Mutual Daily Mutterings
Quote of the day…
“The Bible never says anything about dinosaurs. You can’t say there were dinosaurs when you never saw them. Somebody actually saw Adam and Eve. No one ever saw a Tyrannosaurus Rex.”.…baseball player, Carl Everett
Chart du jour…..QE impact…
Overview…”Stagnation or stagflation… ”
- On the surface, inflation remains a problem. How long a problem is the debateable point. Nevertheless, core US CPI printed higher than consensus expectations, while CPI ex-food and energy was in line. Trimmed mean (excludes largest outlying components in either direction) printed at 30-year highs, an inflation measure that some consider the “most reliable measure of the underlying direction of inflation.” In other relevant news, the Fed minutes indicated the taper gun is cocked, locked and ready to rock. Trigger date is either November (consensus) or December. Net result on the day – stocks gained a touch (I don’t get it), while treasuries bear flattened (makes more sense). Traditionally a bear flattener is the “harbinger of an economic contraction”.
- Talking heads…”Wednesday’s still elevated consumer-price index marks about six-month’s worth of hot inflation data — suggesting that inflation is not as transitory as many investors previously expected…the overall inflation story is being driven by supply-chain disruptions and a swift rise in prices, due to the labour shortage.”
- More on the Fed minutes, which ultimately delivered minimal revelations or surprises. Officials broadly agreed they should start reducing pandemic stimulus sometime between mid-November or mid-December. And, surprise, surprise, they also saw inflation lasting longer, while still being transitory – time will tell, but I’m calling wrong on that one. Some colour on the likely of tapering with officials tossing around an illustrative path featuring “monthly reductions in the pace of asset purchases, by $10bn in the case of Treasury securities and $5 bn in the case of agency mortgage-backed securities.”
- For some context on tapering. The Fed has been buying bonds at a clip of US$120bn a month. At US$15bn a month in tapering, the Fed will end its buying program around July next year (assuming November kick off). By that stage the Fed’s balance sheet will have reached US$8.5 trillion, double what it was pre-pandemic…it’s also equal to around 22% of the S&P 500 market cap, marginally ahead of the post financial crisis average (20%). The pre-crisis range was just 5% – 7%. Just saying…
- Offshore Stocks – despite the fundamental headwinds evidenced in CPI data, and the Fed inching a step closer to moderating the size of the monetary punch bowl, stocks closed higher – although the S&P 500 did slum it in the red-zone for a while in early trading (-0.5%). By days end, a modest rally, and hardly a convincing one with only 57% of stocks advancing. Across the sectors, only two failed to fire, Financials (-0.6%) and Energy (-0.1%). At the top of the tables, it was Utilities (+1.1%), Materials (+0.8%) and Discretionary (+0.6%).
- Local stocks – moderately weaker sentiment on the day, shrugging off early gains in the futures to post a down day. Around 60% of ASX 200 stocks retreated, but only two sectors saw red, however they were the two big ones, Materials (-1.1%) and Financials (-0.6%). At the head of the honour’s roll, we had REITS (+1.5%), Staples (+0.7%) and Tech. ASX 200 futures are up +0.7% this morning.
- Bank of Queensland reported annual results, lodging strong gains in cash earnings, up +83% YoY (but 2020 provided a very low base) to $412m, which was ahead of consensus ($400m). CET1 was solid at 9.8%, up +12 bps YoY. NIM came in at 1.92% – below what I consider to be the benchmark pass-level, 2.00%. On the outlook, management were cautiously optimistic that Australia remains well placed for economic recovery, characterized by further house price rises and solid growth in consumer spending and business investment. They see further NIM, pressure, likely declining 5-7 bps in FY22, as competition continues and the low interest rate environment remains. On the risk side, they expect to maintain a prudent approach to provisioning given the ongoing impact of lockdowns. And lastly, on the ME Bank acquisition, management remain ‘excited’ about the new addition, despite rising costs to improve the small lender’s operations, risk controls, anti-money laundering compliance and customer experience. BEN is trading at a discount to BOQ, 11.5x vs 13.0x (forward PE’s), reflecting their differing growth paths, organic vs acquisition respectively, and perceived execution risks.
