Fed Chair Jerome Powell is adamant that the US will not go where other Central Banks have gone before … to negative rates.
Even though the Mankiw specification of the Taylor Rule model says that The Fed Funds Target rate should be -10.01% based on the surge in unemployment (14.70%) and the lack of core inflation (1.70%). The Fed Funds Target rate remains at 0.25%.
As unemployment surges (green line) with the lockdown, banks are expecting a tsunami of loan delinquencies and defaults. Hence, bank excess reserves have spiked as well (white line fever).
Hopefully with states opening up again, this is simply temporary.
Instead of losing my blues, Powell is giving me the blues.
Now ain’t this a kick in the head. The Covid-19 and the government shutdown response is leading to a crushing decline in US GDP for Q2 2020 of … -34.9% QoQ.
The recent dismal wholesale trade report sent forecast Q2 GDP down -34.9% QoQ.
The reaction to the declining US GDP? Meh.
The good news? NMHC rent payment tracker finds 80.2% of apartment households paid rent as of May 6.
A sign of the times. As governments around the globe shut down economies to prevent the spread of the Covid-19 condition.
The US unemployment rate rose to 14.7% in April, up from 4.4% in March.
Yes, 20.5 millions jobs were lost in April.
The U-6 unemployment rate (or full-time plus partial unemployment rate) rose to an astronomic 22.8%!
Average hourly earnings YoY rose to 7.9% YoY.
But look at the US employment total in labor force. Covid-19 / gov’t shutdown has wiped out labor force gains since 1999 and The Clinton Administration.
I wish I knew a place that was open in Virginia, but I don’t.
I feel like we are in the Three Stooges film “Oyster Stew.” Every time we look for good news, more bad news come out.
But here is some good news.
WTI Crude oil is up 21.26% this morning .. to $16.71 a barrel (still low).
And while US jobless claims rose 4.43 million the past week, the US is several weeks past the peak. (Knock on wood).
But back to crude. Saudi oil is still negative for heavy and medium crudes to the USA.
Now for the oyster eating the cracker.
US new home sales fell -15.4% MoM in March.
As I said, oyster stew.
The lack of demand for oil (and incredible supply build-ups) had led to WTI Crude oil to fall below … $11!
WTI Crude (Cushing, OKLA) is now at an all-time low.
Crude oil prices in the Middle East are … negative?
On the hotel front (government lockdowns are pretty bad for travel and hotels!), in comparison with the week of 7-13 April 2019, the industry recorded the following:
• Occupancy: -69.8% to 21.0%
• Average daily rate (ADR): -45.6% to US$74.18
• Revenue per available room (RevPAR): -83.6% to US$15.61
What I like about the government shutdown of the US economy? NOTHING!
Even Jack Torrance can’t get a drink from Lloyd in the shutdown.
How far will Central Banks go to save the economy (or banks)? The Fed Funds target rate is back to Bernanke (BtoB?) in late 2008. And The Fed’s balance sheet keeps rising (after a momentary respite).
But it seems that all the stimulus (Federal government and Federal Reserve) is having trouble saving the market.
The S&P 500 hasn’t done so well either with today’s drop falling below the lowest P/E band.
US Treasuries rose again today and 10-year Treasury yields dropped almost 30 basis points.
And the spread between the 3 month Libor rate and the NY Fed’s Secured Overnight Finance rate is going up … and up.
Treasury Repo collateral … again?
They will do it on Fed Time!
Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap) widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!
The Federal Reserve has reversed course on its balance sheet unwind, but the reversal started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.
Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.
Treasury Repo collateral has spiked recently.
And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,
leading to a steepening of the Treasury yield curve.
Treasury volatility is on the rise again.
The coronavirus is NOT a good thing.
Yes, coronavirus fears are sweeping the globe.
But The Fed drives me crazy!
The spread between forward rate agreements (FRA) and overnight indexed swaps (OIS) just spiked to the highest level since Q1 2009.
A vanilla interest rate swap is an agreement between two counter-parties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa.
The payments are made during the life of the swap in the frequency that is pre-established by the counter-parties.
Here is Tom Cruise wearing his Coronavirus mask from Vanilla Sky.
Good news! The stock market is up almost 10%, the exact opposite of yesterday.
The WHO (World Health Organization, not the 60s/70s rock band) announced that the coronavirus is a new PANDEMIC.
Or it is a bubble pop? Not tiny bubbles as Don Ho sang. But a BIG bubble … burst.
Yes, The Federal Reserve and other Central Banks kept their target rate near zero for almost the entire Obama Presidency, then started to raise rates only to lower them again. But the S&P 500 and NAREIT – all equity indices have risen dramatically as well.
A bear market in equities is when prices fall 20% from their peak. Over the past month, we are almost in a bear market.
Is this that fast 20% in history? Nearly.
And there is lots of downward rotation in global equities.
Yes, equity markets are fragile thank to the central banks. And now the bears have been awakened.
Whoomp, there it is!
Boston Fed President Eric Rosengren is joining the “unconstrained rate manipulation squad” by calling for The Fed to purchase more than just Treasuries and Agency MBS.
(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.
With 10-year U.S. Treasury yields notes already at record lows, Rosengren said typical quantitative easing may not work as it did during the 2008 financial crisis. Therefore, the Fed may need the flexibility “enjoyed” by policy makers in Europe and Japan.
For the moment.
Remember, Maiden Lane LLC from 2008? The loan to Maiden Lane LLC loan was extended under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations.
Will The Fed declare unusual and exigent circumstances, like they did with Bear Stearns, JP Morgan Chase and Maiden Lane?
Perhaps The Fed will add stocks, corporate bonds and real estate citing unusual and exigent circumstance.
Fear is driving markets … and Central Banks.
To quote Coates (Common) from the Keanu Reeve’s flick The Street Kings about The Federal Reserve, “We straight nightmares. We the walking, talking exigent circumstances.”
Thanks to Jesse at Jesse’s Cafe Americain for that wonderful Fear photoshop of Fed Chair Powell.