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Mutual Daily Mutterings


Quote of the day…


“My father carries arounde the picture of the kid who came with his wallet” – Rodney Dangerfield












“The ‘T’ word ….”





Overview…”you had one job to do, just one …!”


  • Moves: risk on… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • Fed Chair Powell testified before a US Senate committee overnight, and markets hung on every word.  In the end it was a mixed reception, but on net he did little to calm market nerves around the prospect of a recession, which he coined as “possible”.  He made no reference to the scale of future hikes, but guided that the bank was “moving expeditiously” and that any move in rates will be data dependent.  Powell raised his hand and acknowledged the Fed had dropped the ball on fulfilling its duty…”you had one job!” as they say. As for engineering a soft landing, well you get the impression it would be easier to knit a jelly fish (not his exact words, my interpretation).


  • Some pundits took comfort from the fact Powell made no specific reference to the “unconditional” commitment to bring down inflation at the cost of higher unemployment and other economic fundamentals.  Given the Fed monitors how the media respond to its’ communications and commentary, some see this omission as a deliberate act to inject some dovishness to the narrative. Perhaps “less hawkish” is a better way of putting it.  In the end, US stocks seemed to cling to the “possibility” of a recession, giving up earlier gains (+1.0%) to end the day moderately in the red.  Bonds on the other hand rallied like it was 1999, strong gains (yields lower) across the US and EU rates complex as investors moved to haven assets. Oil tumbled on growth concerns.


  • Talking heads…“he (Powell) has acknowledged that rates will continue to increase, but the FOMC committee is cognizant of watching incoming data suggesting the Fed will not be exclusively on autopilot with tightening.”  But, then there is…”no one’s going to want to come in and want to buy a market, put anything significant into the market while you’re getting this all-over-the-place volatility.”  As the saying goes, “the early bird gets the worm, but the second mouse gets the cheese.


  • Moderating hawkishness aside, somewhat contradicting these subliminal messages, former New York Fed President, Bill Dudley, stated in a Bloomberg article that a recession was “inevitable” within the next 12 – 18 months.  Old William here is not Robinson Crusoe on this call, it’s resonating with many a respected, and some not so respected, pundits in the market.  Other Fed related peeps were on the wires also, with Patrick Harker calling for the Fed Funds rate to be at 3.0% by year’s end, while Charles Evans is agitating for a +75 bp hike at the July FOMC meeting, but pooh-poohed a +100 bp hike as unnecessary.



The Long Story….


  • Offshore Stocks – a sea of crimson across the screens this morning, but it’s not gushing blood at this stage, more another flesh wound…death by a thousand cuts, I guess.  While the DOW (-0.2%), NASDAQ (-0.2%) and S&P (-0.1%) all closed moderately in the red, stocks spent most of the day in positive territory.  It was only in the last hour that the S&P 500 slipped quietly into the good night in negative territory after being up as much as +1.0% intra-day.  Uppers and downers were equally balanced, although more sectors retreated than advance, 7 to 4.  REITS (+1.6%), Healthcare (+1.4%), Utilities (+1.0%) and Telcos (+0.2%) were the winners on the day.  Participant ribbons were handed to the rest, with the worst of the rest being Energy (-4.2%), Materials (-1.3%) and Industrials (-0.5%).


  • Growth concerns are weighing on oil prices, which have fallen -11.3% since June intra-month peaks, which has seen the Energy sector dust almost -15.0%.  Good for the inflation situation, less so if you’re long energy stocks.  Charted below is the relationship between oil prices and US inflation – it is a similar picture for AU CPI.  The second chart below depicts how important the price of fuel is for consumer inflation is – reduce fuel costs and you go a long way to taming the gnarliest elements of the inflation dragon.


  • US CPI vs Crude


Source: Bloomberg, Mutual Limited


  • US Consumer Inflation Expectations vs Retail Gasoline Prices…


Source: Bloomberg, Mutual Limited


  • Local Stocks – the day started from a happy place, with the ASX 200 up +0.5% in the first couple of hours of trading.  US futures started trading around midday and the tone was decidedly sombre, which bled into local markets.  By day’s end, a modest -0.2% sell-off.  At 6503 on the close the ASX 200 is at the top of my tactical trading range, but with modestly weak leads this morning, it could be back within my 6300 – 6500 tactical trading range shortly, although futures are up at the moment (+0.4%).  Just under two-thirds of the index lost ground yesterday, with seven sectors in the red (and five in the green).  Having said that, it was a reasonably balanced day in that no one sector was really dominant with regard to its influence on the broader index’s performance.  Utilities (+2.1%), Energy (+1.5%) and Staples (+0.5%) occupied the winner’s podium in the main ballroom.  Meanwhile, in the car park, on the losers podium we had Tech (-1.5%), Discretionary (-1.4%) and REITS (-1.0%).


