Mutual Daily Mutterings
Quote of the day…
“An escalator can never break: it can only become stairs. You should never see an Escalator Temporarily Out Of Order sign, just Escalator Temporarily Stairs. Sorry for the convenience..…” – Mitch Hedberg
Chart du jour: US 10Y inflation expectations…
Source: Bloomberg, Mutual Limited
Overview…”a tale of two halves …”
- A broadly optimistic close to an otherwise volatile week in markets. Battered from pillar to post over the first half or so of the week, markets steadied as dip-buying emerged mid-week to steady the ship. Both US and EU equity markets closed firmly up on Friday, but on the week still sporting some bruises (↓1% – 2.0%), although some pockets of EU markets were largely unscathed. On the macro front, US data mostly disappointed on Friday, with April retail sales flat and industrial production data missing estimates. Bonds rallied, again another day of cats and dogs getting along, and on the week also, similar trends, both weaker. Commodities closed firmer on the week, and oil was up.
- Talking heads… “the disappointing retail sales numbers shouldn’t really come as a huge surprise given that last month (March) encompassed stimulus money hitting bank accounts…it probably supports the point of view that the dip we experienced this week is a buying opportunity as all sectors march toward full recovery.” As the reflation trade builds momentum, value stocks should trump growth stocks.
- Despite the volatility witnessed last week – the VIX peaked at 28% (from 16%) – market themes remain consistent with prior weeks. Investors continue to balance signs of uneven growth with growing inflation prospects, somewhat confirmed through the week with US CPI surprising to the upside. The $64 trillion dollar question remains, will this spike in inflation be the start of a sustained rise in prices, or as the Fed expects, a transitory blip? I have empathy at various levels with each school of thought, but am reserving judgement. The next couple of month’s data will be very interesting.
- Fed speak (Bloomberg)….”Loretta Mester preached Fed patience while warning data will be volatile as the economy reopens. “We’re in a good place right now with our policy….this is not the time to be adjusting anything.” Inflation will run above the central bank’s 2% target this year, but prices will go down “as some of those constraints on supply ease.”
- Offshore Stocks – focusing on the S&P 500, on Friday a solid and broad-based rally was observed, with 85% of the index’s stocks closing higher, and no sector left behind. On the day, Energy (+3.2%), Tech (+2.1%), and Discretionary (+1.8%) got the party started, while Healthcare, Utilities and Staples were the relative party-poopers, all gaining just +0.4%. On the week, however, it was a bloodier picture. Only three sectors escaped the carnage, Staples (+0.4%), Financials (+0.3%), and Materials (+0.1%). The main purveyors of gore were Discretionary (-3.7%), Tech (-2.2%), and Telcos (-2.2%).
- Local stocks – a positive day in the ASX 200 on Friday, but Materials (-1.2%) was a meaningful drag, albeit the only sector in the red on the day. Tech (+0.1%) and Telcos (+0.2%) rounded out the bottom three. At the top of the leader board, we had Energy (+1.7%), Utilities (+1.4%) and Discretionary (+1.3%). Over the week, the story was a lot different, mirroring some of the moves from offshore. Only two sectors gained, Staples (+1.1%) and Healthcare (+0.8%). At the top of Santa’s naughty list we had Tech (-6.9%), Utilities (-2.5%) and Energy (-1.9%). Futures are pointing to a solid open.
- Offshore Credit – a solid week of issuance and subsequent secondary performance across global credit markets. In US IG markets, around US$42bn priced, with 72% of lines issued trading tighter in secondary. US IG outperformed EU IG, with US indices tighter on the day (-2 bps) and week (-1 bps), whereas EU IG drifted a few basis points wider.
- Local Credit – trader talk…”Friday benefited from constructive tones in SSA’s and Offshore Financials although all in all a quiet end to a quiet week”. More technical support this week in the tier 2 space, with ANZ’s A$700m 21-26 T2 line up for call, which in my mind is a given. From the traders on tier 2…”no trades on the day although nascent buying in USD lines reflective of a potential change in the T2 sentiment pendulum. Real money remains sidelined amidst suspicions of potential domestic primary issuance”, although this has been the case for several weeks now. Major bank senior unchanged on the day and only minimal movement, if any, on the week. Tier 2 largely unchanged on Friday, although the NAB Nov-25 call (-1 bps) and CBA Sep-25 call (-2 bps) closed a touch tighter.
- Bonds & Rates – US treasuries rallied despite growing inflationary concerns. Ten-year yields closed at 1.63%, -3 bps on the day and floating around the middle of the two-month trading range of 1.55% – 1.75%. Consensus has yields drifting higher by quarter end, up to 1.72% or +9 bps from current levels, and then on to 1.80% by Q3 (+17 bps) and 1.88% by Q4 (+25 bps). While meaningfully higher from current levels, nevertheless still very accommodative in a historical context. Locally, 10-year yields closed the week at 1.80%, or down a couple of basis points on the day, but +12 bps on the week. Consensus estimates actually have the ACGB 10’s dropping to 1.73% by quarter end, or -7 bps. Thereafter, however, and yields are marching higher – 1.84% by Q3 (+4 bps) and 1.90% by Q4 (+10 bps).
- Offshore Macro – US April Retail Sales hit the brakes, coming in flat, well shy of +1.0% forecasts, and a goodly length short of March’s stimulus-fuelled +9.8%. The core reading, which strips out more volatile fuel sales, unexpectedly dropped also as another round of restrictions crimped shopper’s style. Industrial production rose less than expected, climbing +0.7% MoM vs +0.9% MoM consensus, though manufacturing output slightly beat estimates. The University of Michigan’s May consumer sentiment index fell to 82.8 from 88.3, with inflation fears growing amongst your average American. Elsewhere, US labour market conditions continue to improve, albeit gradually as vaccination rates climb and consumer demand picks up. Jobless claims fell 34K to 473K, well below 490K expected, and the first sub-500K reading of the pandemic. With more businesses and states expected to lift pandemic restrictions, hiring is should continue to accelerate.
- Local Macro – week ahead, lifted from a NAB piece last week…”a busy week with April Employment, Q1 Wages and April Preliminary Retail Sales. Employment on Thursday is expected to post another strong increase with job ads at record highs, while the Treasurer has highlighted JobSeeker numbers fell by 105k in April despite the end of the JobKeeper. We look for +40k jobs and for the unemployment rate to decline 0.2 ppts to 5.4%, which is much stronger than the consensus of +15k/5.6%. For WPI on Wednesday, we pencil in soft wages growth of +0.4% QoQ, reflecting some pull back from last quarter’s +0.6% QoQ read that was boosted by one-off unwinds of wage cuts at the height of the pandemic. Also out are the RBA Minutes for the May meeting on Tuesday and W-MI Consumer Confidence on Wednesday. It is unlikely the Minutes will reveal much new given the May SoMP and recent Deputy Governor speech”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907