Mutual Daily Mutterings
Quote of the day…
“Son, if you really want something in this life, you have to work for it. Now quiet! They’re about to announce the lottery numbers…” – Homer Simpson
Chart du jour: US reporting season …
Source: Bloomberg, Mutual Limited
“Run Over By a Monte Carlo…”
“The party rolls on…”
- Overview – stocks up, bonds unchanged to slightly lower (yields), commodities up, oil down, while in credit it’s steady as she goes. Growth expectations, supported by ongoing improvements in data, continue to outweigh inflation concerns, which no doubt is a function of the plethora of stimulus in the ‘system’. The BOE upped its growth forecasts for the UK economy, from +5.0% just a few months ago to +7.25%. Wow! The BOE also slowed the pace of bond buying and expects to end its QE program, all other things being equal, around the end of 2021. Across the pond in the US and the Biden Administration looks to be extending one of Trump’s policies, around limits on US investment in certain Chinese companies, mainly those in the defence and telco space. US jobs data (jobless claims) fell to new pandemic lows, so the macro backdrop continues to firm up – tonight’s non-farm payroll print is expected to reinforce that view. Talking heads…”today’s read is another proof point that we’re one step closer to full economic recovery. As we see some serious momentum building on the jobs front, all eyes will be on how this plays into action taken by the Fed.” Fed speakers were again out and about, but markets weren’t really listening. Dallas chief, Kaplan said he’d like to “begin discussions to talk about tapering sooner rather than later” and the Fed’s employment and inflation targets will likely be met sometime next year. Kaplan’s Cleveland colleague, Mester, has her eye on financial stability risks…hmm, ok, don’t we all? Lastly, Bostic, indicated the addition of 1 million jobs through April was a real possibility, which was super, but he added that the US Economy is still short 7 – 8 million jobs. US reporting season is all but over with 87% of the S&P 500 now reported. Aggregate sales were up +10.3% on the pcp, while earnings are up + 47.6% pcp. Only Industrials saw sales drop (-1.3%), with earnings also down (-6.7%). Utilities is the only other sector sporting some red in the earnings column, down -25.5%. Talking heads…”surely, though, those rising earnings (and forecast upgrades) mean that stocks are “cheaper” than they were before? It’s true that expected future profits explain more of the stock market’s valuation than they did at the start of the year. But in the US at least, equities remain perched on an edifice made of nought but hopes and dreams. In at least some corners of the market, it may be starting to wobble”
- Offshore Stocks – US stocks closed near session highs with the DOW setting a new record. Within the S&P 500, three stocks up for every one down, and all sectors sporting a delightful shade of green, possible a pistachio hue perhaps? Top of the pops was Financials (+1.43%), followed by Staples (+1.32%), Telcos (+1.10%) and Tech (+1.01%). Dragging the chain, but still in positive territory, was Healthcare (+0.07%), Discretionary (+0.32%) and Energy (+0.48%). E-mini’s are up +0.8% – 1.0%.
- Local stocks – a modest off day, down just under half a percent, but it was all one-way traffic with three stocks down for every stock up. Only two sectors were able to keep their heads above water, Materials (+0.78%) and Energy (+0.20%). Dragging the fight down into the gutter was Tech (-3.60%), Telcos (-1.58%), and REITS (-0.95%), although Financials, which represent ~30% of the index, was down -0.67% and had the most significant downside impact on the day. Nevertheless, with e-mini’s up, local futures are in the green, implying a firmer session today. On the banks, NAB reported a significant lift in both statutory profit (A$3.2bn) and cash earnings (A$3.3bn) compared to both the pcp and 2H’20, which was driven by the absence of notable items in the 1H’21 result and a provision release for the period following the significant build in provisions undertaken in the two previous halves, i.e. pandemic related.
- Offshore Credit – Westpac priced a €1bn green EURO tier 2 line overnight, pricing at +105 bps to mid-swaps. The deal is 10-NC-5, with a May-26 call and per my calculations swaps back around +138 bps.
- Local Credit – not a lot to say, very modest volumes reported and spreads were left largely unchanged. The above Westpac tier 2 is interesting in the sense that there appears to be no meaningful price benefit to WBC heading to EURO markets for funding. Westpac’s Jan-26 callable tier 2 line is pricing around +138 bps, so if we adjust for the four-month maturity difference, perhaps a couple of basis points in it. At best it’s a diversifier as Westpac has no existing EUR denominated tier 2 paper outstanding. Elsewhere major bank senior and tier 2 in A$ closed unchanged. With NAB interim results out, hope is building that we’ll see some issuance.
- Bonds & Rates – RBA Dep Gov Debelle spoke in Perth last night, with the title of his speech being “Monetary Policy During COVID”, I haven’t read the speech myself yet, but here’s a copy (LINK) and I’ve lifted some comments from NAB’s morning note…”Debelle said that the May Board meeting reiterated that in its central scenario, the conditions required to be evident before the RBA hikes rates are unlikely to be met until 2024 at the earliest, but they are not beholden to that date. They will be driven by what happens not by being pre-emptive and setting policy from their forecasts from the likes of NAIRU models.” Also, “on the bond purchase program, he reinforced the board’s view that this had produced a net reduction in AU bond yields of 30 basis points than would otherwise be the case. Speaking more generally about asset purchase programs, he said that research suggested that it was the stock of purchases that mattered more, the market likely to make a judgment of the future and how that might flow through to yields”
- Macro – in the above speech, or in Q&A specifically, “asked about inflation and inflationary expectations, he said he didn’t see evidence of rising pressures. He noted that inflationary expectations were only now up to about the bottom of the RBA’s target range and that they don’t see evidence of rising wages but rather reports of some wage pressures only in some pockets of the economy as well as a reversal in prior wage reductions. When asked about medium-term inflation influences, he was not convinced that inflation will be pre-determined by the likes of ageing demographics and falling labour supply (see Goodhart and Pradham’s paper on this here), saying was wasn’t completely convinced by the Goodhart/ Pradham thesis, mentioning other influences such as technology”
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Scott Rundell, Chief Investment Officer
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