Mutual Daily Mutterings
Quote of the day…
“Nothing spoils a good story like the arrival of an eyewitness”.…Mark Twain
Chart du jour: rising inflation expectations…
“Can we get on the beers now?”
- US stocks started on a positive footing on Friday with a positive lead from Europe, but before long dropped into the red-zone. A move which followed comments from Fed Chair Jerome Powell on interest rates. By the end of the session some of these losses had been clawed back, but not all. Treasury yields steepened in early trading on inflation fears, but then reversed course once Powell ‘assured’ markets that he was aware of the risks – a bull-flattening by day’s end (long end falling faster than the front end). I doubt a change in market thematics just yet, a pause. Oil rose, as did commodities in general and credit spreads were range bound
- Over the week “there was no real shortage of worrisome headlines to spook investors. China’s economy slowed in the third quarter, while in the US, manufacturing and the housing market cooled. Oil posted the longest stretch of weekly advances since 2015 and everything from natural gas to wheat climbed, adding to inflationary pressure that prompted the bond market to price in higher odds of a rate hike by June 2022”.
- Fed Chair Powell confirmed it was time to taper, with the end of the buying program coming sometime in mid-2022. He did reiterate, however, that it’s not time to raise rates, which investors took that as meaning there would be no rate hikes until next June – August, apparently (offshore narrative) regardless of the fact that markets have in fact priced in a 70% chance of a June increase. On the hot topic of inflation, Powell sounded a note of heightened concern over persistently high inflation….“the risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation”…and…”I would say our policy is well-positioned to manage a range of plausible outcomes…I do think it’s time to taper and I don’t think it’s time to raise rates.”
- Talking heads “Powell sounded less anxious about employment and more anxious about inflation…he is not really leaning against the market pricing, which is revealing in and of itself.”
- Offshore Stocks – a ‘nothing’ end to the week, no meaningful change to themes, with the S&P 500 closing a smidge below record highs, which it reached on Thursday. On the day, Financials (+1.3%) performed best, followed by Energy (+0.9%) and Staples (+0.8%), while laggards included Telcos (-2.3%), Discretionary (-0.7%) and Tech (-0.3%). Despite inflationary headwinds, markets are looking at US reporting season through rose coloured glasses, all juiced up on expectations of consumers splashing the cash around as post COVID spending habits normalise. Talking heads…”while supply-chain and labour-market snarls have been tormenting investors for much of the year and are far from solved, they remain — for now — the tolerable downside of trends that investors are happy to celebrate: robust demand in a reopening economy. Throw in an earnings season showing that damage to profit margins remains light, and it explains why shares are up +5.0% in October, a month sceptics had circled as a tough one”. US reporting season inched forward with 117 of the S&P 500 now reported. Just under 84% of stocks have reported growth in earnings, while just under 85% have reported top line growth. Aggregate sales have grown +16.1% on the pcp, led by Materials (+60.6%), Energy (+50.4% and Industrials (+48.9%). Aggregate earnings are up +46.1%, with Materials earnings up almost three-fold and energy more than four-fold on the pcp.
- Local stocks – markets close flat on minimal news, other than Victorian’s being granted some token freedoms from the supreme leader, and no data of any significance. The ASX 200 closed unchanged with a fraction over half of the stocks in the index advancing. Discretionary (+1.4%) led the winner’s back, followed by Staples (+0.9%) and REITS (+0.7%). Meanwhile Energy (-2.1%), Materials (-1.2%) and Industrials (-0.1%) failed to embrace the freedom vibe, staying under the doona covers for the day. Despite the less than convincing leads from offshore, in either direction, futures are pointing to a modestly positive open.
- Global credit – a quiet end to the week in US IG markets with most still digesting the AerCap US$21bn deal that hit markets the day before. The second largest deal of the year helped take issuance on the week to over US$50bn, more than 2x estimates. The spread on the Bloomberg U.S. Investment Grade Corporate Bond Index held steady, closing unchanged at +85 for the fifth straight session. China Evergrande Group pulled back from the brink of a default, meeting scheduled payments and injecting a note of optimism into markets at the end of a week dominated by earnings reports and inflation worries.
