Mutual Daily Mutterings
Quote of the day…
“Oh, I don’t think I’m a lot dumber than you think that I thought that I thought I was once…” – White Goodman (‘Dodgeball’)
Chart du jour: US inflation expectations …
Source: Bloomberg, Mutual Limited
“Inflation fears easing, perhaps, maybe…probably not?”
- Overview – stocks up, bond yields mixed, commodity prices still rising, macro data constructive, and corporate earnings continue to shine as the post pandemic rebound rolls on. That’s the short version of last night’s action. Now, for some meat…US equities rebounded from a shaky start, but tech stocks extended losses. Macro data continued to reinforce the scale of the economic rebound, with US services providers expanding in April at the second-fastest pace since 1997, and second only to March 2021. Elsewhere, ISM’s measure of services employment rose to 58.8, the highest since September 2018. More fuel for the “inflation-will-be-a-problem” fire with copper and lumber prices rallying, adding to inflation worries. To this end, the five-year breakeven rate – a proxy for the annual inflation rate bond traders expect over the next five years – jumped to the highest level since 2008. Despite rising commodity prices and well documented supply shortages, several Fed officials again were on the wires overnight espousing the Fed’s ability to keep inflation contained and under control. Talking heads…“here’s a fun fact (if you’re long) and a not-so-fun fact if you use commodities as inputs: the Bloomberg Commodity index is experiencing its fastest YoY rise since the Carter Administration (1977 – 1981). True, that is somewhat down to base effects, but shorter rates of change are also at elevated levels. Despite this, our friends in Washington claim that massive stimulus in an economy where profits and wages are already back to their highs won’t stoke inflation.” Still with the inflation theme — sorry, but it seems to be the only narrative in town at the moment, and after a long absence, it has its shiny new dancing shoes on and wants to par-tay! Near-term inflation expectations are rising faster than longer term ones, i.e. 2Y and 5Y break even rates exceed 10Y break even rates and the gap has widened in recent weeks (see chart of the day), which suggests traders are slowly coming around to the concept that inflation may be front-loaded, somewhat transitory and not structural. Recall, this is a barrow the Fed has been pushing for a while now…for mine, I’m still sitting on the fence, I have empathy for both sides of the argument.
- Offshore Stocks – mixed bag across US markets, with modest gains in the old school DOW (new record highs) and the S&P 500, while the NASDAQ went marginally backward. In Europe, procyclical sectors partied like it was 1999 (+1.5% – 2.0% across most bourses), which was a similar theme in the US markets, just they had juice boxes rather than a full keg. Within the S&P 500, just over half the stocks rose on the day, while the leading sectors were Energy (+3.3%), Materials (+1.3%) and Financials (+0.9%). Bringing the mood down, we had Utilities (-1.7%), REITS (-1.5%), and Discretionary (-0.4%). E-mini’s reflect the moves of the day, DOW and S&P 500 up a touch, NASDAQ down a touch.
- Local stocks – modest, but broad-based, rally yesterday in local markets – at least sector wise, with only two sectors dragging the chain, Tech (-1.1%) and Discretionary (-0.2%), all others were in the green. At the top of the heap, it was Healthcare (+1.0%), Materials (+0.8%), and Financials (+0.6%) walking tall. The ASX 200 is just a couple of modestly positive sessions away from reaching new all-time highs – the index closed at 7095 last night, just -0.9% shy of the Feb-20 high of 7162. ANZ interim results out yesterday, market not happy, stock down -3.2%. Futures are up a smidge this morning.
- Offshore Credit – primary continues at a reasonable pace, while secondary spreads remain firm…not much more to say really.
- Local Credit – ripping from traders commentary once again…”closing the indicative senior curve unchanged. No reaction to ANZ H1 results with the accompanying commentary acknowledging the prospect of “modest” senior and T2 issuance before September year end. No surprises here with the timing of any new senior issuance likely to be determined by balance sheet growth”. I’m of the opinion that any forthcoming senior A$ issuance will underwhelm in both size and spread, which is a view shared by several traders I’ve spoken to. The curve, as it stands, suggests a 5Y would come at +50 – 55 bps. To draw again from trader’s comments….”we do not anticipate spread widening on the existing curve as any primary issuance is unlikely to provoke material switching”. Yes, what that man said. In the tier 2 space. ANZ has issued c.$4bln YTD of their $4bn – $5bn requirement, or planned issuance for FY’21 target, so don’t hold your breath for any meaningful issuance there any time soon (next 3 months). Also, reading that WBC are punting around a ‘green’ tier 2 deal in Europe, reducing the likelihood of them coming to primary markets any time soon also. Add to the fact that tier 2 curves have come under some recent selling pressing on the expectation of issuance, perhaps we’ll see some buying gas these expectations wane.
- Bonds & Rates – modest movement in nominal yields overnight, with a minor rally in US treasuries (-2.5 bps to 1.57% in the 10’s), while European bonds went the other way on the stronger risk tone in their time-zone (+1.5 bps to +3.5 bps). US break evens were active and the inflation theme continues to evolve. From Bloomberg “two- and five-year break-evens have passed the 10- and 30-year measures since beginning of year, when Democrats took control of the Senate, paving the way for more government spending, and reopening came into focus. That trend is gathering force with surging commodities and companies warning about price hikes and supply-chain bottlenecks”.
- Macro – some commentary from CBA…”the services ISM (US) printed very strongly. The ADP employment report – a not very reliable guide to Friday’s non-farm payroll report – fell modestly short of expectations after taking account of prior revisions. Nevertheless, non-farm payrolls is on track to expand significantly tomorrow (somewhere between 800,000 and 1,000,000). While many US labour market indicators are certainly improving, the issue for the FOMC is do they have enough indicators improved by enough to start a discussion about tapering asset purchases. We judge not yet”. And this “RBA deputy governor Guy Debelle speaks about ‘monetary policy during covid’ (7pm Sydney time). We expect his speech to be largely backward looking. We also expect him to be asked in the Q&A about possible changes to yield curve control and the next quantitative easing program. But we do not expect Debelle to pre-empt a decision the RBA Board has said it will make at its July meeting.”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907