- FOMC meeting unlikely to produce any major new easing moves
- BOJ adopts unlimited QE
- April U.S. consumer confidence expected to plunge
- USO tries to protect itself from the existential threat of negative oil prices
FOMC meeting unlikely to produce any major new easing moves — The FOMC at its 2-day meeting that begins today is not expected to announce any major policy changes. The Fed has already adopted the most stimulative monetary policy in its history, with interest rates near zero and with an unlimited QE program. The Fed, just since the end of February, has boosted its balance sheet by $2.4 trillion (+58%) to a record $6.57 trillion, which is a much larger boost than the $1.7 trillion QE3 program in 2012-14 that took two years to complete. The increase in the Fed’s balance sheet has permanently injected a massive quantity of reserves and liquidity into the U.S. financial system.
The Fed, in addition, has adopted a variety of emergency programs that are providing liquidity to key markets including the Treasury market (with daily purchases this week of $10 billion), the mortgage-backed securities market (with daily purchases this week of $8 billion), the corporate bond market, the commercial paper market, and the asset-backed securities market.
The Fed is also backstopping business loans with a program to buy PPP loans from banks and with funding for the Main Street Business Lending program. The Fed also has programs to support government securities dealers, money market funds, and state-and-local governments. The Fed has also met heavy emergency demand for dollar liquidity overseas by (1) expanding its dollar swap programs with major foreign central banks, and (2) giving dollar loans to most other foreign central banks via a Treasury repo facility.
The Fed on Monday announced the expansion of its Municipal Liquidity Facility, which will allow smaller cities and counties to borrow from the facility.
The markets are not expecting the Fed to cut the funds rate any farther because it is already essentially at zero. Fed Chair Powell continues to disavow any intention of adopting negative interest rates. Negative interest rates are a double-edged sword because they represent an easier monetary policy but hurt bank profitability and individual savers.
The Fed this week might raise its IOER rate from the current level of 0.10% because the funds rate traded as low as 0.04% last week, well below the 0.125% mid-point of the funds rate target range of 0.00%/0.25%. However, any increase in the IOER rate would simply be a technical move, with no implication for the Fed’s policy direction.
BOJ adopts unlimited QE — The Bank of Japan (BOJ) on Monday at its policy meeting adopted an unlimited QE program and dropped its former annual purchase target of 80 trillion yen ($743 billion). The BOJ also increased its limits on purchases of corporate bonds and commercial paper to 20 trillion yen, which should provide some relief to the corporate funding markets. The BOJ since the end of February has increased its balance sheet by $259 billion, which is more than its usual purchase amount but far less than the Fed’s $2.4 trillion boost over the same period.
Even though the BOJ now says it has an unlimited QE program, the BOJ’s primary policy goal still seems to be its yield-curve control policy where its short-term rate is pegged at -0.10% and its 10-year JGB yield target is pegged at zero with a band of +/- 0.20%. The BOJ will likely keep buying whatever amount of securities it must in order to keep the 10-year yield within the target range, but likely in the lower half of the range (i.e., zero to -0.20%) to keep monetary conditions as stimulative as possible.
April U.S. consumer confidence expected to plunge — The consensus is for today’s April Conference Board U.S. consumer confidence index to plunge by -32.1 points to a new 6-year low of 87.9, adding to March’s -12.6 point decline to 120.0. The University of Michigan has already reported that its U.S. consumer sentiment index in April fell by -17.3 points to an 8-year low of 71.8.
USO tries to protect itself from the existential threat of negative oil prices — June WTI oil prices on Monday plunged by -$4.16 (-24.6%) to $12.78 on the combination of overwhelmingly bearish oil-market fundamentals and heavy selling by the United States Oil Fund ETF (USO). July WTI showed a smaller decline of -$3.14 (-14.8%) to $18.08. USO on Monday announced that it would sell all its June contracts during the 3-day period of Monday through Wednesday and roll the positions into Aug, Sep, Oct, Dec and June 2021 contracts. Also, USO can now invest in ICE as well as CME futures contracts.
USO’s original purpose was to invest in the front-month WTI contract in order to track spot oil prices. However, the gargantuan size of USO means that it is causing massive volatility in the front-month contracts and is at risk of exceeding position-limits allowed by the CME and ICE.
USO could also face an existential problem if it were to continue investing mainly in the front-month WTI contract. If that contract were to turn negative again, then USO itself might have to dissolve since it could have a negative worth. That in turn could cause systemic problems for the financial system because of the possibility that USO could default on its futures contracts, leaving its brokerage firm and the exchange clearing company on the hook for the losses.
Crude oil prices on Monday also fell on news that world oil storage facilities are nearing capacity, at which point spot prices would likely see another collapse. South Korea on Monday said it had run out of commercial crude oil storage space, making it the fourth Asian country to run out of storage space. Goldman Sachs on Sunday said it estimates the global oil market may test its storage capacity limits in as little as three weeks, which it said would then require the immediate shut-down of 20% of global oil production.