- Local Credit – trader’s nerves tightening, unlike spreads…”quiet end to the week, with some ominous clouds appearing. Interbank liquidity conditions deteriorating in T2 and SSA markets with flow skewed heavily in one direction. We have been able to recycle some of this risk but challenges remain.” Major bank senior paper was ”wider again with no buying noted. A few accounts kicking tyres but we did not make any material sales. The longer that buyers remain absent, the longer the curve will continue to drift wider. A$1.5bln Westpac maturity on today (Monday), but this is unlikely to stem the move wider”. The syndicate teams that ran the BOQ deal, which has been a key contributing factor to the move wider need to have a good hard look at themselves. Everyone I spoke to on the deal, both sell side and buys side, was firmly of the opinion +70 bps was more than fair pricing, yet the deal printed +10 bps wider at +80 bps. Demand was very strong, as it should have been, and perhaps that was the intention for the first post CLF deal, make it a no-brainer slam dunk to calm any potential nerves. Unfortunately, there was some collateral damage. Major bank spreads were +2 – 5 bps wider on the week, with the Aug-26’s at +54-55 bps area, and the Jan-26’s at +43 bps. In the major bank tier 2 space, “ongoing pressure on spreads with anecdotes of market makers withdrawing bid side liquidity”. Having said that, traders are reporting real money stepping up to the plate. On the week the 2026 callable lines are ranging around +129 – 134 bps, or +1 – 3 bps wider. The 2025’s were +1 – 2 bps wider to +123 – 126 bps, and the 2024’s were +3 bps to +98bps.
- Bonds & Rates – no material change to prevailing themes on Friday, but it was an active and frisky week in yields. Three-year yields rose +10 bps on the week to 0.74%, while the Apr-24 – the bond the RBA targets for its 0.10% yield curve control activities hit peaks of 0.17%, before the RBA finally loaded up the shopping cart. The yield closed at 0.11%. Further out the curve, 10-year yields closed the week +17 bps higher at 1.80%, representing two-month highs and well through the high end of market estimates for rates by the end of December. Consensus average estimates for 10-year yields is 1.64% (1.70% median), up +18 bps vs prior month guesses The range of estimates is wide at 1.25% – 1.90%, so not a lot of conviction. At these estimated ranges, based on Friday’s close, investors in 10-year bond can either expect a -0.94% loss by year end, or +5.35% in gains. Leads from offshore suggest a step toward the latter is likely on the day with US 10-year yields falling -7 bps.
- Local Macro – a reasonably active week ahead on the data front, with CPI due out on Wednesday (October 27). Q3 Core CPI is forecast to come in at +0.8% QoQ (vs +0.8% last) and +3.1% YoY (vs +3.8% last) – first chart below. Trimmed CPI is forecast to come in at +0.5% QoQ (vs +0.6% QoQ) and +1.8% YoY (vs +1.6% YoY). Risks is to the upside here, with the key risk coming from higher-than-expected new dwelling construction costs which have been restrained due to the HomeBuilder subsidy which is treated as an effective price cut for the consumer. September credit growth data is due on Friday (October 29) with consensus expectations running at +0.5% MoM (vs +0.6% MoM for August) and +3.1% YoY (vs +4.7% YoY as at August) – second chart below. Risk here is also to the high side.
- Offshore Macro – US PMI’s out over the weekend with manufacturing indicators missing to the downside (just), 59.2 vs 60.5 (cons.) and 60.7 last, still well elevated vs historical ranges. Services PMI beat expectations, 59.1 vs 55.2 consensus and 54.9 last, also well above pre-pandemic averages. Busy week ahead for US data, including a range of GDP partials – also new home sales, consumer confidence, durable goods, personal income, and importantly (for Fed inflation views) PCE deflator. On the latter, consensus is at +0.2% MoM (vs +0.3% MoM last). and +3.7% YoY (vs +3.8% YoY last). From Powell’s speech, he noted that more than five million people who were working before the pandemic remain unemployed an d as a consequence the labour market needs time to heal.
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Scott Rundell, Chief Investment Officer
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