  • ASX 200 RSI’s…’oversold’ still…


Source: Bloomberg


  • Offshore credit – three deals in the US IG space, pricing US$3bn.  Issuers that moved forward and launched were only able to tighten spreads -10 bps from IPT to launch, offering investors elevated concessions (~29 bps) on modest demand (deals 1.9x covered).  Bloomberg noted that the recent increase in issuers’ risk tolerance around announcement strategy implies that a growing number in the origination community feel the funding landscape could deteriorate further before it improves.  Powell’s Senate testimony won’t have helped the mood.  Cash spreads drifted a smidge wider, with US IG now +15 – 20 bps wider, and +30 – 35 bps wider in EU IG.  Synthetics edged wider, +2 bps in the CDX (US), while MAIN (EU) was +4 bps wider. CDS spreads are +9 – 11 bps wider over the past month.


  • Local Credit – we’re not seeing any major thematic changes here and now as we approach quarter end, although there is the usual window dressing trades filtering through the market.  Flows were light and spreads relatively stable, likely underpinned by a combination of reinvestment flows (maturities) and generally constructive spread levels.  The most recent 5-year major bank senior deal, the WBC May-27, is quoted on Bloomberg at +103 bps mid vs +105 bps at launch, while the most recent 3-year senior deal, NAB’s May-25, is quoted at +85 bps vs +90 bps at launch.  Per my model, 5-year spreads are at +108 bps (vs +109 bps yesterday) and 3-year is at +81 bps (vs +82 bps yesterday).  Minimal action in tier 2 as far I could tell.


  • 12-month credit spread trends….


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – a decent rally in bonds yesterday, particularly the front end as local economists begin to feel the RBA may be in a position to pause after a +25 bp rate hike in August (and +50 bps in July).  However, the risk to this theme will be the July release of Q2 CPI data, which will inevitably come in hot and heavy given trends and anecdotal evidence elsewhere.  One trader coined the move lower in yields as a “Pavlovian knee-jerk rally to Bill Evans calling a hike pause in Sep and Oct.”, I guess that’s a tip of the cap toward Bill’s influence on the market, real, perceived or otherwise.  The same trader acknowledged that Bill’s calls are worth trading on the day, but they lack longer term substance (from a market influence perspective).  Fair call I guess, I’m not at the table thumping stage of where I think rates are going, I need more evidence on where inflation is heading.  Nevertheless, ACGB 10-year yields dipped back below 4.00% yesterday (3.99%), and given leads overnight, will likely fall further today.


  • US 2-year yields closed -14 bps lower at 3.06% and 10-year yields -12 bps lower at 3.16% (vs a June peak of 3.47%).  Given the recent run up in yields, there is a growing chorus of pundits, real money and street strategist alike, calling now as a good time to go long bonds.  Yes, bonds have cheapened, but the risk of being wrong here could hurt.  We’re within a materially different inflation environment, one that all but only the oldest and crustiest bond manager have ever seen. This means that every time we have a new price data print, or every time a Fed official clears their throat, there is risk to rates and yields whipping higher.  The second half of the year will be fraught with landmines as risk of policy error becomes more pronounced.  This policy error – where the Fed goes too far on the tightening front could support long bonds, i.e. growth concerns pushes the back end lower, whereas policy error in the opposite direction – where the Fed remains behind the curve, could see inflation run away from it and the risk causes rates and yields to push higher again.


  • A$ Fixed Income Markets…


Source: Bloomberg


  • Macro – “Recession is more than just a possibility, others say. Deutsche Bank’s CEO sees the probability of a global downturn at 50%. US junk-rated bonds are also indicating a 50% chance, Citi said. Risk premiums on some of the lowest-rated debt are closing in on 1,000 bps, considered a distressed level. That “should cause investors to become more cautious and reset expectations,” strategists wrote. One ray of light: given the underlying strength of banks, a repeat of the GFC is less likely, Citi said.” (Bloomberg)


  • Charts:





Source: Bloomberg, Mutual Limited





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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.78%
MIF – Mutual Income Fund
Gross running yield: 2.07%
Yield to maturity: 1.78%
MCF – Mutual Credit Fund
Gross running yield: 3.34%
Yield to maturity: 2.99%
MHYF – Mutual High Yield Fund
Gross running yield: 6.00%
Yield to maturity: 6.02%