assuming funding markets remain constructive, the RBA’s Term Funding Facility (‘TFF’) will cease at the end of June. After which banks will once again reliant on deposit and wholesale markets for funding. This is a positive development as it will hopefully loosen up some supply. No change to the bank’s three-year yield control activities, they remain in place. No change in major bank spreads, but as we approach expiry of the TFF (June 30), I would expect the Jan-25’s (currently +24 bps), which will have term to maturity of 3.5 years, to drift toward the TFF funding rate, i.e. 0.10%. So, adjusting for a slightly longer duration, Janb-25’s to reach +12 – 13 bps by the end of June, so ↓11 – 12 bps of tightening over the next 4 – 5 months. Whether coincidence or not, on the day tier 2 paper was hot-property and spreads tightened across the major bank complex. I’m relatively bullish in this space over the near term, spreads should continue to grind tighter and I can see ↓15 – 25 bps of tightening over the next couple of months.
- Bonds – US treasuries drifted higher (yield) with 10’s ↑3 bps to 1.13% (↑22 bps YTD), just a basis-point below post-pandemic highs. EU markets also sporting some red across the screens with yields ↑0 – 2.5 bps higher, and curves bear-steepening. Locally yesterday, a modest-risk on session locally, and a relatively optimistic speech from RBA Guvna Lowe, saw bond yields inch higher, with the 10’s tickling 1.18%, post pandemic highs, while three’s did diddly-squat. ASX futures are pointing to a modest risk off session, which would suggest a modest flattening in the curve. No data of significance.
- Macro – from yesterday’s speech…GDP is expected to rebound 3.5% in both 2021 and 2022 (vs 3.7% & 3.3% cons. respectively), which is quicker than initially expected, i.e. in the first few months of the pandemic. I won’t go into too much detail, the piece (link), and it’s an easy read. Specifics though, unemployment is now forecast to fall to 6.0% by year end (from 6.6% current), although some slowing in employment is expected when the JobKeeper program comes to an end (31 March 2020). Significant spare capacity in the economy and subdued wage growth, inflation is also forecast to remain well below the RBA’s 2% – 3% target range. By the end of 2021 the RBA expect CPI to be 1.25% (vs 1.6% cons) and 1.5% (vs 1.6% consensus) by the end of 2022.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907