Mutual Daily Mutterings
Quote of the day…
“While money can’t buy happiness, it certainly lets you choose your own form of misery.”– Groucho Marx
“Adapt Or Die…”
“Lies and Broken Promises…”
Overview…”More rate hikes, prep for alarmist media hyperbole…”
- Moves: risk off… stocks ↓, bond yields ↑, curve ↔, credit spreads ↑, volatility ↑ and oil ↑….
- A somewhat meaningful risk off move on Friday with US and EU stocks in the red. US non-farm payrolls came out ahead of consensus, which suggest the labour market remains robust enough for the Fed to raise rates quickly. Market-derived odds for a third +50 bps rate hike in September held steady near 85% after the report. For the S&P 500 it was the eighth weekly loss out of the past nine weeks. Bond yields inched higher after the strong labour data and also after Cleveland Fed President, Loretta Mester, once more reiterated her preference for hiking rates by +50 bps this month and next – nothing new there, but markets always seem to react when Fed speakers are out and about. Credit spread moves were modest.
- No easing up of price pressure on the energy front. Crude futures extended their gains on Friday after OPEC+’s hotly anticipated output meeting on Thursday underwhelmed market expectations. Oil has just notched up its sixth straight monthly gain, which is the longest winning streak in a decade – and the rally now looks set to continue as the supply deficit widens.
- A busy week for central banks this week. The RBA meets tomorrow with options markets suggesting a +25 bp hike, although there some respected, and some not so respected, market commentators calling for a +40 bp hike. The Fed meets later next week (June 16th), with Fed speakers gagged until after the meeting, possibly longer. A +50 bp rate hike is on the cards there. Lastly, the ECB is also scheduled to meet, although the Europeans are operating to a different schedule vis a vis hikes. Nonetheless, we’re looking for some guidance at this upcoming meeting on when they might hike and by how much, and plans around asset purchases. US CPI out later this week, which will be watched closely.
- Following JPM’s Jamie Dimon warnings of financial “hurricanes”, other bank CEO’s are getting in on the act…”on Friday, Citigroup Inc. CEO Jane Fraser said a recession feels more likely in Europe than the US due to energy costs, though it won’t be easy for either to avoid. US consumers are healthy with a lot of money in their wallets, she said, even though interest rates, Russia and the threat of recession are dominating conversations right now.” (Bloomberg). It’s not all doom-and-gloom, Bank of America’s head of retail banking has said “we are not seeing any signs of cracks” in the strength of consumer spending. And Goldman Sach’s bigwig, Lloyd Blankfein suggested that some of the gloom was overdone. “Dial back a bit the negativity on the economic outlook,” and while these are “riskier times,” the economy “may yet land softly.”
The Long Story….
- Offshore Stocks – stronger US labour data cemented views that the Fed will likely add another rate hike in September rather than the ‘hoped’ for pause, which underpinned a risk off end to the week. The DOW lost -1.1% on the day, while the S&P 500 lost -1.6% and the NASDAQ lost -2.5%. European markets fared marginally better, down, but less so. Within the S&P 500 some 85% of stocks retreated and only one sector, Energy (+1.4%) had its game face on. At the bottom of the scrap heap we had Discretionary (-2.9%), followed by Tech (-2.5%) and Telcos (-2.4%). Markets will likely range trade from here into the next CPI print later this week, which will likely help firm up views on what the Fed will do at the next FOMC meeting…although it’s generally a given they’ll hike +50 bps.
- Local Stocks – a reasonably buoyant end to the week with the ASX 200 closing +0.9% on the day, and +0.8% on the week. Around 72% of the ASX 200 gained on Friday with almost all sectors getting some meat. Only Discretionary (-0.1%) retreating, while Telcos closed unchanged. Materials (+2.6%) was top of the pops, contributing almost two-thirds of the index’s gains. Tech (+2.3%) followed, and then Energy (+1.0%). Technicals are somewhat indifferent with the index struggling for momentum in either direction. Despite the week leads from offshore on Friday, local futures are suggesting a positive open, +0.6%.
- ASX 200 relative strength indicators…
- Offshore credit – no primary of note given US non-farm payrolls, which is normal. On the week cash spreads were a smidge tighter, while in the synthetic space, CDS was a couple of basis points wider, reflecting the risk off tone set by stocks.
- Offshore credit indices vs A$ spreads…note, A$ spreads are much less volatile than offshore markets…
Source: Bloomberg, Mutual Limited
- Local Credit – again little happening in A$ credit – traders reporting light volumes and general cautiousness across the board. The most recent major bank senior 5-year paper, the WBC May-27 is quoted at +101 bps (vs +105 bps at issuance), while the most recent 3-year senior line, NAB’s May-25 is quoted at +85 bps (vs +90 bps at issuance). Tighter on the week by a few basis points. I called the peak recently in major bank senior at +105 bps for 5-year money, which to date is working in my favour. I did have some pushback from a reader – also former colleague, who questioned the call given the major banks large TFF refinancing requirement and offshore spread differential (vs A$spread). I acknowledge the risks, and would assign a reasonable probability that they eventuate into a widening headwind in time, but over the near term I’m sticking to my guns. The big-fat caveat to this view is ANZ…we’re hearing on jungle-drums they might be coming to market with an A$ deal, and with recent deals coming with some sizeable new issue concessions, my prediction is at risk. In tier 2, again nothing new to add. The recent CBA Apr-27 call is quoted at +212 bps after hitting wides of +223 bps recently. Macquarie Bank’s recent tier 2 deal is quoted at ASw+253 bps for the fixed line (vs +270 bps at issuance), while the floater is at BBSW+265 bps, both performing well.
