CBO Forecasts Q2 GDP Drop Of -7% (Annualized -28% Decline), Mortgage Delinquencies To Near 30%

The Congressional Budget Office (CBO) is anticipating a grim second quarter this year as the economy sputters amid coronavirus-related layoffs and business closures, CBO director Phill Swagel said in a blog on Thursday (April 2).

Considering the disruption of daily business combined with a boost from the stimulus package, the CBO’s “very preliminary estimates” point to a drop in gross domestic product (GDP) exceeding 7 percent in Q2 2020.

“If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however,” he said.

There were more than 3.3 million new unemployment claims reported on March 26. The Q2 unemployment rate “is expected to exceed 10 percent during the second quarter, in part reflecting the … claims reported on March 26 and the 6.6 million new claims reported this morning [Thursday, April 2].”

The CBO indicated that new claims filed April 2 were 10 times higher than in any single week from 2007-09, during the financial crisis and recession. And unemployment is likely to exceed 10%

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Of course, mortgage delinquencies will explode to near 30%.
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All The King’s Horses: Atlanta Fed GDP For Q1 Is Now 2.1% As Dow Tanks Another 900 Pts After Factory Orders Decline

The George Mason University Law School is having an online discussion of “The Financial Pandemic: How to Navigate the Crisis to a Soft Landing.” And how The CARES Act – the CARE SYSTEM ENHANCEMENTS, AND ECONOMIC STABILIZATION Act and the various rescue credit facilities and regulatory forbearance programs being launched by the bank regulators will save the economy and financial markets.

First, the coronavirus impacts are not showing up in the Atlanta GDPNow forecast for GDP in Q1.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 2.2 percent on April 1, down from 2.7 percent on March 27.

After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the U.S. Census Bureau, the nowcasts of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth decreased from 1.6 percent and 4.5 percent, respectively, to 1.3 percent and 2.4 percent, respectively, and the nowcast of first-quarter real government spending growth decreased from 2.2 percent to 2.0 percent.

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Second, the lockdowns permeating the US, UK and other countries will have a negative effect on the economy.

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But all The Fed’s horses and all The Fed’s men (sic) can’t put the bubbly stock market back together again. The Dow is down another thousand today.

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Yes, The Fed and Treasury have enacted numerous programs to counter the job losses associated with the coronavirus and just try to keep the economy going through the crisis.

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Mortgage REITs Collapse By More Than 50% Before Slight Rally

Mortgage Real Estate Investment Trusts (MREITs) got clobbered starting February 20th and declined by over 50% before a small rally after the Fed/Congressional bailouts.

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Year-to-date, mortgage REITs are down over 50%.

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The Fidelity and Vanguard bond indices didn’t plunge as far and had a better rebound effect after the bailouts.

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Equity REITs had a plunge and rebound similar to the Dow.

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Mr. Freeze is still around for mortgage REITs.

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Dow Closes Friday Down 915 (Or 4%) As 10-Year Treasury Yield Drop 17 BPS (Fed Announces Reduction In QE)

Despite titanic intervention by The Federal Reserve and $2 trillion Congressional spending bill (packed with pork-barrel spending unrelated to the coronavirus), the Dow continued to nosedive.

Or as Buzz Lightyear once said “To infinity … and beyond!” He was referring to government spending and The Fed’s balance sheet.

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The Dow has whipsawed over the week, but particularly Friday. When The Fed announced it will reduce Treasury QE from $75BN to $60BN per day, the Dow dropped.

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Oddly, the Dow has been fairly predictable .. until The Fed/Congress got involved.

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According to the Elliott Wave, the Dow has broken from the major wave.

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Equity markets are still hypersensitive to coronavirus news and its impact on the economy.

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At least Chilean markets are up!

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The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus. Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets.

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.

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Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.

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The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.

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Welcome to Amity Island, in a shutdown over the Corona-19 virus.

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$423 Billion Distressed-Debt Deluge in March Doubles Lehman Wave (Hair Of The Dog!)

We are back to the collapse of Lehman Brothers, but this time the virus is not due to the banking system.

(Bloomberg) — Distressed debt supply has surged $234 billion to $559 billion in just the past week, escalating this month’s jump to $423 billion and setting a pace that would nearly double the $215 billion record for a single month set in October 2008. If the total ends the month at these levels, it would be the biggest-ever increase in the par amount of debt in the ICE BofAML US Distressed Index.

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Energy isn’t solely driving the distressed ratio (44.5%) higher anymore as all sectors now have double-digit distressed ratios.

