- Powell’s comments awaited on economy, systemic risk, and negative interest rates
- U.S./China relations are fraying over pandemic accusations but phase-one trade deal so far remains in place
- Markets snap up refunding auctions despite much bigger sizes
Powell’s comments awaited on economy, systemic risk, and negative interest rates — Fed Chair Powell today will discuss current economic issues in a webinar hosted by the Peterson Institute for International Economics.
The markets are eager to hear Mr. Powell’s take on the extent of the weakness in the U.S. economy and the prospects for a recovery. Other Fed officials have recently been predicting a weak recovery. Minneapolis Fed President Kashkari, for example, said on Tuesday the there is likely to be a “gradual, muted recovery.” However, Mr. Powell may take more of a cheerleading role to try to buck up business and consumer confidence. Mr. Powell may also call on Congress and the White House to provide more fiscal help for the economy.
The markets will also be waiting to hear whether Mr. Powell believes the Fed has the systemic risks in the global financial markets under control. The Fed has thrown every tool it can think of at the economy and the markets, and the Fed has so far at least prevented a global financial crisis. However, there is still the lurking possibility of new trouble in particular markets or the failure of a major fund or financial institution. In some good news, the Fed yesterday finally got its Secondary Market Corporate Credit Facility off the ground and started buying corporate debt ETFs.
Mr. Powell today may reiterate his long-held view that the Fed will not cut its funds rate target into negative territory. Several Fed officials in the past few days have specifically mentioned their opposition to negative interest rates, suggesting that the Fed is running a coordinated messaging campaign against negative interest rates. For example, Dallas Fed President Kaplan on Tuesday bluntly said, “I would be against negative interest rates.” St. Louis Fed President Bullard on Tuesday said negative interest rates have a mixed track record and are not a good option for the U.S.
The federal funds rate futures contracts from mid-2021 through early-2022 yesterday closed at slightly negative levels of minus 2-3 bp, which kept negative interest rates in the news. Meanwhile, the April 2023 federal funds futures contract, which is the longest-dated futures contract that is currently trading, closed at 6 bp yesterday, which is only 1 bp above the current effective federal funds rate of 5 bp. That illustrates that the market current currently sees no chance of a Fed rate hike for at least the next three years.
The markets today will also be listening for the off chance that Mr. Powell mentions any parameters for the Fed’s unlimited QE program. The Fed this week trimmed its daily purchases of Treasury securities to $7 billion (from $8 bln last week) and MBS securities to $5 billion (from $6 bln last week). The Fed’s balance sheet has risen by a total of $2.5 trillion (+62%) just since the end of February to a new record high of $6.72 trillion, which is equivalent to 31% of U.S. GDP (up from 19% before the pandemic).
U.S./China relations are fraying over pandemic accusations but phase-one trade deal so far remains in place — The markets were pleased last Friday when Lighthizer/Mnuchin held what they said was a constructive phone call with China’s Vice Premier Liu, who apparently promised that China will make good on its purchase requirements under the phase-one trade deal. Indeed, China in the past two weeks has announced significant purchases of U.S. soybeans. Also, China on Tuesday announced tariff exemptions for 79 U.S. products to encourage the purchase of those goods.
However, all is not well with U.S./China relations. The White House on Monday instructed the Federal Retirement Thrift Investment Board to halt its plan to move $50 billion of a federal employee retirement plan into tracking an MSCI index that has emerging market stocks, including Chinese stocks. The White House said that order was due to investment risk and national security, but there was little doubt it was driven in part by Mr. Trump’s threat to punish China for the coronavirus pandemic. It remains unclear whether that move is significant enough to draw Chinese retaliation.
China yesterday did retaliate against Australia for its call for an independent and transparent investigation into the source of the coronavirus pandemic. China cut off meat imports from four Australian meatpacking plants and threatened tariffs on Australian barley.
Chinese officials are also angry at the U.S. for pandemic accusations and some Chinese hardliners are calling for China to void the U.S./China phase-one trade deal. Throwing fuel on the fire, Republican Senator Lindsey Graham on Tuesday introduced a bill that would authorize President Trump to slap sanctions on China if it does not provide a full accounting of its actions on the pandemic.
Markets snap up refunding auctions despite much bigger sizes — Luckily for the Treasury, investor demand was strong for Monday’s 3-year T-note and Tuesday’s 10-year T-note auctions. Strong demand isn’t surprising given the Depression-era level of unemployment, zero short-term rates, and inflation expectations hovering near 1%. However, this week’s much larger auction sizes could have resulted in disappointing investor demand and a rise in Treasury yields. The Treasury today will conclude this week’s $96 billion refunding operation by selling $22 billion of 30-year T-bonds, up by $3 billion from February’s $19 billion auction.
The Treasury yesterday announced a record-sized -$738 billion deficit for April as April 15 tax revenues were deferred and pandemic spending exploded. The Treasury has already announced that it will have to sell a net $3 trillion of new debt in Q2 and $677 billion of net new debt in Q3.
