- Today’s German court ruling has the outside potential for disrupting ECB’s QE programs
- U.S. debt will soar by $3 trillion in Q2
- U.S. ISM non-manufacturing index expected to tumbleÂ
- March U.S. trade deficit expected to widen
Today’s German court ruling has the outside potential for disrupting ECB’s QE programs — The German Constitutional Court today will deliver a ruling that is expected to affirm the ECB’s QE programs. However, if there are any aspects of the ruling that throw the ECB’s QE programs into jeopardy, then the ruling could cause a massive sell-off in the peripheral bond markets, particularly the Italian bond market.
The German Constitutional Court today will issue a ruling on the ECB’s original QE program (2015-18), ending the 5-year court challenge. The strong likelihood is that the Court today will affirm the ECB’s QE programs, which would allow the ECB to continue with its purchases this year that could total nearly 1 trillion euros. The German Constitutional Court has generally accepted the ECB’s various unconventional monetary policy measures despite the plaintiffs’ claims that the QE program and other lending programs represent an illegal ECB financing of national governments.
Today’s ruling could have implications for the ECB’s two new QE programs, i.e., the Asset Purchase Program (APP) of 20 billion euros/mo that the ECB began in Nov-2019, and the Pandemic Emergency Purchase Program (PEPP) of 750 bln euros that the ECB began in March.
The main issue with the new PEPP program is that the ECB dropped the “capital key” restrictions that required the ECB to buy national securities in a proportion that equals the country’s size in the Eurozone. The ECB dropped that restriction so that it could concentrate its securities purchases in the Italian bond market, in particular, where yields surged due to concern about a high national debt load and a potential sovereign debt crisis.
The ECB has said that it eventually intends to return its portfolio to meet the capital key requirements, but there is no timeline for such a move. The German Constitutional Court could have something negative to say about the ECB favoring one country over another in buying securities.
The 10-year Italian bond yield spread over the German bund yield closed at 233 bp on Monday, towards the middle of the range seen in the past two weeks. The Italian bond yield spread is up sharply from the pre-pandemic level of about 135 bp, but is at least comfortably below the 11-month high of 279 bp posted in mid-March. The Spanish 10-year bond yield spread over bunds is in much better shape at 132 bp, which is about 100 bp less than Italy’s yield spread. Greece’s 10-year yield spread is currently 271 bp above bunds, which isn’t bad considering that Greece effectively went bankrupt in 2010-12.
U.S. debt will soar by $3 trillion in Q2— The Treasury announced yesterday that it expects to issue $2.999 trillion of privately-held net marketable debt in Q2 in order to finance the new pandemic rescue programs and cover reduced and deferred tax revenues. The Treasury said it expects another $677 billion of net new debt in Q3.
The expected $3 trillion surge in the national debt in Q3 would push the national debt from the current level of $25 trillion up to a new record high of $28 trillion. The new debt level would be up by about $8 trillion (+40%) since President Trump took office due to the combination of long-term chronic overspending, the 2018 tax cuts, and now the pandemic debacle.
U.S. ISM non-manufacturing index expected to tumble — The consensus is for today’s Apr ISM non-manufacturing index to show a sharp -14.7 point decline to 37.8, adding to March’s -4.8 point decline to 52.5. Today’s final-April Markit U.S. services PMI is expected to be unrevised from the early-April figure of 27.0, which would leave it down by -12.8 points from March.
Business confidence in the non-manufacturing sectors of the U.S. economy has been hit very hard by the partial shutdown of the U.S. economy. The restaurant, travel, and entertainment sectors are almost completely closed down and are likely to recover very slowly when the U.S. economy reopens. Confidence is dismal among home builders as the NAHB housing market index in April plunged by -42 points to an 8-year low of 30.
The consensus is for U.S. GDP in Q2 to plunge by -7.7% q/q (-27.5% annualized), which would produce a peak-to-trough decline in GDP in 1H2020 -8.9% (adding in the -1.2% q/q decline already seen in Q1). A -8.9% peak-to-trough decline in U.S. GDP would be more than double the -4.0% decline seen during the Great Recession in 2007/09, but at least would be less than the definition of a depression of more than -10%.
March U.S. trade deficit expected to widen — The consensus is for today’s March U.S. trade balance to widen to -$44.2 billion from the 3-1/2 year low of -$39.9 billion posted in February. Today’s expected deficit of -$44.2 billion would be substantially narrower than the 12-month trend average of -$49.7 billion.
Both exports and imports are likely to fall sharply starting in March due to the pandemic, which has sharply reduced overseas demand for U.S. products (exports) as well as U.S. demand for overseas products (imports). Exports and imports were already weak coming into the pandemic due to trade tensions, with exports in February falling by -0.4% y/y and imports falling by -4.7% y/y. China is not likely to be able to make good on its phase-one trade agreement to buy an extra $200 billion of U.S. products during 2020-21. Tariffs are now back in the news after President Trump threatened to slap new tariffs on China as retribution for what he says is China’s blame in causing the pandemic.
