Mutual Daily Mutterings
Quote of the day…
“A perfect parent is a person with excellent child-rearing theories and no actual children…” – Dave Barry
Chart du jour: long run ACGB 10-year yields …
Source: Bloomberg, Mutual Limited
“Let Them Eat Checks…”
- Overview – a wild day in treasuries on Friday as a materially weaker than expected April non-farm payrolls threw the inflationary cat amongst the transitory pigeons. Consensus was expecting 933K, yet they only got 218K…and the March increase was revised lower by 72K, but wait, there’s more. The unemployment rate inched higher, up from 5.8% to 6.1%. Minneapolis Fed President, Kashkari, had this to say on the report…”we are still somewhere between 8 and 10 million jobs below where we were before the pandemic.” Initial sticker shock on the jobs data saw ten-year yields plunge as much as -10 bps (to 1.464%) before promptly rebounding to 1.565%. Talking heads…”the big downside surprise will likely reinforce the Fed’s dovish bias in the face of percolating inflation data, keeping downward pressure on real yields…the market is clearly still digesting how to interpret the data, whether this was some fluke or seasonal adjustment that will be rectified in coming months or something more concerning.” Treasury yields have been stuck in a rut for the past couple of months, range trading as the collective market continues to debate just how much inflation the central bank will tolerate before pulling the trigger on tighter monetary policy settings. And, if the Fed and its merry band of policy wonks are to be believed, any tightening of policy is well off into the future. However, that hasn’t stopped traders from punting their hard-earned cheddar on the likelihood of yields pressing higher. And, if you look at the failure of bonds to maintain the initial intra-day rally, there’s some solid underlying conviction in the reflation trade. Bloomberg… “the initial rally across the Treasury curve in reaction to the jobs data was accompanied by heavy volume in futures, consistent with a flushing out of short positions. However, the subsequent price action suggests that new shorts were set, at least in the long end, to benefit from curve steepening.” In all this merriment, stocks rose across the board, likely supported by expectations of monetary conditions remaining easy for longer on the back of the jobs report. All this talk about inflation and we have US CPI due out on Wednesday (cons. +3.6% YoY), with a spike expected (pandemic base effect). Also, there is US retail sales, industrial production, PPI’s and number of job openings.
- Offshore Stocks – a generally solid end to the week despite the weaker US jobs report. Both the DOW and S&P closed higher over the week, +2.9% and +2.5% respectively, while the NASDAQ actually fell -1.1%. European markets were also buoyant, up as much as +5.8% in some instances, but averaging +2.0% – 3.0%. Across the week, within the S&P 500, Energy led the gains, +8.9%, followed by Materials (+5.9%) and Financials (+4.2%), while at the other end of the spectrum, losses were modest, Discretionary (-1.2%), Utilities (-1.1%) and REITS (-0.9%). An observation from a Bloomberg piece…”the S&P 500’s forward earnings yield net of the 10-year Treasury rate was 280 bps at the close of trading on Thursday. The last time the spread was this low was in 2007, leaving the index vulnerable to a major shift in risk appetite when the global financial crisis hit. The following year, the S&P 500 plummeted more than 38%.” Yep, time to be cautious, but at the same time we need to recognise the policy backdrop now vs then is materially different. E-mini’s are up.
- Local stocks – modest gains across the ASX 200 on Friday, with four sectors in the red, seven in the green. On the week, however it was a little more balance in sector movements, six down, five up, for a net gain of +0.8%. Materials (+3.9%), Energy (+1.8%), and Financials (+1.8%) all led from the front, while at the bottom of the pile we saw Tech (-10.5%) take it in the neck with a rusty fish fork, most of that being a handful of names including Appen (-21.5%), Nearmap (-19.3%), AfterPay (-18.9%), Altium (-15.0%) and Nuix (-13.3%). Despite the constructive lead from offshore markets, and with e-mini’s up, local futures are marginally in the red.
- Offshore Credit – consistent themes on last week, spreads continue to grind tighter, and primary remains constructive. A new milestone in US IG, with spreads at three-year tights according to Bloomberg indices, with April returns the best since November. Bloomberg “bond investors are again racing to find places to park their cash as spreads across the spectrum plummet amid strong corporate earnings, improving economic forecasts and an accelerating COVID vaccine rollout.” To paraphrase Buffet, probably time to be cautious, when everyone else is so ‘greedy’.
- Local Credit – from the traders…”a typically quiet Friday ahead of US employment data. Major Bank H1 results released this week showcased a trio of enviable capital holdings yet the subsequent lack of secondary market flows is largely attributable to prospect of near-term A$ primary issuance. NAB to retire A$3.2bn of senior paper on Wednesday”…so that’s some cash potentially hunting for a new home. Major bank senior paper closed unchanged on the day and week, with Jan-25’s at +34 bps, and similar in tier 2 space – on the day at least, with 2026 calls pricing +137 – 138 bps. That’s about +2 – 3 bps wider on the week.
- Bonds & Rates – with reference to the RBA’s SoMP (broader details below), market consensus seems to be that within the context of their YCC actions, the bank will maintain its buying activities in the Apr-24 bonds, but won’t extend into the Nov-24 bonds. They’re also expected to expand the buying by an additional $50bn, i.e. taper from the previous two $100bn rounds (each). Official rates are still expected to remain on hold, or that seems to be the consensus, however there is a growing view that this time line could be truncated if the RBA’s growth outlook proves accurate. In the US, treasuries surged briefly on Friday after the US April jobs report came out weaker than expected (consensus), surrendering some of the gains as attention shifted back to inflationary pressures. The weaker data seemed to prompt a repricing to the timing of any Fed tightening, i.e. rate increases, and later than previously priced. Yields were abruptly lower, but long-end rates quickly snapped back on expectations easy monetary policy and fiscal stimulus will ultimately win the day and create price pressures.
- Macro – a reasonably busy week for offshore data, specifically the US and most particularly CPI data, which is due out on Wednesday. April CPI is forecast (consensus) to come out at +3.6%, well above the Fed’s +2.0% target, and well ahead of March figures (+2.6%). If the Fed is to be believed, this is a transitory spike, nothing to see here, move along. Markets think otherwise. Place your bets, place your bets! The main event on Friday, from a local market’s perspective, was the release of the RBA’s latest Statement of Monetary Policy (or ‘SoMP’) – copy here (LINK). The RBA updated forecasts on key economics, with GDP growth increased to +5.25% YoY for 2021 and then +4.00% YoY in 2022. This compares to recent growth averaging +2.5% per annum, i.e. in the five year period (2014 – 2019) leading up to the pandemic. At best the economy grew +2.9% YoY. Unemployment expectations have been reduced to 5.0% at the end of 2021 (vs 5.6% last, March) and 4.5% by mid-2022 and 2023. Despite the strong growth expectations, RBA continues to forecast inflation levels around the bottom of their target range (+2.0% – 3.0% trimmed mean), or +2.0% YoY by mid-2023. Most in the market accept the GDP and unemployment forecasts without too much quibbling. However, on the inflation stuff, market commentators are calling shenanigans on that one. I called in a favour from a former colleague who has tracked and charted the RBA’s success rate with its forecasts, they’re tabled below. Safe to say the RBA is good at calling growth (left hand chart below), but rubbish at calling inflation (right hand chart below).
RBA GDP Growth forecasts vs reality….
Source: CBA Global Research
RBA CPI forecasts vs reality….
Source: CBA Global Research
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907