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Articles by Andrew Canobi
How the RBA scores on its inflation goal
Ian Kelly, CFP, BTACS Financial Services: "Probably the best source of commentary and information I have seen over the past 20 years." Reader: "Best innovation I have seen whilst an investor for 25 years. The writers are brilliant.
Welcome to the bond lost (half) decade
It’s no secret that our team does not like bond benchmarks. It’s nothing personal, but our view has been that they don’t provide the logical starting point for fixed income exposures. Hence our long-standing Absolute Return focus.
We need to talk about Japan
Japan has been in the news a lot lately. The US announced a trade deal with Japan last week, which essentially settles the tariff for Japanese goods exports to the US at 15%. The big deal here, and indeed with a lot of the US trade negotiations, is autos. In 2024 Toyota (NASDAQ: TM) and Honda (NASDAQ: HMC) featured in the top five selling US passenger vehicles. Toyota stock after the announcement: Honda stock after the announcement: Japan is a big deal for global bond and equity markets.
When do geopolitics really matter for markets?
No one likes sitting around the proverbial fireplace and musing about the shifting tectonic plates in geopolitics more than us. While geopolitical events often capture significant attention, they generally do not have a substantial impact on bond and equity markets.
Cut by how much?
The US Federal Reserve took the “bang” rather than the “whimper” approach last month, surprising almost everyone with a 50 basis point cut. With stocks at or near a record high, credit spreads at their tightest, and macro data cooling, but not crashing, it is a bold move.
Can anything stop the credit train?
US investment grade spreads are hovering at or very close to all-time lows. Since the GFC, US spreads versus treasury have been as low as 76 basis points (bps). They currently sit at 82bps. US High Yield spreads are hovering at or very close to all-time lows. Since the GFC, High yield spreads have rarely, and for a short period, stayed below 300bps. They currently sit at 298bps.
3 parts of the economy keeping inflation high (and making the RBA's job tough)
“Now people, stop what you're doing, and listen to what I have to say, cause inflation is in the nation and it's about to put us all away.” - Inflation blues classic. Ernest Jackson, Sugar Daddy and the Gumbo Roux For many years, we have been card carrying members of the deflationista club. In the decades preceding COVID, long term drivers of prices were overwhelmingly lower, exerting downward pressure on inflation.
Could the RBA cut before the Fed?
Everyone is fixated on when the US Federal Reserve will cut rates. The discussion isn’t if, but when, and by how much. This is welcome news for a bond market that, so far in 2024, is treading water when one considers the year-to-date negative returns for the major benchmarks – the Bloomberg Ausbond Composite Index and Bloomberg Global Aggregate.
The high yielding recession is coming
We wish we could bring better news but the prognosis for the Australian economy is not good with recession risks rising as the consumer enters a new era of pain, whilst the RBA is likely to only consider limited relief by way of cuts. The consumer has been under pressure for some time, but business confidence and activity has held up. That’s changing now, which sees both consumers and business start the year more aligned in a sombre outlook.
Why Australian 10-year yields may struggle to rally even as the recession rolls in
In the ‘year of the bond’ the beleaguered bond investor could be forgiven for being sceptical of the sustainability of any rally as we head into the final stage of 2023. 10-year government bond yields have been the wild thing, gyrating up and down regularly but so far already up ~100bps over 2023. Recently, after touching 5%, the US 10-year Treasury yield has retreated back to ~4.40%.
Australia's economy is living in a Matrix of its own doing
The 1999 movie “The Matrix” is a great film on many levels. It explores the theme of perception versus reality in a world where machines have trapped humans as an energy source and then created an illusory veil to placate people into thinking everything is awesome. A bit like financial markets.
Australia is living in a matrix economy
The 1999 movie “The Matrix” is a great film on many levels. It explores the theme of perception versus reality in a world where machines have trapped humans as an energy source and then created an illusory veil to placate people into thinking everything is awesome. A bit like financial markets.
Applause for a pause
It’s becoming extremely difficult to discern the likely action at each RBA meeting other than to say they are in the latter stage of the game. At this late stage of the cycle, the RBA is attempting to finesse what is already tight policy without risking an overshoot. The decision to pause is the RBA’s way of conveying that they are now reluctant hikers (again) and that the outlook is very data dependent. The commentariat is ruminating over whether this is a ‘hawkish’ or ‘dovish’ pause.
Has the recession already begun?
The contrast couldn’t be starker. In Q1, 2023 the US economy grew at 1.3% on an annualised basis. Forecasts for Q2 are lower but still positive. Next week, we get the equivalent Q1 GDP data for Australia and already forecasts are centred around whether it will even be positive at all. Two major banks forecast 0.2%. Another high-profile investment bank projects 0%. Another still expects -0.2%. We will see but the charts below show the sequence of quarterly real GDP growth over the last two years.
