Markets appear to be going through a reality check in recent days. Yesterday, Fed Chair Powell added to the caution:
“the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems”
He reminded investors that Fed lending to businesses and state governments exists only in “unusual and exigent circumstances” and once the crisis over, the Fed will put these “tools away”. He was lukewarm on negative rates – “evidence on negative rates is very mixed”. Yet, he argued that the longer-term economic uncertainty warranted “additional policy measures”. He then reminded the government that “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage”.
This mix of defending existing policies (lending to businesses), ruling out some (negative rates) and inviting others (fiscal stimulus) shows the fast disappearing line between central banks and finance ministries. We touch on the thorny issue of negative rates in an excellent piece by George Goncalves and Dominique Dwor-Frecaut.
John Tierney takes a deeper look at US unemployment trends and compares them to recent data from Korea. The punchline is that unemployment rates could be underestimated. Meanwhile, I share some thoughts on Asian FX – INR looks particularly interesting right now.
Finally, we’ve added some cool new charts to our COVID tracker, which more clearly show the countries that have contained COVID and ones that haven’t.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Markets appear to be going through a reality check in recent days. Yesterday, Fed Chair Powell added to the caution:
“…the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.”
He reminded investors that Fed lending to businesses and state governments exists only in “unusual and exigent circumstances” and once the crisis over, the Fed will put these “tools away”. He was lukewarm on negative rates – “evidence on negative rates is very mixed”. Yet, he argued that the longer-term economic uncertainty warranted “additional policy measures”. He then reminded the government that “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage”.
This mix of defending existing policies (lending to businesses), ruling out some (negative rates) and inviting others (fiscal stimulus) shows the fast disappearing line between central banks and finance ministries. We touch on the thorny issue of negative rates in an excellent piece by George Goncalves and Dominique Dwor-Frecaut.
John Tierney takes a deeper look at US unemployment trends and compares them to recent data from Korea. The punchline is that unemployment rates could be underestimated. Meanwhile, I share some thoughts on Asian FX – INR looks particularly interesting right now.
Finally, we’ve added some cool new charts to our COVID tracker, which more clearly show the countries that have contained COVID and ones that haven’t.
Enjoy!
Bilal
The Fed’s Constructive Negative Rates Ambiguity (4 min read) Several Fed Funds futures contracts began pricing above 100 last week, implying that markets were pricing in a small negative Fed Funds rate in the not so distant future. Here, we discuss why we expect Chair Powell to maintain a “constructive ambiguity” on negative rates in his speech on 13 May, and we explore the potential market drivers and implications…
(Dominique Dwor-Frecaut, George Goncalves | 12th May, 2020)
The US Employment Report Was Bad, But Not For The Reason You Think (4 min read) There was plenty for everyone in last Friday’s US employment report. Bears (and most media) jumped on the massive increase in the unemployment rate to a post-war record of 14.7%, far above the GFC peak of 10%. At the top and spanning the width of the front page, the New York Times had a graphic of monthly nonfarm payroll employment change since 1946.
Most of the chart was a couple of inches tall but the last bar, representing 20.3 million lost jobs, stretched all the way to the bottom of the last column…
(John Tierney | 14th May, 2020)
Asia FX Update: Watch INR (1 min read) Markets are starting to come to terms with a COVID world and Asia FX is no different. After tumbling in March, most Asia FX stabilised over the last month. INR has strengthened against the dollar, SGD and TWD are flat, while CNH and KRW are down. The strength in INR is notable as it comes in the face of a generally strong dollar – the DXY is up over the past month…
(Bilal Hafeez | 14th May, 2020)
Global COVID-19 Tracker In the DM world, there were not any big changes in cases. However, on deaths, Sweden saw a 4% jump, which is most likely related to a recent death spiral in care homes. This has seen an additional $220 million fiscal spending targeted to elderly care. Neighbouring Finland saw a 3% increase, raising concerns about today’s school openings. Similarly, Japan saw a 3% increase as they plan to reopen some of its prefectures.
Denmark is planning to re-open cafes and restaurants on 18 May. Curiously, new data suggests that Japan has seen a 20% drop in suicides over April – perhaps the lockdown has eased worries…
(Bilal Hafeez, Stefan Posea | 14th May, 2020)
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)