Mutual Daily Mutterings
Quote of the day…
“I think the best analogy for where we are right now is that America is Elvis Presley — the most beautiful, talented, rebellious nation in the history of Earth. And now, you’re in your Vegas years. You’ve squeezed yourself into a white jumpsuit, you’re wheezing your way through ‘Love Me Tender’ and you might be about to pass away bloated on the toilet. But you’re still the King.”– John Oliver…
Chart du jour…US stocks vs bonds
Source: Bloomberg, Mutual Limited
Overview…”words hurt, ok!…”
- Markets seemed to take the Feds dot plot moves and slight swivel to a more hawkish tone in their relative strides mid-week. Relatively modest moves across both bonds and stocks, while credit just shrugged its collective shoulders. That was Wednesday and Thursday. And then, on Friday the mood swung decidedly ‘more’ hawkish. Stocks sold off, and the curve bull-flattened. The US dollar rallied strongly, while oil advanced and gold retreated.
- James Bullard, St Lois Fed Governor, was on the wires on Friday saying “I put us starting (tapering/tightening) in late 2022” citing his core PCE inflation projections of 3.0% this year and 2.5% next. Nothing really new in what he said, and he’s a non-voter this year, but markets reacted strongly to it. Just how transitory inflation will be and when tapering will actually begin remain the key discussion points amongst Fed officials. But there are dissenters amongst the ranks. Kashkari, Minneapolis Fed, told Reuters on Friday that he favours keeping rates on hold at least through 2023 to support the labour market.
- Seemingly Bullard’s words hit a nerve. Stocks suffered their worst days / weeks for some months. Bonds’ bull-flattened with 10-year yields dropping -7 bps to be a smidge above three-month lows. The Fed has previously voiced a willingness to let the economy run hot, however with the change in tone this week, markets are less certain around the Fed’s commitment to past assurances, which presents a potential growth headwind relative to prior expectations. With the rise in dot plots the front end sold-off aggressively (yields higher) over the latter half of the week.
- Some Fed heavy-hitters, including Chair Powell (Wed) and New York Fed President Williams (Tue), are set to speak this week. We’ll be interested to hear whether they double down on risks of an inflation overshoot. While the FOMC still considers the acceleration in inflation to be transitory, Powell acknowledged last week the risk “that inflation could turn out to be higher and more persistent.” A big week of US data also, a rafter of activity and pricing measures, including GDP and PCE Deflators.
- Offshore Stocks – risk-off across the board with 90% of S&P 500 closing down on the day and no sector able to get up on the day. Best performing sectors were Discretionary (-0.5%), Tech (-0.9%) and Telcos (-1.2%), while at the other end of the table, Energy (-2.9%), Utilities (-2.6%) and Financials (-2.4%) were haemorrhaging freely. Volatility rose, with the VIX up from 15% midweek to close at 21%, while traded volumes were almost 3x recent moving averages. Thematically, growth stocks were more in favour again (relatively), with the S&P 500 Growth index down -0.8% vs the S&P 500 value index, which fell -1.9% as investors rotate back into cash rich tech stocks. From Bloomberg…”the prevailing belief on Wall Street continues to be that the spike in inflation will be brief. A recent Bank of America survey of fund managers found that nearly three-quarters don’t expect elevated inflation to be long lasting. That is alleviating concern that rising interest rates would kill demand for tech stocks that have priced in a lot of optimism about growth in the distant future”. E-mini’s are down: DOW (-1.6%), S&P 500 (-1.4%), and NASDAQ (-0.9%).
- Local stocks – in aggregate a modest rally on Friday with just under two-thirds of stocks gaining on the day. Tech (+3.5%), Discretionary (+2.0%), and Telcos (+1.9%) led the charge, but falls in Energy (-1.9%), Materials (-1.1%), and Financials (-0.7%) all but wiped out these gains. Volumes were higher than average, almost double. With weak offshore leads from last Friday, and the apparent rotation (again) from value to growth-oriented stocks, the local market will likely open with a particularly insidious shade of red – local markets are more value-weighted relative to growth. ASX 200 futures are down -1.5%.
- Offshore Credit – with risk assets under the pump, no companies were game enough to poke their heads above the primary market parapets on Friday. Volume for the week finished around US$22.6bn, in line with estimates. Early projections for this week are US$15bn – US$20b. EU IG markets were a little more active, but dominated by government authorities issuing. In secondary markets, US IG spreads were +2 bps wider on Friday, but still -3 bps tighter on the week. High yield reflected similar movements. In EU IG, minimal movement on the day, and week for that matter, less than a basis point either way. Only modest movements in high yield also. If the weakness in stocks persists (I don’t think it will), spreads will likely come under a little selling pressure, but nothing too alarming at this stage.
- Local Credit – the Fed’s changing tone had minimal impact on local risk appetite last week – investors are conscious of it, but no noticeable change to overring themes. Trader talk…”ongoing rates volatility combined with further primary issuance contrived for benign secondary market conditions. Flows remain mostly two way and liquidity conditions pretty good. Street inventories do not feel overburdened and we would suggest that the lack of aggression apparent in the interbank market is indicative of the prevailing low conviction landscape”. No change on the day in major bank senior or tier 2, while over the week…yep minimal change also.
- Bonds & Rates – the front of the US treasury curve (2-years) is sitting at 12-month highs after post FOMC meeting moves. On Friday 2-year yields jumped another +4.5 bps to 0.25% after Bullard’s comments, while on the week 2-year yields are +10 bps higher, and well above the 12-month average (0.14%). Not surprising in light of the Fed’s slight hawkish swivel, with consensus expecting yields to rise by quarter end, albeit we’re seeing a bit of an overshoot. Further out the curve, 10-year yields went the other way, -6.5 bps to 1.44%, or three-month lows. Over the week, 10-year yields are -5 bps and -20 bps over the past month. So, a bull-flattener with the market pricing in Fed tightening / tapering earlier than originally priced in, while the back end is coming in because monetary settings will become less accommodative, forming a modest (at this stage) headwind for growth (but constructive for bonds). A month ago, give or take, there was a growing view that 10-year yields would hit 2.0% by year end. Still possible, but looking less probable at this stage. Consensus numbers, which are probably stale now, have US 10-year yields hitting 1.79% by the end of Q3 and 1.88% by the end of Q4. A bull flattener in AU markets also on Friday (and over the week) with the Nov-24 ACGB’s jumping +6 bps to 0.43% on Friday, or +17 bps on the week. Markets have written off the likelihood of the RBA extending it’s 3-year curve control buying from the Apr-24 maturing bond to the Nov-24 bond. Local 10-year yields dropped -5 bps to 1.60% and will probably fall again today given offshore leads.
- Macro – reasonably quiet week ahead of us data wise (locally), just Retail Sales (May), which are likely to reinforce the underlying strength in Australia’s recovery / economy. The data is out later this morning, with consensus expecting +0.4% vs +1.1% for April. A massive week for US data, with probably one of the most important prints being the PCE Deflator (Friday, after market close for local markets), which is the Fed’s preferred measure of inflation. The PCE Deflator measures inflation based on changes in personal consumption, both goods and services. Consensus expects the core PCE deflator to come in at +0.6% MoM (vs +0.7% last) and +3.4% YoY (vs +3.1% last). GDP data is also out, with annualised Q1 GDP expected to come in at +6.4% YoY (vs +6.4% YoY last).
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Scott Rundell, Chief Investment Officer
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