Powell Bests Bernanke’s 2008 Policy Response

The Daily Shot: 24-Mar-20
The United States
The United Kingdom
The Eurozone
Japan
Asia – Pacific
China
Emerging Markets
Energy
Equities
Credit
Global Developments
Food for Thought



 

The United States

1. The Federal Reserve announced a new set of policy measures designed to stabilize the credit markets and cushion the economic contraction. The scope of some of these actions is unprecedented, going beyond what we saw in 2008.
 
Unlimited QE: Purchases of “Treasury securities and agency mortgage-backed securities in the  amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”
 
Support for commercial real estate: Including commercial mortgage-backed securities (CMBS) in QE.
 
Support for consumers and businesses: Credit facility to provide financing to “employers, consumers, and businesses” ($300 billion).
 
Support for corporate bonds: Two facilities to stabilize primary and secondary corporate bond markets. To support the secondary market, the facility will purchase ” corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds …” (see description).
 
Support for consumer credit: Issuance of debt “backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration” (TALF 2.0).
 
Support for municipal finance:
 
Expansion of the Money Market Mutual Fund Liquidity Facility to “include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit.”
Including “tax-exempt commercial paper as eligible securities” in the Fed’s commercial paper facility.
 
Support for small and medium-sized businesses: “Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts by the SBA.”

——————–

 
2. Investment-grade corporate and muni bonds rallied after the announcement.
 


 
The US dollar rally stalled, and gold rose.
 


 
Stocks shrugged off the Fed’s announcement and continued to sink. The stimulus bill impasse in Congress weighed on US shares, as the S&P 500 hit the lowest level since 2016.
 

——————–

3. The US Economic Policy Uncertainty Index hit a record high.
 

 
4. Over the past five years, there has been an unprecedented divergence between the unemployment rate and the US federal deficit. The government was pumping significant fiscal stimulus into a growing economy, which, in combination with low interest rates, inflated asset prices.
 
Source: Alpine Macro  


Back to Index

 

The United Kingdom

1. The UK is on lockdown.
 
Source: CNN   Read full article  
 
2. Over 40% of consumer spending is linked to social situations, and is at risk from “social distancing.”
 
Source: Oxford Economics  
 
3. This chart shows the UK’s coordinated fiscal and monetary stimulus.
 
Source: Goldman Sachs  
 
4. School closures are putting tremendous pressure on the UK’s workforce.
 
Source: Pantheon Macroeconomics  
 
5. Is the pound oversold?
 
Source: ANZ Research  
 
Traders remain bearish on the pound. Here is the 3-month risk reversal.
 


Back to Index

 

The Eurozone

1. Markit PMI measures showed business activity crashing in March. Here is Germany’s composite PMI. More on this tomorrow.
 

 
2. Consumer confidence has deteriorated sharply this month.
 

 
Retail sales will follow.
 
Source: Pantheon Macroeconomics  

——————–

 
3. Here is an overview of Germany’s fiscal stimulus.
 
Source: Goldman Sachs  
 
4. Market-based inflation expectations continue to tumble.
 

 
5. Hopefully, Italy’s infection rate trajectory is following China and South Korea.
 
Source: Pantheon Macroeconomics  


Back to Index

 

Japan

The March Markit PMI report suggests that Japan is in a deep recession.
 
Manufacturing PMI:
 

 
Services PMI:
 

 
Composite PMI vs. the GDP (first chart) and services PMI vs. household spending (second chart):
 
Source: IHS Markit   Read full article  


Back to Index

 

Asia – Pacific

1. South Korea’s exports remained resilient this month.
 

 
2. Singapore is in deflation.
 

 
3. Next, we have some updates on Australia.
 
Australian consumer confidence plummeted this month.
 

 
Here is the sentiment index on household finances.
 
Source: ANZ Research  
 
The March manufacturing PMI was resilient, but the index of new orders tumbled.
 

 
Service sector activity crashed.
 

 
The Aussie dollar bounced from the lows as global risk aversion moderated a bit.
 


Back to Index

 

China

1. The government is easing the Hubei lockdown.
 
Source: @WSJ   Read full article  
 
2. New infections appear to be all imported as students/expats return from other parts of the world.
 
Source: Goldman Sachs  
 
3. Steel inventories remain elevated (chart below), but the demand is recovering (second chart).
 
Source: @WSJ   Read full article  
Source: Goldman Sachs  

——————–

 
4. Margin loans have been on the rise.
 
Source: @WSJ   Read full article  
 
5. The nation’s total debt reached record levels last year.
 
Source: @WSJ   Read full article  


Back to Index

 

Emerging Markets

1. According to the World Economics SMI report, India’s business activity remained resilient this month.
 
Source: World Economics  
 
2. EM sovereign borrowing costs spiked this month.
 
Source: IIF  


Back to Index

 

Energy

1. With prices near the lowest levels in years, ETF investors are flooding into crude oil.
 
Source:   Further reading  
 
2. Gasoline prices are extraordinarily low. Is this the bottom?
 
Wholesale:
 
Source: @markets   Read full article  
 
Retail:
 
Source: GasBuddy  

——————–

 
3. Nigeria is selling its crude oil at record discounts.
 
Source: @adam_tooze, @JavierBlas, @TheTerminal  


Back to Index

 

Equities

1. The Fed’s drastic stimulus measures and optimistic comments from the White House boosted stock futures.
 
Source: Bloomberg   Read full article  

 
The Nikkei is up sharply.
 

