Mutual Daily Mutterings
Quote of the day…
“I couldn’t repair your brakes, so I made your horn louder…” – Steven Wright
Chart du jour: Australian public net debt & debt servicing…
Source: Westpac, Mutual Limited
Overview…”the future’s so bright, I gotta wear shades…”
- The sell-off in tech stocks broadened overnight, with Energy, Financial and Industrials shares dragged into the mire as investors remain nervous on inflation risks. Nevertheless, markets, in the US at least, closed off their lows with the NASDAQ down over -2.0% in early trading, before closing a smidge in the red as dip buyers emerged. The S&P 500 closed off its lows also, originally down -1.8% early in the trading day, eventually closing down -0.9%. No new or obvious catalysts to explain the recent move – inflation risks and concerns are not new. Tonight’s US CPI data, along with a series of treasury auctions this week will be the likely triggers to either deepen the slight in risk appetite, or arrest it.
- Again, in the face of wavering market conviction around growth vs inflation net benefits, Fed officials did their best to project an image of control. Fed Gov. Brainard said policy makers must show continued “patience as distortions in the post-pandemic boom sort themselves out while the economy is still far from the Fed’s objectives”. With stocks having a case of the wobbles on inflation concerns, bond curves were generally steeper, +2 bps in treasuries and a little more vigorous in Europe, 10Y yields were +5 – 6 bps higher across the board. Elsewhere, the US$ weakened against most of its G-10 peers. The AUD is up, with some forecasts seeing it around 0.85 by mid-2022 on the back of the budget. Oil advanced, while gold was flat. Asian equity futures are mixed.
- The Australian Federal Budget was released last night, with a clear focus on creating jobs and getting the economy back on track post the pandemic. The budget has been described as a ‘spendathon’, with $20.7bn going to business investment incentives, $17.7bn to aged care, $15.2bn to infrastructure, and $7.8bn allocated to & middle-income tax relief. Nevertheless, there is still expectation (hope) that the deficit will fall from $161bn in 2020-21 to $57bn by 2024-25, with peak debt to GDP of 40.9% by 2024-25 vs the prevailing 30.0% ratio (see Chart du jour) – despite the rise in net debt, we’re still well under the likes of the US (~90%) and UK (~105%).
- Offshore Stocks – nowhere to hide last night with a sea of red and just one solidary sprout of green within the US markets, Materials (+0.4%), which eked out very modest gains. But that was it, crimson red everywhere else. Across the S&P 500 82% of stocks closed lower with Energy (-2.6%), Financials (-1.7%) and Industrials (-1.4%) driving the bus. The recent “inflationary risk is on the horizon punching back”, Tech (-0.2%) was actually the second-best performing sector on the day. The carnage was more visceral across the pond in Europe, with markets down 1.7% – 2.5% on average. Futures are in the red.
- Local stocks – the ASX 200 spent less than 12 hours at or around its new historical highs with market’s weaker across the board yesterday. Only one sector was able to eke out some gains, Staples (+0.3%), while elsewhere it was somewhat grim – but still sitting on some healthy YTD gains (+7.7%) . Front and centre in the naughty corner was Tech (-4.2%), followed by Energy (-2.7%), Telcos (-1.4%), and Materials (-1.2%). All up 80% of the ASX 200 constituents felt the wrath of investor selling, closing down. Futures are pointing to a soft opening.
- Offshore Credit – Bloomberg “rising concern that inflation will push up financing costs is prompting a rush of bond issuance to lock in rates globally, with a flurry of offerings in Europe and Asia following a jumbo deal from Amazon.” Bloomberg, again….“companies are taking advantage of still-low rates as rising inflation expectations make real borrowing costs more attractive. A surge in commodities earlier pushed inflation expectations to the highest level since 2006. That rippled into secondary market trading, as yield premiums on Asian high-grade dollar bonds widened 2 to 3 basis points Tuesday, a trader said. But largesse from central banks has kept financing costs still near record lows”
- Local Credit – in a word, ‘quiet’. No change to major bank senior or tier 2 spreads of note. We met with NAB yesterday and when asked the question on senior A$ wholesale funding, i.e. when, NAB advised a deal post June 30 (expire of the TFF) was possible. Tonally, they remain wary of New Zealand’s funding experience, where wholesale funding needs spiked as housing lending demands picked up and deposit balances faded. They don’t want to find themselves in a position of having to hit markets in size over a short time frame. Tier 2 issuance also remains ‘possible’, which was as good as we could get. With regard to provision release, which they were cautious, they’re watchful of commercial property exposures, which is prudent given past experiences (sector wise, not necessarily NAB).
- Bonds & Rates – with the Federal Government opening the cheque book to ensure the economy remains on a level footing, and let’s be honest, runs a little hot, bond issuance will increase. Net issuance (net of cash balances) is forecast to be around $130bn over 2021-22. All other things being equal, increased issuance will send yields higher – given this increased funding requirement, it’s fair to assume RBA QE programs will be extended. Some early post-budget yield forecasts have 3-year bond yields at 0.60% (+50 bps) within 12 months, while 10-year yields are expected to reach 2.30% (+55 bps) by mid-2022, and then rise again to 2.50% by the end of 2022. The AUD is expected to hit mid-80’s by the end of 2022 also. Importantly, the official cash rate is expected to remain unchanged at 0.10% through to the end of 2023. To put the rise in 10-year yields into context, the May-31 ACGB is yielding 1.66% at present. Should an investor buy this bond today, and hold it for a year, and if we assume the above 2.3% yield forecast is correct, said investor would book a loss of -5.7% (excluding coupons, which on this bond are just 1.5%). ACGB 10-year index yield closed at 1.729% yesterday…they’ll open higher on the budget details and offshore leads.
- Macro – growth and employment to be supported by government spending, and by virtue inflation…eventually. Still digesting the data to be honest, but underlying fundamentals of the local economy should continue to trend in the right direction.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907