- Performance wise, our universe of credit, our sandpit if you will, continues to outperform all comers in the fixed income space, i.e. floating rate notes. The Bloomberg AusBond Credit Index (FXD) closed the week -0.88% lower, taking the index’s YTD losses to -6.93%, the worst year to date performance as at the end of May in the history of the Australian credit market. Before 2021, when the index returned -1.63% for the full calendar year, the index had never generated a negative return. With underlying bond yields rising and spread widening, the fixed index has had a torrid time. As has ACGB’s and Semi’s (see below). And while FRN’s have delivered negative returns also (+0.04% last week and -0.39% YTD), the relative lack of exposure to duration has seen minimal capital downside. In fact, the income profile of the floating rate note space is only getting stronger. For readers interested in pure FRN funds, please ‘DM’ me as the cool kids say, we offer a range of funds with varying degrees of credit risk in the FRN space.
- Major bank 5-year vs the Bloomberg AusBond Index (FRN)…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – a modest rally to end the week, although over the week yields were higher. With yields higher, the Bloomberg AusBond ACGB Index delivered another negative return for the week, -1.23%, which takes YTD losses to -9.26%. The Bloomberg AusBond Semi Index dusted -1.35% on the week, taking YTD losses to -9.17%. US treasury yield inched higher on Friday, +2 bps across the 2-year and 10-year, which might cause local yields to also move a touch higher. However, ahead of tomorrow’s RBA meeting, we might be in a holding pattern. A rate hike of around +40 bps is priced in (chart below), although strategist expectations range from +25 bps to +40 bps, which would take the cash rate to either 0.60% or 0.75%. My money is on the latter. Statistically, the median cash rate at the end of June is at 0.65% (with a range of 0.35% – 0.85%). Given pressure on prices, both formally in the data and anecdotally, I think the RBA needs to unleash the rolled-up weekend edition of the newspaper to give markets a whack over the beak. Of the market pontificators followed by Bloomberg, 19 out of 32 are predicting a +25 bp hike, while 9 are calling a +40 bp hike. There are a couple at ‘no hike’ forecasters out there, but I’ve never heard of them, so…there is also one calling for a +50 bp rate hike, from a large US bank.
- US Fed speakers entered blackout mode on Friday evening, a period where they are gagged heading into the next policy meeting, on June 16, unless otherwise noted. A pause in the constant reminder of rate hikes might help bond prices rise (yields fall), or so someone on Bloomberg said. It will be interesting to see if this is the case…seems like wishful thinking to me, head in the sand type stuff. If I can’t see (hear) it, then maybe it won’t happen. Cynicism aside, with no Fed snake oil sales people out and about, and a light data calendar to start the week, bonds will likely trend sideways. US CPI will round out the week. And while it might be a market mover, Fed officials won’t be able to comment on it. The ECB meets later this week, which I’ve already touched on above.
- RBA rate hike cycle – market expectations…
Source: Bloomberg, Mutual Limited
- A$ Fixed Income Markets…
- Local Macro – Australian housing finance data came out on Friday, with approvals weakening sharply through April (so ahead of the RBA rate hike), down -6.4% in value terms, materially greater than the -0.3% dip consensus forecast. “Downside risks were on the cards, particularly after the CoreLogic update on Wed showed a big fall in turnover. Indeed, the combination of falling turnover and prices points to even larger declines in finance approvals in the months to come.” Slowing lending growth is an earnings moderator for ADI’s, but also reduces the need for wholesale funding (all other things being equal).
- Offshore Macro – US non-farm payrolls was the main event on Friday with +390K jobs added, well ahead of consensus expectations at +313K. The unemployment rate was flat at 3.6%, but marginally up on consensus expectations (3.5%). Average hourly earnings grew 5.2% YoY, moderating on the prior month’s annual run rate, but in line with consensus. Month-on-month data saw gains of +0.3%, flat to the prior month, but below consensus expectations (+0.4%). “The modest gains in wages in a backdrop where official job openings data remain very high (signalling a tight labour market) is something commentators are looking at in terms of the broader outlook. For now, it highlights that inflation is not being driven by a wage driven cost push, however, with more workers re-entering the market, there is income growth and this increased demand could be a factor lifting prices…” (NAB).
- An alternative perspective…”at first glance the figures are less hawkish than implied by headline payroll gains, as the wage and participation figures suggest an easing of labour supply shortages, which would be a welcome development and ease some inflation pressures on the margin…. It’s probably worth taking a few breaths before reaching any sweeping conclusions based on these figures. They are just one thread in the overall picture, and more data will be required to establish any kind of trend.” (Cameron Crise, Bloomberg)
- Probability of a recession in the US at some stage in the coming 1 – 2 year are running as high as 70% in some models, although most accept that 2022 will be ok, it’s 2023 that poses a problem.
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907