——————–

 
2. Next, let’s take a look at some historical data on market corrections and recoveries.
 
The fastest crash ever (2 charts):
 
Source: @dollarsanddata  
Source: @WSJ   Read full article  
 
US and EM drawdowns:
 
Source: Pavilion Global Markets  
 
Declines and recoveries:
 
Source: BlackRock  
 
Length of recovery (2 charts):
 
Source: Investopedia  
Source: Statista  

——————–

 
3. Technicals suggest that the S&P 500 could stabilize soon.
 
Source: @DantesOutlook  
 
4. Earnings growth consensus estimates continue to tumble.
 
Source: Yardeni Research  
 
5. Equity long/short hedge funds had a rough month as they shrunk their exposure.
 
Source: Deutsche Bank Research  
Source: @markets   Read full article  

——————–

 
6. Dealers have been stuck with short-gamma positions amid client demand for equity puts. That exposure has been exacerbating equity volatility.
 
Source: @markets   Read full article  
 
7. The number of equity sales, trading, and research jobs at the largest investment banks has been declining over the past decade.
 
Source: @WSJ   Read full article  
 
8. This chart shows fund flows by factor/style.
 
Source: Deutsche Bank Research  
 
9. Next, we have some sector updates.
 
Below is the number of S&P 500 companies by sector mentioning coronavirus on their earnings calls.
 
Source: @FactSet   Read full article  
 
Will airline stocks follow a similar path of auto stocks in 2009 – with a potential bailout?
 
Source: BCA Research  
 
Nasdaq has consistently outperformed the S&P 500 since 2002.
 
Source: @markets   Read full article  


Back to Index

 

Credit

1. While investment-grade bonds rallied after the Fed’s announcement, the rout in leveraged-finance debt continued.
 
High-yield:
 

 
Leveraged loans:
 

——————–

 
2. The Fed’s action came just in time to ease forced sales in muni bonds and …
 
Source: @markets   Read full article  
 
… ETF price dislocation in investment-grade corporate bonds.
 
Source: @WSJ   Read full article  

——————–

 
3. The non-financial commercial paper market (short-term financing for corporations) remains stressed.
 

 
4. According to BCA Research, the US recession could be shorter in length than recent recessions. This suggests a peak default rate closer to 9%.
 
Source: BCA Research  
 
5. Which sectors in the securitization market are most vulnerable to the current downturn?
 
Source: Moody’s Investors Service  


Back to Index

 

Global Developments

1. The global economic contraction is likely to be deeper than in 2008, but the recovery is expected to be faster, according to Oxford Economics.
 
Source: Oxford Economics  
 
Here is a forecast from Goldman Sachs.
 
Source: Goldman Sachs  

——————–

 
2. High-frequency indicators don’t look encouraging.
 
Source: Alpine Macro  
 
Layoffs around the world are accelerating.
 
Source: World Economics  

——————–

 
2. The global weighted average monetary policy rate is now well below post-financial-crisis lows.
 
Source: Morgan Stanley Research  
 
And the G4 central banks are expanding their balance sheets.
 
Source: Morgan Stanley Research  

——————–

 
3. This chart shows the number of coronavirus-related fatalities.
 
Source: Gavekal   
 
If the rest of the world follows China’s trajectory, the total number of infections could flatten out in mid-April, according to Alpine Macro.
 
Source: Alpine Macro  


——————–

Back to Index

 

Food for Thought

1. The top 20% households’ share of US income:
 
Source: @pewresearch   Read full article  
 
2. Germany’s and Japan’s aging populations:
 
Source: Alpine Macro  
 
3. The aging population of US state prisons:
 
Source: The Marshall Project   Read full article  
 
4. Working longer hours at home:
 
Source: @markets   Read full article  
 
5. The coronavirus panic index by county:
 
Source: Cognovi Labs  
 
6. Concerns about getting tested:
 
Source: Gallup   Read full article  
 
7. How long can the coronavirus survive on surfaces?
 
Source: The Economist   Read full article  
 
8. Foreign tourism spending in the US:
 
Source: ANZ Research  
 
9. Job offer rejection rates by industry:
 
Source: @WSJ   Read full article  
 
10. TV ratings:
 
Source: Statista  

——————–


Back to Index