Mutual Daily Mutterings
Quote of the day…
“The difference between stupidity and genius is that genius has its limits.” – Albert Einstein
Rolling weekly spread change…
Source: Bloomberg, Mutual Limited
“In a box, or in a corner…?”
“All about the Fed…”
- Overview – modest risk on tone overnight in the end following day-one of the FOMC meeting with Fed officials continuing to project near-zero interest rates at least through 2023 despite upgrading their US economic outlook and the mounting inflation worries in financial markets. Like a broken record, Fed Chair Powell reiterated the central bank wants to see inflation moderately above 2.0%. He also voiced his opinion that recent moves higher in yields wasn’t disorderly (cough, bull#$%@, cough!), and that financial conditions continue to remain accommodative (cough, mumble, mumble, agreed, cough). Talking heads…”the Federal Reserve continues to hold the course, maintaining the glide path for both rates and asset purchases which it established last year, and does not appear to be close to altering its trajectory anytime soon.” The Fed expects any near term “bump” in inflation to be short-lived, which is understandable given the slack in the economy (labour, wages etc), nevertheless one cannot be too dismissive of inflationary risks, it’s been dormant, not dead… and that view by many has a sizeable weight of money positioned behind it. Fed Chair Powell again reiterated that any inflationary pulse needed to be actual and sustained, “we’re not going to act pre-emptively based on forecasts”
- Offshore Stocks – European stocks were down a touch, while US stocks punched out some modest gains and reached new all-time highs (S&P 500)…“the Fed was dovish relative to some fears of ‘hawkish dots’, but since we didn’t get that ‘hawkish’ outcome, stocks are having a relief move…. bottom line, the inflation/growth forecasts the Fed has along with no rate hikes for three years is a positive backdrop for risk assets.” More stocks were up than down, 62:37, with 1% unchanged and six sectors closed up on the day, led by Discretionary (+1.4%), followed by Industrials (+1.1%), Energy (+0.9%) and Materials (0.9%). In the corner of the room sporting the dunce’s cap, Utilities (-1.6%) was particularly red-faced, while Healthcare (-0.4%) and REITS (-0.2%) were only marginally down. Volatility continued to moderate with the VIX sub 20%, levels not seen in almost a year…in fact the last time the VIX was at these levels it was only brief as it sky-rocketed from 13.7% mid-Feb to 82.7% mid-March. Per the Fed’s statement and commitment, they’re doing their darnedest to keep volatility contained. E-mini’s are marginally up on after-market trading.
- Local Stocks – a down day yesterday with the mood soft from the get-go as US markets lost its initial buoyancy. Financials (-0.6%) and Materials (-1.5%) contributed most to the broader mood of woe-is-me, collectively accounting for about 80% of the declines in the ASX 200. All up, 72% of stocks closed on the wrong side of the ledger (from a long perspective). Tech (+0.8%) and Telcos (+0.6%) at the top of the tables fought a valiant, albeit fruitless, rear guard action. Utilities also kept their noses above water. Futures are pointing to a modestly softer opening (-0.15%) with the main index seemingly stuck in a tight 6500 – 6800 (‘ish) range, or around the 6700 – 6800 50 day moving average.
- Offshore Credit – as is usually the case for FOMC meeting days, very little activity in US primary markets. EU markets were active, but only marginally so…just two deals for €1.3bn. In secondary, US markets eked out a couple of basis points of compression, while EU markets went in the oppositive direction. Nevertheless, no real change to thematics following the Fed statement.
- Local Credit – primary was up and about yesterday with Stockland (A-) launching and pricing a 7-year bond. The company has never been my favourite REIT, and in a former life I had a run-in with their former treasurer, intellectually…nothing physical (I could have taken him though!). Either way, no obvious concerns amongst investors around commercial property values etc with the deal well covered, capped at $300m and a book of $675m, and spreads compressing from launch (+120 – 125 bps guided) to print (+108 bps). BWP Trust (A-, they own Bunnings warehouses) also priced a 7-year deal, with a book of $550m and final print of $100m at +92 bps (+100 – 105 bps guided). Lastly, ALE Property (Baa2, they own pubs) had a book of $775m for their 3.5 year $150m deal, which priced at +190 bps (vs +210 bps guided). No sign of indigestion in these deal metrics. In secondary, major bank senior was unchanged, as was tier 2.
- Bonds & Rates – following day one of the two-day FOMC love-in, seven of 18 Fed officials are now predicting higher rates by the end of 2023, up from five of 17 at the December meeting, showing a slightly larger group who see the likely and earlier confiscation of the monetary policy punch-bowl (i.e. rate hikes without the hyperbole). At this meeting however, with no surprises to most people, official rates were left unchanged at 0.00% – 0.25%. The Fed left asset purchases unchanged at US$120bn a month and reiterated that this pace would be maintained until “substantial further progress” is made on their employment and inflation goals – so the regular tipping in of market liquidity will continue. Powell also said that now was not the time to discuss tapering, too soon as they say. Treasury yields on the day were vigorous, spiking to 1.69% prior to the statement, +8 bps, but then eased off the gas post the release of the statement to 1.65% (+3 bps). Local bonds bear-steepened yesterday, modestly, just a couple of basis points, which we’ll possibly see again today. The 10’s closed at 1.72%.
- Macro – the Fed upgraded forecasts for economic growth and the labour market, with the median estimate for unemployment falling to 4.5% at the end of 2021 and 3.5% in 2023, while GDP was seen rocketing toward China like numbers, expanding +6.5% this year, up from a prior projection of +4.2%. The recovery continues to be ”uneven”, which must be a core phrase in the ‘Central Bankers Playbook’, the RBA uses it in their statements often also. Core inflation is seen rising to +2.2% this year before slowing to +2.0% in 2022, the last print was for February at +1.7% YoY (core). Tonight, we have US jobless claims with consensus expected 700K, down marginally on the 712K reported last week, while continuing claims are expected to drop also, 4,034K vs 4,144K last week. While the labour market is improving, even with 379,000 jobs added to payrolls in February, 9.5 million fewer Americans have jobs compared with a year ago (Bloomberg). Speaking of labour data, local figures are due out today. Consensus expect +30K jobs were added over February, up marginally from the 29K reported in January. The participation rate is expected to remain pat, at 66.1%, while the unemployment rate is expected to drop to 6.3% from 6.4%. Despite the improvement, unemployment is still well above the five-year average of 5.7%, but importantly it’s trending in the right direction.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907