- Powell in his testimony today on the CARES Act will likely reiterate his key themes
- U.S. housing starts expected to plunge
- Italian bond yields drop sharply as Germany/France agree on recovery fund
Powell in his testimony today on the CARES Act will likely reiterate his key themes — Fed Chair Powell and Treasury Secretary Mnuchin both testify today in a virtual hearing before the Senate Banking Committee regarding the CARES Act, which is the $2 trillion virus rescue bill passed by Congress in March.
Mr. Powell is likely to reiterate his key themes, i.e., (1) the economic recovery will be slow, (2) more fiscal stimulus is necessary, and (3) the Fed does not want to see negative interest rates. Mr. Powell’s written testimony for today’s hearing was already released Monday afternoon, and he said in part, “We are committed to using our full range of tools to support the economy.”
Mr. Powell, in an interview with “60 Minutes” aired on Sunday, said that “We’re not out of ammunition by a long shot. We can enlarge our existing lending programs. We can start new lending programs if need be.” Mr. Powell was also pessimistic about the economic outlook, saying he thinks the economy will recover steadily in the second half of this year if there isn’t a second wave of the virus. However, he said that a full recovery may take until the end of 2021 since people need to be fully confident about the health risks.
Mr. Powell on Sunday again rejected negative interest rates, saying that the Fed believes negative interest rates are “probably not an appropriate or useful policy for us here in the United States. There’s no clear finding that it actually does support economic activity on net. And it introduces distortions into the financial system, which I think offset that.”
Left unsaid, the Fed is also undoubtedly afraid that pushing the funds rate into negative territory could spark a run on the $5 trillion of U.S. money market funds, which in turn could cause new systemic risks for the U.S. financial system. Many investors would rather withdraw their cash and put it in a safe or in a zero-rate FDIC bank checking account rather than paying a money market fund to hold their money.
Other Fed officials will be out in force this week with speaking engagements. The Fed is clearly running a coordinated messaging campaign with all Fed officials trying to convince the markets that there is no way the Fed will adopt negative interest rates. The Fed seems to be trying to keep market rates from turning negative on expectations that the Fed might cut the funds rate into negative territory. The federal funds rate futures curve, from mid-2021 through early-2022, rose to zero yesterday from minus 1-3 bp late last week as the Fed’s warnings against negative rates seemed to finally have some impact.
Senators today may put Powell-Mnuchin on the spot about how much longer it will take to get all the Fed’s financing facilities up and running. Of the Fed’s nine facilities, there are still four that have yet to be launched, including the important Main Street Lending Program. The Fed has pulled out all the stops in trying to get cash directly to the markets and entities that need it the most in an attempt to avert another depression, although the more complicated programs are taking time to launch.
U.S. housing starts expected to plunge — The consensus is for today’s April housing starts report to plunge by -26.0% to 900,000, adding to March’s -22.3% plunge to an 8-month low of 1.216 million. Today’s expected report of 900,000 would be a new 5-year low and would produce an overall March-April plunge of an extraordinary -43%.
U.S. home builders have slammed the brakes on their building plans due to (1) the shutdown of non-essential businesses in many states, and (2) uncertainty about how long it might take for demand to recover for new homes. New home sales will have some heavy competition in coming months as many people are forced to put their existing homes on the market to bail out of mortgages and as banks flood the market with foreclosed houses. There are currently millions of Americans who have lost their jobs and many are likely to have difficulty paying their mortgages.
In some other bad news for the U.S. housing market, mortgage rates have only fallen modestly compared with the Fed’s 150 bp cut in the federal funds rate to near zero. The 30-year mortgage rate is currently at 3.28%, which is down by only -23 bp from the end of January. The 30-year mortgage rate has only fallen slightly below the previous record low of 3.31% seen in 2012 even though the current U.S. economic situation is the most dire since the Great Depression. Mortgage rates have not dropped by much because banks currently view the default risks as extremely high. Banks have also substantially tightened up their mortgage underwriting criteria, meaning it is now more difficult for U.S. home builders to find buyers who can qualify for a mortgage in this difficult environment.
Italian bond yields drop sharply as Germany/France agree on recovery fund — The 10-year Italian bond yield on Monday fell sharply to a 5-week low and closed the day -19 bp at 1.67%. The spread of the 10-year Italian bond yield over the bund yield fell by an even larger -25 bp to a 5-week low of 214 bp. The markets were pleased that German Chancellor Merkel and French President Macron agreed on the outline of a 500 billion euro recovery fund that can be used to help countries such as Italy and Spain that have been hit particularly hard by the pandemic. Merkel/Macron agreed that the recovery fund would be under the framework of the EU budget and that money could be borrowed by the European Commission. The deal was able to skirt Germany’s rock-solid opposition to any mutualized bonds. However, several countries have been opposed to any grants to troubled countries and approval of the deal by all the EU members is therefore not assured.