- Local Credit – general trader’s comments…”an active day with increased participation from a number of domestic accounts. No negative risk off tones permeating from Asia, though street liquidity remains poor. Bid/offer dispersion remains elevated with a number of part time market makers retreating from the fray”…pffft, despise tourists! Major bank senior curve is +1 – 2 bps wider on the day, with Aug-26’s at +48 bps and the Jan-25’s at +37 bps. Generic three-year spreads are at +33 bps.
- Some activity in tier 2 paper…traders again ”street indigestion starting to weigh on spreads which have enjoyed a month of outperformance versus senior. Some modest selling yesterday, possibly spooked a wave of street offers…. Curves are a few bps wider with the likelihood that spreads remain heavy in the near term. Tier 2 used to be a momentum play, with a small number of domestic players jumping on the pendulum as it swung from one side of a ±20 bps range to the other, this isn’t necessarily the case now. We think that a number of pan Asian accounts who have been out of the office this week may return and see this an opportunity to add”.
- While there is a distinct difference between BEN and BOQ from an equity perspective, in credit you could throw a hankichief over the two…see below:
- Bonds & Rates – a modest pull back in yields yesterday after some fast and furious increases recently, particularly in the three-year part of the curve, -2 bps yesterday, but +36 bps in just over a month. Offshore influences continue with US CPI still running hot, although the market reaction was somewhat muted – treasuries bear flattened (long end lower than front end), with the 10’s +3 bps to 1.54% and 3’s -2 bps to 0.37%. From the Fed minutes, the outtake on the path of rates… “the debate was split as you’d expect — doves emphasizing the shortfall from maximum employment, while hawks citing a more rapid improvement in labour as well as ongoing upside inflation risks.” Nevertheless, rate hike expectations remain elevated with a 25 bps hike now fully priced for September 2022. Rolling 12-month correlations between three-year treasuries and ACGB’s are running close to 100%, so assuming that trend continues today (no reason to expect otherwise), the front of the local curve may give back some, if not all, of yesterday’s modest gains.
- Local Macro –Westpac consumer sentiment index out yesterday…from the horse’s mouth…”despite both Sydney and Melbourne remaining in lock down throughout the last month consumers are relatively upbeat. At 104.6 there continues to be a clear majority of optimists nationally with little difference in the state readings – NSW (103.4); Victoria (105.4); Queensland (105.3) and Western Australia (105.4) all show similar majorities of optimists. This is despite a sharp contrast between the lock down status of NSW/Victoria and Queensland/Western Australia. Consumers in NSW and Victoria are clearly looking towards their states’ reopening as vaccine coverage reaches globally competitive rates. Just over 90% of the eligible population in NSW and 85% of the eligible population in Victoria have now received at least one vaccine dose, 15–20% ahead of Queensland and Western Australia. This theme is best exemplified by the contrast in confidence between respondents who are not vaccinated but intend to be vaccinated – with an index read of 122.0 – and those who are not vaccinated and do not intend to get vaccinated – with an index read of 84.8”
- Offshore Macro – US inflation is still running hot, which was to be expected. US CPI (core) data published last night, coming in at +0.4% MoM (vs +0.3% MoM consensus & +0.3% MoM last) and +5.4% YoY (vs +5.3% YoY consensus & +5.3% last)….at +5.4% the September CPI print matches the largest annual gain since 2008. Ex food and energy CPI came in bang on consensus, +0.2% MoM and +4.0% YoY. Average hourly earnings fell -0.8% YoY. Unprecedented shipping challenges (see bulk shipping index in yesterday’s chart to du jour), materials shortages, high commodities prices and rising wages have driven up costs for producers. Many have passed a portion of those costs to consumers — leading to more persistent inflation. Again, see CPI vs PPI chart from earlier in the week. From last night’s Fed minutes, some nuggets on inflation view (lifted from a Bloomberg review)…“some” participants expressed concern about high spot inflation rates feeding through into expectations, while “several” claimed that it was just pandemic-related stuff driving most of the price rises.
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Scott Rundell, Chief Investment Officer
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