In debt we (can no longer) trust
The US is close to hitting its congressionally mandated debt limit. This event comes about every few years because the US government has a legislated dollar cap on the borrowing authority of the treasury which can only be increased by an act of Congress. The Treasury has recently suggested it could run out of money as soon as early June. One-year sovereign credit default swaps on the US are trading at ~177bps. The long run average is ~15bps.
Can the battler find a friend?
The Australian dollar has been stuck in the high 60-cent range against the US dollar for a while now. Aside from a brief look above the 70-cent area in January, it’s been generally stuck in a range of 65-70c since August last year. What is going on with the little Aussie battler? Are the days of the strong Aussie dollar behind us and are we entering a longer-term structural period of weakness? There are many angles to take but there is reason for optimism.
Falling money supply points to recession, and maybe severe
Introduction Professor Tim Congdon is Chair of the Institute of International Monetary Research at the University of Buckingham. Firstlinks has featured his work several times, starting at the height of the pandemic on 15 April 2020 in Magic money printing and the reality of inflation, when he said: "What is wrong with the supposed ‘magic money tree’? The trouble is this.
How to weight companies in a successful stock portfolio
As a fund manager, we like to talk about the stocks we hold: what the companies do, why they look attractive and how they fit with our investment philosophy. Stock picking is key to our investment philosophy. Outperforming over the long term, however, does not solely depend on the stocks you pick. It also depends on how you weight those stocks in your portfolio.
Brace, brace, brace: The real issue behind the recent banking turmoil
The commentariat until recently had shifted from hard to soft landing to no landing at all. Suddenly, those lags in monetary policy don’t look so long and variable after all. But it’s highly unlikely that we are about to face another banking crisis, GFC style. The tremors reverberating across the banking world from Silicon Valley to Zurich expose idiosyncratic weaknesses, but the risk is that markets focus on the headlines and miss the bigger issue building beneath the surface.
Brace, brace, brace: The real issue behind the banking turmoil
Editor's Note: This article was first published by Franklin Templeton on 17 March 2023. The commentariat until recently had shifted from hard to soft landing to no landing at all. Suddenly, those lags in monetary policy don’t look so long and variable after all. But it’s highly unlikely that we are about to face another banking crisis, GFC style.
Brace, brace, brace
The commentariat until recently had shifted from hard to soft landing to no landing at all. All of a sudden, those lags in monetary policy don’t look so long and variable after all. But it’s highly unlikely that we are about to face another banking crisis, GFC style. The tremors reverberating across the banking world from Silicon Valley to Zurich expose idiosyncratic weaknesses but the risk is that markets focus on the headlines and miss the bigger issue building beneath the surface.
Time to start talking about rate cuts
It’s time to start contemplating the next phase of the cycle as we approach the end of the monetary assault on inflation. The RBA Governor Phil Lowe yesterday, in a key speech, pointed out that the bank is close to a pause. This is a significant development as it reinforces the belief we have had that we are in the final stage of the hiking cycle. It also reinforces the key point that Australia faces different dynamics to other economies, notably the United States.
It's time to start talking about rate cuts
It’s time to start contemplating the next phase of the cycle as we approach the end of the monetary assault on inflation. The RBA Governor Phil Lowe yesterday, in a key speech, pointed out that the bank is close to a pause. This is a significant development as it reinforces the belief we have had that we are in the final stage of the hiking cycle. It also reinforces the key point that Australia faces different dynamics to other economies, notably the United States.
Is the consumer about to crumble?
If there is one thing the RBA wants its for Australians to stop spending, easing pressure on the employment market and consumption. It is still early days but signs are growing that the Australian consumer might finally be getting the memo. If that’s the case its good news in the task of cooling domestic demand and further adds to confidence that inflationary pressures peaked at the end of 2022 and will ease this year – a point made today by the RBA’s Head of Economic Analysis, Marion Kohler.
After the rally. What is the fair value of the 10 year?
A much welcome rally in bonds over recent weeks has seen the Australian 10-year government bond yield fall by around 80bps from its high of ~4.20% in mid-October to ~3.40%. With the cash rate now at 3.1%, this is a premium of only 30bps - the lowest since 2019. The US 10-year treasury over the same period has rallied from around 4.23% to ~3.5% which has been a significant driver of the move in local yields as is typically the case.
Layer cake anyone? Just like that, corporate bonds look attractive again.
Can it be that parts of the credit market look attractive again? Firstly, daring to suggest any aspect of fixed income looks cheap at the moment is about as popular as a coal miner at an ESG meeting, as the chorus grows ever louder for the end of the world...
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