Mutual Daily Mutterings
Quote of the day…
“I had to stop drinkin, cuz I got tired of waking up in my car driving ninety” – Richard Pryor
“Running of the bulls…”
“Pfft, inflation…what’s that?”
- Overview – optically the bulls look to be running out of puff. By no means am I suggesting an imminent correction, although I think it would be warranted. Rather, the upward momentum in risk assets over the past couple of trading sessions has waned. Markets have priced in a gilded outlook, with all the good stuff well and truly priced in. Fool’s gold perhaps? US CPI data last night was ‘tame’ relative to history and expectations, raising concerns that perhaps the short-term outlook isn’t as rosy as first thought. Having said that, “investors continue to worry that price pressures are set to increase in the months ahead as Congress passes an aid bill and more vaccinations spur consumer spending”. The problem with this premise, to some degree, is it assumes a return to ‘normal’ spending behaviours, which could be a perilous hypothesis, especially with valuations so frothy. Bond yields fell on the inflation data, while credit maintained its grind tighter. Trump’s impeachment trial got underway in the US Senate. Makes for some amusing viewing, kind of like watching monkeys at the zoo flinging poo at each other.
- Offshore Stocks – talking heads…”the stock market has seen a strong rally over the past six trading days, so I think it’s just using the inflation data as an excuse to take a breather.” It was a mixed bag overnight with European stocks in the red at the close, albeit up for most of the session before falling out of bed as the US came on line (triggered by the soft CPI print). Modest falls across EU markets in the end – nothing more than say half a percent down. The US was down -0.7% within the first hour of trading, again because of the CPI print, but then recovered as the session wore on, closing with its nose marginally underwater and a smidge below historical-highs. Energy led the recovery off the intra-day bottom, +1.8%, as did Telcos (+0.6%), although the latter having the largest influence on the overall index’s performance. Consumer related sectors lagged, as did Tech and Materials, albeit marginally down. Volatility drifted above recent lows, but without any real change to momentum…a pause if you will.
- Local Stocks – an up day for the ASX 200, driven by solid gains in Tech +3.1%, bloody AfterPay again, +4.2%, and contributing around 27% of the ASX 200’s gains. I say ‘bloody AfterPay again’ because I bought it at $15, but sold at $45…it’s now $158. But, as the saying goes, you can’t go broke taking profits. Utilities (+1.8%) and REITS (+1.3%) had solid days, with the latter having the greater influence on the index (16%). Consumer Discretionary was in the naughty corner on its own, down -0.4%, with gaming stocks taking it in the neck…related to the recent Crown snafu no doubt. For those with the Jul-21 (callable) A$ Crown junior sub-notes, S&P placed the company’s ‘BBB’ rating on CreditWatch Negative. Be curious to see if they call. The notes are pricing at $90.29, callable at $100.00 in five months. Futures are suggesting a soft open, -0.4%, with a busy day on the reporting front (ASX, AGL, DOW, TLS, TCL and AMP). So far, a quarter of the ASX 200 has reported, with aggregate sales down -2.8% HoH and aggregate earnings down -34.8% HoH….ASX 200 over the half gained +13.3%.
- Offshore Credit – modest primary volumes in the US given upcoming public holidays (President’s Day, 15 February). Just $1.4bn priced, taking WTD issuance to $15.8bn. European primary has been a little more active, €31.6bn priced WTD. Deal metrics have generally been constructive. Secondary spreads are a smidge tighter, but nothing to write home about. Despite the slight risk off tone across stocks, CDS spreads inched tighter with MAIN -0.4 bps and CDX -0.5 bps, both within spitting distance of three-month lows.
- Local Credit – same-same, no real changes to prevailing themes. The word on the ‘street’ is it was a ‘lighter volume session, given upcoming Regional holidays’. Nevertheless, cash spreads closed unchanged to marginally tighter. Some primary action in the corporate space with Charter Hall mandating banks on either or both 7yr and 10yr benchmark transaction (no price guidance). Be interesting to see how that goes, REITS were the worst performers at the height of the March 2020 sell-off (you could drive a semi-trailer through the bid / offer spread. Still some solid interest in the higher Beta Subs/T2 space as investors chase yield, with better buying reported from domestic accounts. With both the NABHA and A$ WBC Mar-21 callable tier being repaid, technicals remain supportive within the sector.
- Bonds – US treasuries yields eased off the case on account of the ‘tame’ CPI print and the curve bull flattened (i.e. back end rallied more than the front end). ACGB’s are off their recent highs, at least at the back end, while the 5-year part of the curve has developed a bit of a kink over the past week (+10 bps), elsewhere it was a modest bull-flattening. No local macro data of note for the remainder of the week.
- Macro – inflation failed to pick-up as expected in January, with the headline number coming in at +1.4% YoY again. The core reading slowed more than expected to +1.4% YoY from +1.6% YoY. Month on month, consumer prices rose +0.3%, in line with consensus, though the core print was zero, as was the revised reading for December. Wholesale inventories increased a touch, +0.3% MoM vs +0.1% MoM cons. Stripping out the rise in fuel prices, the ex-food and energy measure was flat (vs. est. +0.2% MoM), for a +1.4% annual pace (vs est. +1.5% YoY, prior +1.6% YoY). The notable price drops were for air fares and cars. Fed Chair, Jerome Powell, commented overnight that the US job market remains “very far” away from a full recovery and put the heat on lawmakers to ante-up and support workers. For some context, US employment as at the end of January was nearly 10 million below levels recorded a year ago. Powell further emphasized “the need for fiscal support and played down concerns that the economy might overheat as a result. It could take “many years” to overcome scars from long-term unemployment, and signs of inflation are scarce, he said in signalling monetary policy will stay ultra-easy for some time” (Bloomberg).
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