Mutual Daily Mutterings
Quote of the day…
“The real reason that we can’t have the Ten Commandments in a courthouse: You cannot post “Thou shalt not steal,” “Thou shalt not commit adultery,” and “Thou shalt not lie” in a building full of lawyers, judges, and politicians. It creates a hostile work environment.” – George Carlin
“Elephant in the room…”
“Twists and turns in the narrative…”
- Overview – some froth off the top in stocks with a modest risk off tone as the narrative turns to whether the aggressive steepening of yield curves could derail the recovery. Add to this the abundance of policy support across both monetary and fiscal mechanisms, and the reflation trade is increasingly gaining support. Nevertheless, the Fed seems wedded to its massive asset-purchasing program, signalling that it will remain part of the landscape for “some-time.” Bonds yields (10Y treasuries) hit new 12-month highs (1.33%), but then turned tail and fell (to 1.29%). Talking heads “it’s not surprising to see stocks take a break….the news in terms of the economic data – retail sales really blew out expectations, stronger than expected inflation data, strong reading on housing sentiment — that may provide fuel to the argument that the proposed stimulus is maybe too big and the economy doesn’t need it.” And “So the tricky part is going to be figuring what level of interest rates will be supportive of stock prices either hanging in there and going higher or what level of inflation or interest rates will then start to become a worry for the market in terms of valuation.” Volatility is back on the agenda.
- Offshore Stocks – tech stocks soiled the bed overnight (-1.3%) dragging the broader market down with them, Industrials were an accomplice, albeit just a bit player (-0.3%). In the end the uppers almost matched the downers in a count sense, 45:55. Companies that may have difficulty justifying stretched valuations if rising inflation dents profits bore the brunt of selling – high-flying tech shares among them. Energy (+1.4%) and Discretionary (+0.5%) carried the flag for the optimists, moderating the size of the fall. Across the ditch, EU stocks had been marginally weaker leading into the US retail sale release and took another leg lower into the EU close. Despite the past two days of softness, major bourses are clinging to week-on-week gains.
- Local Stocks – a softer session yesterday, probably about due to be fair. Only Materials (+1.5%) and Energy (+0.4%) were able to make gains in the day. Leading the charge down the s-bend were Consumer Staples (-3.5%), driven down by Coles (-5.4%) and Woolworths (-4.6%) – mainly on fading COVID tailwinds, while Tech (-2.1%) and REITS (-2.0%) also had days to forget. In the end, over two-thirds of stocks closed in the red after a modestly softer offshore lead. Financials ended the day flat, with a surprisingly buoyant Q3 trading update from WBC unable to fully lift spirits. An earlier than expected provision release boosted earnings, signalling improved asset quality, which in turn gave the share price a boost, +4.6% on the day vs a -1.9% fall from CBA, +14.4% from ANZ and +0.2% from NAB. The main earnings headwind for WBC is declining loan growth as competitive pressures bit. The bank’s loan book fell almost -2.0% vs peer loan growth of +2.0%. Despite the loan book headwinds, WBC has outperformed its peers (major) YTD, +21.5% vs ~2% – 14%, but remains in the red over a 12-month period, -6.4% YoY vs -1.7% up to +1.4% YoY across the other three ‘Big 4’. Futures are pointing to a modest drop at the open (-0.2%).
- Offshore Credit – a modest day in US IG primary, with three deals for $3.1bn priced, including a $1bn green bonds (from Rabo). Good coverage and decent spread compression. In EU IG, €6.2bn priced with coverage just under 3.0x and spread compression of 17 bps. Overall sentiment remains buoyant…. some comments from JPM Asset Management’s CIO in this regard suggests the trend will persist. He’s “betting” on an ever-more intensifying rally across junk bonds (i.e. he’s talking his book), with HY spreads to drop below +300 bps (currently +350 bps) and may even test pre-GFC lows of +250 bps. With continued Fed support, and additional fiscal stimulus to come down the pipeline, yeah, a defendable stance. Buoyant HY means buoyant IG.
- Local Credit – from the trading oracles, “the sharp 10yr rate sell-off still risk positive as the higher outright yields attract increased investor interest”. The new Suncorp-Metway senior 5-year has settled at +43 bps, 2 bps inside reoffer and 7 bps inside the curve at launch…crunchy, crunchy, crunchy. The march tighter in major bank tier 2 paper continues as the market begs, “please sir, I want some more.” But the street cupboard be bare…from the traders “the underlying investor demand is evident, with multiple requests looking for offers. The reality of finding bonds is another matter. Spreads the generic 2 bps tighter again!” I nailed my thoughts on this to the mast yesterday, i.e. how far can tier 2 spreads go? So far reality has been kind to my ego and we’re heading in the right direction. The most recent WBC deal is now quoted at +130 bps vs +155 bps at issuance and +145 bps just a week ago. I’ll hold firm for another 10 – 20 bps of tightening from here, so +110 – 120 bps in the 2026 calls, the caveat being of course is if we see some primary.
- Bonds & Rates – from Bloomberg…”expect more wild gyrations. Volatility markets signal the 10-year yield may surge or drop almost 30 bps in the next three months. Three-month implied volatility on 10-year swap rates jumped by the most since March on Tuesday. With the move, what’s known as the terminal breakeven indicates traders are pricing for the yield to either jump to 1.6% or drop all the way back to 1.0%”…you could drive a semi-trailer through that range! Despite assertions that they’re (the Fed) committed to maintaining an accommodative stance, markets are beginning to price otherwise, i.e. on the bet the reflation trade will send global yields surging. To this end, swaps markets are now showing up to 40 bps of hikes by the end of 2023, with a full 100 bps baked in by early 2025. Question is, how do you quantify “sometime?” Is it 2 years, 3 years? Either way, markets are almost always ahead of central banks. As for YTD hikes in 10Y US treasuries, +38 bps, that’s the 8th largest start to any given year dating back to 1962…pretty significant. Locally, the ACGB 10’s sold off again yesterday, +8 bps to 1.4%.
- Macro – US retail data out last night, which blew the lid off expectations. Headline sales rose +5.3% MoM, following December’s revised -1.0% MoM decline. Producer-price inflation sped up more than expected, also. Factor output increased +1.0% MoM, adding to the +0.9% MoM booked in December. Consensus had been gunning for a +0.7% MoM rise. Locally, we have labour data today, with +30K forecast and unemployment to drop to 6.5% (from 6.6%)
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