- Markets await details on Washington’s stimulus plan
- ECB fired its bazooka years ago and has only minor stimulus to offer today
- UK shows how stimulus is doneÂ
- Oil prices fall as UAE joins the fray
- U.S. core PPI expected unchanged
- Unemployment claims will be watched for uptick in layoffs
Markets await details on Washington’s stimulus plan — The U.S. stock market on Wednesday fell sharply on disappointment that Washington had not yet been able to put together a fiscal stimulus program. The stock market was also rattled by the growing fallout from the coronavirus as WHO on Wednesday officially declared a pandemic.
President Trump in an address Wednesday evening restricted air travel with Europe and announced plans for payroll tax relief, paid sick leave, tax payment deferrals, and emergency SBA loans to affected businesses. The House is working on its own stimulus package. The House and Senate are scheduled to be in recess next week, but the recess could be canceled if bills need to be passed.
The S&P 500 index (SPX) on Wednesday fell to a new 13-month low and closed the day sharply lower by -4.89%. On yesterday’s low, SPX fell by a total of -20.2% from the mid-Feb record high, thus technically qualifying as a bear market by falling by more than 20%. The Nasdaq 100 index on Wednesday posted a 4-3/4 month low and fell by a total of -18.9% from its mid-Feb record high. The VIX index on Wednesday rose by +6.37 to 53.67, but remained below Monday’s 11-1/4 year high of 62.12.
The 10-year T-note yield on Wednesday fell by -3.7 bp to 0.996% due to the stock market plunge. However, Wednesday’s rally in T-note prices was capped by tepid demand for the 10-year T-note auction and by the fact that the Treasury market will be called upon to deficit-finance any multi-billion-dollar stimulus program offered by Washington. The Treasury today will conclude this week’s $78 billion coupon package by selling $16 billion of re-opened 30-year bonds.
Market expectations for Fed easing increased yesterday. The market is now fully expecting the FOMC at its meeting next week to cut its funds rate target by 75 bp to 0.50%/0.75% and is discounting a 40% chance for a 100 bp to 0.00%/0.25% next week.
ECB fired its bazooka years ago and has only minor stimulus to offer today — The ECB at its policy meeting today is expected to announce new stimulus measures, but the ECB is hamstrung by the fact that its stimulus policy is already running at nearly full tilt. The ECB needs to focus on preventing a new meltdown in the Eurozone banking system and making sure that emergency credit is getting to consumers and businesses with its targeted lending programs.
The consensus is that the ECB today will announce a -10 bp cut in its deposit rate to -0.60% from the current level of -0.50%. However, that cut will further hurt bank profit margins, which is why only a minor -10 bp cut is expected.
The markets would be the most impressed if the ECB today were to announce an expansion of its 20 billion euro per month QE program, along with a wider definition of the securities that it can buy under the program. However, the consensus seems to be that the ECB might save an expansion of its QE program until the coronavirus situation gets worse.
UK shows how stimulus is done — The UK government on Wednesday announced a targeted package of fiscal and monetary stimulus measures that stand as an example to other governments.
The BOE on Wednesday cut its benchmark rate by -50 bp to 0.25% and initiated measures to help keep credit flowing through the economy. The BOE introduced a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves that could provide in excess of 100 billion pounds in term funding. The BOE also reduced the UK countercyclical capital buffer rate to 0%, which should give banks even more room to lend.
UK Chancellor of the Exchequer Sunak then announced 30 billion pounds ($34 billion) of fiscal stimulus and pledged to spend 600 billion pounds by 2025 on an infrastructure program, alongside measures to help businesses contain the disruptions from the coronavirus.
Oil prices fall as UAE joins the fray — April WTI crude oil on Wednesday closed sharply lower by -$1.38 (-4.02%) at $32.98. In case anyone doubted Saudi Arabia’s resolve, Aramco on Wednesday was instructed by the government to boost Saudi Arabia’s oil capacity to 13 million bpd from the current capacity level of about 11.5 million bpd (production is currently at about 9.7 million bpd).
Also, OPEC-member UAE on Wednesday announced that it would join in the fray by selling 4 million bpd of oil in April, which would be up by +33% from its current production level of about 3.0 million. Some of that supply will have to come from inventories since the UAE currently has a production capacity of only about 3.5 million bpd.
U.S. core PPI expected unchanged — The consensus is for today’s Feb PPI report to ease to +1.8% y/y from Jan’s +2.1% and for the Fed core PPI to be unchanged at +1.7% y/y. The February inflation statistics don’t have much significance given the current plunge in commodity prices and the economy. The 10-year breakeven inflation expectations rate yesterday fell by -4 bp to 1.00%, which is half the Fed’s inflation target of +2.0%.
Unemployment claims will be watched for uptick in layoffs — The markets will be watching today’s unemployment claims report for confirmation of anecdotal reports that layoffs are increasing in sensitive industries such as travel, retail, and trucking. The consensus is for today’s initial claims report to rise by +4,000 to 220,000 and for the continuing claims report to rise by +4,000 to 1.733 million
