Mutual Daily Mutterings
Quote of the day…
“If you die in an elevator, be sure to push the Up button”– Sam Levenson
Chart du jour…Financial YTD risk vs return
Source: Bloomberg, Mutual Limited
Before I step into a the market commentary, some chest beating. I’m pleased to announce that Mutual has achieved a clean sweep of ‘Recommended’ ratings across its Zenith Partners rated funds. Zenith affirmed the Mutual Term Deposit Fund (‘MCTDF’) at ‘Recommended’, upgraded the Mutual Income Fund (‘MIF’) from ‘Approved’ to ‘Recommended’ and rated the Mutual Credit Fund (‘MCF’) for the first time at ‘Recommended.’ A great outcome and just rewards for a lot of hard work from a lot of people across the business.
Overview…”not moving ‘til the Fed does, nope, don’t wanna!”
- Very modest moves in risk assets overnight. European stocks closed with their noses marginally ahead, while US stocks were mixed with the DOW a touch in the red, and SPX and NASDAQ marginally ahead. The recent rally in bond markets lost momentum as investors marked time ahead of this week’s Fed meeting. Yields were higher. Oil was little changed after touching two-year high, while commodities in general were mixed.
- Tomorrow’s FOMC policy statement, Summary of Economic Projections and Fed Chair Jay Powell’s post meeting press conference will determine the direction markets take in the immediate term – new highs in stocks and / or the return of the bond bear market. Specifically, attention will be for any clues around: (i) the start of discussions on reducing the pace of Treasury securities purchases, (ii) changes to the description that higher US inflation reflects transitory factors and (iii) the updated median fed funds rate projections (dot plots).
- Per Bloomberg surveys, expectations are the Fed will reaffirm the pace of bond purchases this week, even if it delivers projections for interest-rate lift-off in 2023. In local markets, consensus is swinging toward a 2023 lift-off in official rates also, with ANZ the latest to join the 2023 party. Noting the RBA has been touting expectations that they wouldn’t tighten until at least 2024 given their outlook and forecasts.
- My base case scenario is for the Fed to maintain their ultra-dovish policy guidance over the near term, giving inflation data more time to mature, if that makes sense. The risk to this view is if the Fed proves to be somewhat less confident on said inflation, and is pressured into tightening sooner rather than later…noting consensus expects tapering to unfold by Q4 this year. If the Fed buys less bonds, yields increase.
- Talking heads…”we’re in a tug-of-war between the understanding that we’re having great economic growth and great earnings growth juxtaposed with the fact that we need to get our head wrapped around what inflation looks like and what it will mean both to profit margins and to the Fed”
- Offshore Stocks – Materials (-1.3%), Financials (-1.0%) and Industrials (-0.5%) weighed on the S&P 500 overnight. Nevertheless, modest gains in aggregate saw the index close at new all-time highs. With almost four stocks down for every one higher in the benchmark it was hardly a convincing rally, with the market dragged higher by Tech (+1.0%) and Telcos (+0.7%). E-mini’s are showing modest gains across the S&P 500 and NASDAQ, while the old school DOW is down a touch. All eyes will be honed in on tomorrow night’s Fed events for guidance on when markets might have their toys taken away from them. A more hawkish Fed, given inflation fears, equates to a headwind for risk appetite and therefore downside pressure on stocks.
- Local stocks – markets were closed yesterday for the Queen’s birthday holiday celebration, but on Friday they closed marginally higher…and at new historical highs. Given last night’s offshore leads – which were very modest, I’m not expecting much in the way of meaningful moves today. And, I doubt we’d see any major positional changes to positioning so close to a Fed meeting, especially one amidst a rapidly evolving inflationary cycle. Speaking of inflation, I read somewhere over the weekend that global shipping costs were up +575% relative to five-year averages. Regardless, steady as she goes for the next couple of sessions – all other things being equal.
- Offshore Credit – from Bloomberg…for US IG ”five borrowers navigated a softer macro backdrop, which may have contributed to mixed primary market pricing performances overnight”. A total of US$9.4bn priced, with books 2.3x over-subscribed and spread compression of -21 bps. New issue concessions were modest at just +2 bps. A solid session in EU IG also, with €8bn priced. Books were 4.1x over-subscribed and spread compression well above average at -32 bps. The tone in offshore markets over the near term will be dependent upon what the Fed says later this week. A more hawkish stance will likely place widening pressure on spreads.
- Local Credit – markets here also closed yesterday. Traders comments from COB last Friday…”very quiet day with a number of factors at play here, the amassing primary pipeline, the SFE contract roll and the lead into a long weekend across most of Australia.” Note, the amassing primary pipeline is not necessarily in the ADI space, rather elsewhere (corporates etc). Major bank senior spreads closed unchanged at +32 bps for the Jan-25’s. In the tier 2 space, from the traders again…”spreads feeling heavy after we saw better selling on the day, albeit in modest size”. Spreads were marked +1.0 bps – 1.5 bps wider with the 31-26’s leading the charge, ranging between +126.5 bps to +130.0 bps – perhaps a whiff of a new deal, or more probably come profit taken post the recent rally. Also, the new MQGAU 31-26 continues to trade well. Tactically (<3 months) spreads are expected to remain range bound, while strategically (3 – 6 months), I’m thinking wider, but not alarmingly so…a healthy widening as underlying yields rise.
- Bonds & Rates – overnight we saw US 10-year treasury yields drifted higher, +4 bps to 1.49% after hitting three-month lows late last week amid the biggest weekly slide since December. Market anxiety about imminent tapering has faded recently, which gave bond markets a bit of a spring to their step, i.e. bond yields fell to the bottom of recent trading ranges. With the Fed meeting this week, the good times could be over. ACGB’s have followed a similar path as they tend to do, although local markets were subdued on Friday, ahead of the long weekend. The obvious next road-marker for bonds is this week’s Fed meeting. If, as some strategists are expecting (see Macro comments below), a more hawkish tone emerges, we could see pressure on bond yields to start marching higher. The Jun-31 ACGB bond is currently yielding 1.44%, and priced at $100.55. Over the past three-months the yield on the ACGB 10-year index has ranged between 1.49% and 1.91%, averaging 1.72%. If we see a three-month mean-reversion, the Jun-31 bond will fall to $97.89, gifting bond holders a -2.7% loss. For obvious reasons, we advocate FRN’s in this environment.
- Macro – all about the Fed this week and the central bank’s take on rising inflation pressures. Consensus seems to be of the opinion the board will sit tight for this time being, at least another month, but the natives are getting restless. What about the ‘average person in the street’, what’s their view of inflation? According to a New York Fed survey, consumer inflation expectations three years out rose to an eight-year high of +3.6% in May, up from +3.1% in April. One-year expectations reached a record +4.0%. Relevant data, which no doubt will be on the agenda at the FOMC meeting. While consensus is expecting no meaningful changes to the board’s policy settings, a growing number of strategists in the market are predicting a more hawkish message to emerge. i.e. with core inflation projections potentially revised up “substantially” for this year and “probably nudged higher for 2022,” leading bonds to sell off again. Australia’s macro calendar follows, with house prices today, and key labour data due on Thursday.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907