Commercial and industrial (C&I) lending is approaching zero growth as of February.

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Fortunately for America, The Federal Reserve is on call!

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Thanks to Jesse at Jesse’s Cafe Americain!

Mortgage Bonds Rattle Wall Street Anew With Invesco Joining Pain (Fannie Spread To Gov’t SOARS)

Margin calls, the focus of books and movies like Margin Call, The Big Short, etc., during the financial crisis, are back!!

(Bloomberg) — The $16 trillion U.S. mortgage market — epicenter of the last global financial crisis — is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Federal Reserve to intervene.

Unlike last time, risky mortgages aren’t the cause. Instead, the coronavirus pandemic is threatening to make good loans go bad — and simultaneously sapping the market’s funding. There are fears that government efforts to shore up borrowers and financing won’t be enough and that mortgage and property investors again face massive losses.

Measures to slow the spread of the deadly disease are slamming the brakes on commerce, threatening to prevent companies from making payments on their leases and commercial mortgages. Companies are also firing employees, who won’t be able to keep up on their own rents and home loans. Mortgage industry veterans warn of a cascade of defaults.

At the same time, holders of mortgage-backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend. The pain continued Tuesday with Invesco Mortgage Capital Inc., a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell their holdings too.

Yes, Invesco Mortgage Capital is getting slaughtered, plunging from $18 on February 20th to $2.64 today.

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The Fannie Mae to Gov’t 10 year has exploded indicating a troubled mortgage market.

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Margin calls … they’re ba-ack!

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Housing and COVID-19 (Existing Home Sales Rise 6.5% In February) -30% Likely In March 😩

The US housing and residential mortgage market have benefitted from the dreaded COVID-19 virus … in the sense that the 10-year Treasury yield and contemporaneous mortgage rates (30-year) have fallen since September 2019 (pre-COVID-19 breakout).

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But the recent EHS numbers are for February (+6.5% MoM), not March. Expect around a 30% decline in existing home sales for March.

Here is a Washington DC area Realtor in action!

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10Y T-Notes Bid-Ask Spreads Widen To Financial Crisis Levels

The markets are over, under, sideways, down.

Bid-ask spreads on the 10-year Treasury Notes have exploded and is back to financial crisis levels.

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A steepening Treasury yield curve bodes ill for stocks … and volatility.

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Hedge, hedge, hedge!

Stimulypto II: Fed Opens Primary Dealer Credit Facility While Trump Pushes $1.2 Trillion Stimulus, $1,000 Checks in Two Weeks (Dow Jumps 1,000 Points!)

Its Stimulypto time again! The Fed and the US Government are going on a $1.2 TRILLION spending spree related to the infamous coronavirus.

(Bloomberg) — The Trump administration is discussing a plan that could amount to as much as $1.2 trillion in spending — including direct payments of $1,000 or more to Americans within two weeks — to blunt some of the economic impact of the widening coronavirus outbreak.

Treasury Secretary Steven Mnuchin pitched $250 billion in checks to be sent at the end of April with a second set of checks totaling $500 billion four weeks later if there’s still a national emergency, according to a person familiar with the matter.

“Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks,” Mnuchin said Tuesday at a White House briefing alongside President Donald Trump.

“It is a big number,” Mnuchin told reporters later on Capitol Hill. “This is a very big situation in this economy, we put a proposal on the table that would inject $1 trillion into the economy.”

The administration had been discussing a total aid package of $850 billion, but discussions later included spending as much as $1.2 trillion, according to people familiar with the matter.

The cash payments would be part of a stimulus plan Mnuchin is negotiating with Congress. The administration hasn’t decided on how much to send Americans, but wants the checks to exceed $1,000, according to two people familiar with the matter.

Mnuchin’s proposal included $300 billion for small business loans, $200 billion in stabilization funds, $250 billion in cash payments and a possible second round of checks, people familiar with the matter said. Including tax deferrals, that would bring the cost of the plan to around $1.2 trillion.

Also, The Federal Reserve on Tuesday opened an emergency lending program for primary dealers in yet another step aimed at keeping cash flowing into a U.S. economy shuddering under the impact of the coronavirus pandemic.

The Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a statement.

The facility will run for at least six months, the statement said, and may be extended. It will be offered at the discount rate, which was cut to 0.25% on Sunday evening in an emergency move by the central bank when it lowered its benchmark federal funds rate to nearly zero.

The Dow jumped 1,000 points on the sea of spending.

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Stimulypto!!

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