The US economy has gotten pummeled by the economic shutdown. The Atlanta Fed’s GDPNow measure of Q2 GDP is now at -45.5% with two weeks to go until the end of Q2. Note that The Federal Reserve has been expanding the M2 Money supply with a vengeance since the end of February.
M2 Velocity (Nominal GDP / M2 Money Supply) was at an all-time low at the end of Q1. The economic destruction caused by the Covid-19 related economic shutdown is epic.
On the positive side, the Philadelphia Fed is showing a V-shaped recovery.
On the down side, the trillions of monetary stimulus generated by The Fed has helped the S&P 500 index detach from corporate earnings. Or out of sync.
I could also say “Fauci’d”, thanks to our own Grim Reaper of the economy.
One month after the first 20Y auction in 34 years, the 20Y auction priced at a yield of 1.22% amid surprisingly strong demand. Moments ago, the Treasury sold its second batch of the recently restarted 20Y Treasury in the form of a $17 billion reopening of the original cusip (SR0), which priced at a high yield of 1.314%, which while higher than last month’s 1.22% yield was unexpectedly strong, stopping through the When Issued 1.329% by 1.5bps.
The auction metrics are as follows:
Bid to Cover: 2.63x, compared to 2.53x in the inaugural auction last month
Indirects: 61.6%, higher than last month’s 60.7%
Directs: 16.5%, also well above May’s 14.7%
Dealers: 21.9%, obviously lower than last month’s 24.6%
The 20Y Treasury appears at near the peak of the Treasury yield curve
Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.
(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.
Thecentral bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.
“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.
The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.
The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.
The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)
The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.
Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??
Fed Chair Jerome Powell channeling Thurston The Great Magician!
Anthony Fauci, the economic Cassandra, is screaming about the 2nd wave of the Covid virus. This will lead to a reversal of the re-opening of the US economy and further economic disaster. Hence, these fears have driven the Dow down almost 7%.
As Atlanta Fed’s Q2 GDP forecast is at -48.466%.
And the Taylor Rule suggestion for the Fed’s target rate is -11%. Although Powell won’t go there … at least yet.
That criticism takes two forms — one, Fed officials say evidence doesn’t show much effectiveness where they have been tried, and two, negative interest rates might throw markets, such as those for money markets, into turmoil.
But don’t get your hopes up for negative mortgage rates. At best, 30-year mortgage rates will shadow the already low 10-year Treasury yield. It really depends on how the 10-year Treasury yield responds.
Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work. Some are even hauling in two to three times as much.
Fed Chair Powell Participates in Virtual Discussion * Powell says Fed ‘days away’ from Main Street lending * Negative not ‘appropriate’ for U.S., he says * A second virus wave would undermine confidence * Fed works in ‘strictly nonpolitical way’
The massive stimulus known as the CARE Act (and massive Fed stimulus) did not work as hoped. Consumer spending in April declined by 13.6% MoM.
Personal income rose 10.5% MoM as intended, but personal spending did not work as planned.
The Atlanta Fed GDPNow forecast for Q2 US GDP is now below 50% at -51.2%.
And speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.