- Fed squeaks through another day
- Senate can now take up virus-relief bill
- Stocks plunge as America shuts down
- Today’s U.S. economic data will only partially capture virus effects
Fed squeaks through another day — The Fed on Monday squeaked through the day with a big -12% stock market sell-off but without any systemic break in the financial system, which itself was a victory. The Fed is trying to help the economy as best as it can, but its most important job right now is keeping the financial markets functioning and keeping credit flowing to businesses and households. As long as the financial system holds up, the economy should be able to recover fairly quickly once the worst of the pandemic is over.
The Fed has already pulled out nearly all the stops by cutting rates to near-zero, providing daily liquidity with virtually unlimited repos, buying $40 billion of Treasury securities on Monday as part of its newly-minted $700 billion QE4 program, and expanding dollar liquidity to overseas central banks with larger swap lines.
The main systemic concern continues to be the corporate funding markets since there are few investors or banks that want to fund corporations that are partially closing down and are seeing massive hits to their revenue. The corporate bond market is in a tailspin, and the commercial paper market is barely holding together. The Fed may yet need more authority from Congress to step in with loans to prop up the corporate funding markets. Banks are always a concern, but they are at least in better shape due to the reforms seen after the 2008/09 financial crisis.
Senate can now take up virus-relief bill — The virus-relief bill, passed by the House late Friday night, saw delays on Monday. Those delays were likely a contributing factor to yesterday’s plunge in the stock market. The stock market last Friday rallied sharply, partially due to hopes that the virus-relief bill would be passed quickly. The House virus-relief bill, which has been approved by President Trump, includes free virus testing, two weeks of paid sick leave, enhanced job benefits, increased food aid, and higher funding for Medicaid benefits.
Some Republican Senators objected to the structure of the paid-leave portion of the bill. However, those objections were apparently addressed in a deal between Treasury Secretary Mnuchin and Speaker Pelosi because the House on Monday evening approved a technical corrections bill by unanimous consent. That allowed the bill to move forward to the Senate for its consideration beginning today.
Meanwhile, Treasury Secretary Mnuchin will meet with Republican Senators at lunch today to discuss ideas for a new and much bigger virus-relief bill. Mr. Mnuchin said the package could include general stimulus, relief to small businesses, and possibly relief to major sectors such as airlines, although sector-relief might have to wait for the next bill. Mr. Mnuchin wouldn’t put a dollar value on the package being developed, although he said it would be “big.”
On the Democratic side, Senate Minority Leader Schumer is expected to unveil a $750 billion package as soon as today. Mr. Schumer’s office said the package would put money “directly into the hands of American people” and would contain many other measures including boosting hospital capacity, providing aid to small businesses, and delaying payments on federal loans. Mr. Schumer’s idea of a $750 billion package would be about 3.5% of U.S. nominal GDP ($21.727 trillion), still less than New Zealand’s fiscal package of 4% of GDP unveiled last night.
The Fed has already done nearly everything it can under its current authority to help the markets and the economy. Congress and the White House now have the responsibility of approving legislation that addresses both the health crisis and the economic crisis. The markets will therefore be carefully watching how relief packages fare in Congress and at the White House.
Stocks plunge as America shuts down — The S&P 500 index (SPX) on Monday plummeted to a 15-month low and closed the day sharply lower by -11.98%. The SPX is nearing the low posted during the Q4-2018 downside correction. However, the index has still retraced only 37% of the remarkable rally seen since the 2008/09 financial crisis.
Stocks plunged on Monday on the avalanche of closures of events, schools, restaurants, bars, and businesses. San Francisco went so far as to impose a public-health order, punishable by a misdemeanor criminal offense, that demands the closure of all non-essential businesses.
The growing size of America’s shutdown assures a big drop in GDP. Goldman Sachs, for example, is projecting that U.S. GDP in Q2 will plunge by -5% (q/q annualized) after zero growth in Q1, but that the economy will then rebound in the second half by +3% in Q3 and +4% in Q4, still posting a positive growth rate of +0.4% for calendar 2020. However, that forecast may prove to be far too optimistic if the coronavirus crisis drags on for months due to the difficulty of forcing Americans to observe social distancing measures and the delay in testing to identify virus carriers.
The VIX index on Monday posted a new 11-1/4 year high of 83.56, but it remained below the record high of 89.53 posted in November 2008. The VIX closed the day +24.86 at 82.69.
Today’s U.S. economic data will only partially capture virus effects — Today’s raft of U.S. economic data will be of limited value since it will not fully reflect the virus panic that started in late February. The consensus is for a +0.2% m/m increase in Feb retail sales, a +0.2% m/m increase in Feb manufacturing production, a -22,000 decline in Jan JOLTS job openings, and a -1 point decline to 73 in the March NAHB housing index. Monday’s Chinese Jan-Feb economic data was sobering with a -13.5% y/y plunge in industrial production and a -20.5% y/y plunge in retail sales.
