Mutual Daily Mutterings
Quote of the day…
“@Collingwoodfc requesting all members and fans put your Fig Jam out on your porch as a sign of respect and thanks to Bucks”– @DThomas_39..…
Chart du jour…US CPI vs AU CPI
Source: Bloomberg, Mutual Limited
Overview…”a slow news day…”.
- Markets still oscillating around recent levels, waiting for tonight’s US inflation data, which could provide clues on the path of Fed monetary policy. Stocks eased off the gas a touch, but only modestly so. Treasury yields eased, closing at three-month lows, with the 10-year Treasury yield falling more than -4 bps to below 1.5%, reflecting some easing of inflation fears and strong demand for an US$38bn auction of the notes. Yields are still a long way from near term consensus expectations (10’s at 1.78% by Q1 end). News flow was light and no data of any significance.
- Elsewhere, the recent rally in commodities stalled somewhat with the global recovery path proving patchy to this point, especially with the pandemic still spreading in the developing world. The Bloomberg Commodity Index, which shows returns on a basket of raw materials, was little changed…but up +21% YTD.
- Thematically, it’s a clash of titans, a battle for the ages, it’s good vs evil, night vs day, and Star Wars vs Star Trek. In the blue trunks, the old campaigner, we have investors who believe inflationary risk will be short-lived. And, in the very, very white trunks, the rookie, the young upstart, those punting on inflation proving persistent enough to warrant Fed tightening. For now, it’s been a clean fight with the Fed’s dovish stance keeping markets relatively calm.
- Talking heads…“even if inflation comes out a little higher than Street expectations tomorrow, the Fed isn’t going to change its path…there’s a lot of wait-and-see going on and really just thinking it would take a lot to really surprise markets.”
- As an indication of how slow a news day it was overnight, I’ve elected to include this globule of social irrelevance. For the ‘look at me’ crowd in the US, a day to rejoice. President Biden last night revoked former President Trump’s ban on TikTok (and WeChat). Instead, Biden ordered a review of software applications from foreign adversaries that could pose a risk to sensitive American data.
- Offshore Stocks – after a couple of sessions of lower-than-average volumes, a return to ‘normal’ last night. Mixed across European markets, but again moves not meaningful. In the US, two thirds of the S&P 500’s stocks closed lower, and seven of the main eleven industry groups fell. Financials (-1.1%) represented the most significant drag, followed by Industrials (-1.0%) and Materials (-0.8%). In the winner’s circle, it was Healthcare (+1.0%), Utilities (+0.9%), and REITS (+0.2%). E-mini’s are marginally in the red.
- Local stocks – a modest risk-off session in local stocks yesterday, with just under two thirds of the ASX 200 closing lower on the day. Only three sectors closed higher – really only two of any significance, Utilities (+0.4%) and Materials (+0.3%). The rest of the index closed in the red, led by Staples (-1.4%), REITS (-1.0%) and Tech (-0.8%). Futures are marginally in the red.
- Offshore Credit – a modest session in US IG primary markets, with seven deals for US$5.8bn priced. Once again, issuance was dominated by financials and utilities with all borrowers from those sectors. A busier session in EU IG markets, with just under €10bn price, with book cover of 3.6x (strong vs recent ranges) and spread compression of -26 bps, also strong against recent averages. Despite the slightly weaker tone in stocks, CDS markets exhibited a marginally firmer tone.
- Local Credit – a busy day in primary markets yesterday. The main focus, for us at least, was the MQG 10-NC-5 tier 2, which launched at +165 bps, the top end of our expectations with the curve (per our calcs) at +160 bps. With strong demand (a $1.3bn book), in the end MQG priced a $750m deal at +155 bps, which was around the mid-point of our fair-value assessment (+154 – 158 bps). With MQG’s May-25 callable line at +140 bps at the beginning of the day, the new deal offered +15 bps pick up for the extra year’s duration. Rule of thumb, that’s about fair. On the day the May-25 line closed a basis point tighter at +139 bps. Despite some modest selling out of Asia, the new Jun-26 deal performed well on the break, tightening -3 – 4 bps into +151 – 152 bps. Still in the tier 2 space, ANZ launched a 10.25-NC-5.25-year GBP deal on Tuesday night our time, which priced (on an ASW basis) at +137 bps, arguably in line with the A$ major bank tier 2 curve (give or take a basis point or two). Major bank senior and tier 2 paper closed unchanged on the day.
- Bonds & Rates – ahead of tonight’s US CPI print, the US 10-year treasury yield fell as much as -6.3 bps last night, to 1.471%. The yield held below 1.5% after an auction of US$38bn of the notes in the afternoon. The 30-year bond’s yield touched 2.148%, levels last seen in early March. Local bond yields fell again yesterday, down -3 bps, with 10’s bumping along the bottom of recent (Apr-to-now) trading ranges at 1.58%. ACGB 10-year yields are now -34 bps lower than their YTD peak (1.92%), which resulted after an inflation risk triggered +95 bps sell-off from the end of December through to February. ”Being short rates markets has been a lonely game in recent months as yields have not followed the expected playbook higher. Despite the pile on of anecdotes of higher wages, price pressures and the run of not just solid but very strong economic data, yields are lower. The cash build up across the world, the need to invest and the creeping suspicion that we have seen this movie before mean that eventually the trade that paid is the trade of pain” (CBA). So, that’s the back of the curve. The front end has been all about the YCC and the TFF. On this matter, Chris Kent (RBA Assist. Gov, Financial Markets), gave a speech yesterday – copy here – covering said programs and other monetary policy measures. While the speech itself was reasonably generic, and nothing overly insightful, there were some good charts. Have a read if you have time.
- Macro – local weekly ABS payrolls out yesterday, which showed a +0.3% increase over the fortnight to 22nd May 2021. “More importantly, the prior fortnight was revised higher by +0.8% with the relevant weeks that match up to the more important Labour Force survey pointing to a+ 0.3% rise in May after previously pointing to a -0.4% decline” (source: NAB). Still from NAB, Consumer Confidence data out yesterday…”sentiment fell -5.2% to 107.2” through June. “Driving the decline was the Victorian virus outbreak and lockdown with confidence falling a sharp -7.5% in Victoria, compared to confidence being little changed at -1.1% in NSW. Interestingly confidence also fell in QLD (-3.9%) and WA (-9.0%), likely reflecting flow on effects from the Victorian lockdown and state border closures to Victorians. Continuing interstate border closures and thankfully only short-lived lockdowns reinforce the need for the recent ramp up in the vaccination rates and the rollout to continue.” No data of significance today locally, while tonight in the US we have CPI data, consensus forecasts as follows:
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907