In the US, the behaviour of the equity market versus the level of employment is very different in the current recession compared to previous recessions. The recession this year stands out because of its sudden, enormous job losses, which were quickly followed by a significant albeit very incomplete recovery. The equity market, after a huge drop, has rebounded swiftly and made new highs although earnings –on a 12 month moving average basis- still have to rebound. For 2021, more than anything, earnings growth matters.
The US mortgage market – the epicentre of the 2007-2008 financial crisis – has yet to be reformed. Nearly half of the USD 10,000 billion in housing loans are guaranteed by the Federal government via two private agencies (GSE), Fannie Mae and Freddie Mac, which were placed under FHFA conservatorship after they were bailed out in 2008. In recent weeks, there have been growing rumours that the FHFA is seeking to hasten the end of its conservatorship of the two agencies. Accelerating this process risks restricting household access to mortgage loans by prematurely ending the GSE Patch
Even if a vaccine is made available soon, it will take months for the USA and the rest of the world to recover from the traumas of the Covid-19 pandemic. Although the US economy is amongst those to have seen the best recoveries so far – notwithstanding comparison with China – it still bears many scars, some of which are clearly visible in our barometer...
With nearly 80 million popular votes and 306 members in Electoral College out of a total of 538, the Democrat Joe Biden won the US presidential election. His rival Donald Trump was beaten, but not by the landslide margins predicted by the polls. The Republican Party even gained seats in the House of Representatives and may hold on to its Senate majority. President-elect Joe Biden’s mandate promises to be especially tough, and his biggest challenge will be to overcome the political and social antagonisms. In the short term, the president-elect’s top priority will be to combat an ever worsening health crisis
On 20 October banking regulators finalised the transposition into American law of the Basel Net Stable Funding Ratio (NSFR)* liquidity requirement. This requires banks to maintain a stable funding profile with regard to the theoretical liquidity of their exposure over a one-year period (in order to protect their capacity to maintain exposure in the event of a liquidity crisis). The final rule differs from the Basel standard, by allocating a nil stable funding requirement to high-quality liquid assets (such as Treasuries) and short-term loans guaranteed by such assets (reverse repos)**
According to the polls, Democrat Joe Biden is well placed to beat Republican Donald Trump and win the presidential election on 3 November 2020. However, because of the unusual US election process, the result is far from a foregone conclusion. There is also the threat of the result being disputed, and it could be delayed. President Trump’s record, which for the sake of fairness should be assessed up to the start of the pandemic, is mixed. Although GDP, jobs and especially share prices rose rapidly, the deterioration in the public finances was unprecedented in peacetime, while inequality increased. Higher tariffs did little to reduce the trade deficit. Environmental protection went sharply into reverse under Trump
Five months after crashing in March-April, the indicators making up our ‘barometer’ of US economic activity show an incomplete recovery...
Social distancing and lockdown measures implemented to combat the Covid-19 pandemic severely damaged the US economy in Q2 2020, resulting in a record 9.1% decline in GDP. The ensuing recovery is still incomplete and inequitable, as many of Americans still unemployed because of the pandemic are from low-income categories. The health toll is getting worse, and the United States is the country with the highest number of deaths (nearly 200,000 victims to date). President Donald Trump long played down the disease but must now deal with consequences during the run up to the presidential election on 3 November. Although the incumbent president is lagging in the polls, the election’s outcome is still highly uncertain.
Over the past 10 years, fostering inclusive growth has moved higher up the agenda of governments, international institutions and, increasingly, companies. Under Chairman Powell, it has become a key topic for the Federal Reserve through the focus on the heterogeneity of the labour market situation of different socio-economic groups. It has led to the view that pre-emptive tightening based on a declining unemployment rate is unwarranted. On the contrary, it may very well stop people from finding a job. It will be interesting to see whether other central banks and in particular the ECB in the context of its strategy review, will follow in the Fed’s footsteps.
In the USA, as nearly everywhere else, the economy was partially paralysed in the spring of 2020 by protective health measures in response to the Covid-19 pandemic...
The Federal Reserve has changed its longer-run goals. Going forward, monetary policy will focus on the shortfall of employment from its maximum level, rather than on the deviations from this level. More importantly, the central bank will now seek to achieve inflation that averages 2 percent over time. The announcement implies a more accommodative stance because the timing of the first rate hike is now pushed further into the future. It also means that, eventually, the Fed’s reaction function will become more difficult to read: when will average inflation –a concept that remains to be defined- warrant a policy tightening? Such ambiguity would then lead to increased volatility, unless guidance takes an even bigger role.
In spring 2020, partially paralysed by the Covid-19 pandemic, the US economy entered the worst recession since 1946. Global activity contracted by more than 10% in Q2 before picking up slightly since the month of May. The question is how much of the lost ground can be recovered. With the approach of summer, business surveys are improving and the equity markets are rebounding, signalling rather optimistic expectations, possibly excessively so. Bolstered by the Federal Reserve’s liquidity injections, the markets could be underestimating the risk of corporate defaults, especially given their increasingly heavy debt loads. The latest statistics on the propagation of the virus are not good.
This week’s economic barometer for the United States integrates the first statistics for June, which are significantly better. This is notably the case for the Institute of Supply Management’s (ISM) business sentiment indexes, which rose above the 50 threshold for all sectors (retailing, construction and manufacturing) [...]
With 50,000 new cases reported daily – twice as many as at the beginning of June – and the number of hospitalisations on the rise, the Covid-19 pandemic is in the midst of an alarming resurgence in the United States. Granted the number of cases increases with the increase in testing, but this alone is not a sufficient explanation. The government’s response to the crisis is also to blame. In the European Union, where lockdown restrictions and business closures were implemented earlier and more systematically than in the United States, the situation seems to be better under control. Estimates of economic losses must be approached cautiously. The economy is rebounding on both sides of the Atlantic after reporting historically big contractions of about 10% in the second quarter
The exceptional measures taken by the US authorities to bolster the liquidity of companies and markets in response to the Covid-19 crisis have resulted in a significant expansion of bank balance sheets. Since the financial crisis of 2007-2008, regulators have tightened balance sheet constraints significantly. Fearing that leverage requirements could damage banks’ ability to finance the economy and support the smooth functioning of financial markets, these have temporarily been relaxed. However, the Federal Reserve is unlikely to undergo a slimming regime that will scale back bank balance sheets for a number of years (and almost certainly not before the end of the period of relaxation of requirements)
In response to the crisis triggered by the Covid-19 pandemic, in April the US Congress set up the Paycheck Protection Program (PPP), a small business lending programme guaranteed by the Federal government with an overall budget of nearly USD 650 billion. Under certain conditions, the loans can be converted into subsidies within the limit of payroll costs, interest on mortgages, rent and utilities paid during the 24 weeks after the loan was granted. The loans will be partially or completely forgiven on condition that employment and wages are maintained by the end of the year. At 22 June, 4.6 million SME had borrowed more than USD 515 billion under the programme, virtually all of which was borrowed as early as mid-May
There were no exceptions. As expected, the US economic barometer, which covers all or part of the data available through May 2020, is signalling the worst recession to have hit the United States since 1946 ...
Fed Chair Powell’s comment about what would happen in case of a prolonged recession has weighed heavily on equity markets. Historically, recessions are accompanied by major equity market drawdowns. The year-to-date decline is more limited, which stands in stark contrast with the plunge of activity. Massive monetary and fiscal policy support has led to a reassessment of the distribution of risks, which goes a long way in explaining the rebound of equity markets. The focus is now shifting to the outlook for corporate earnings, hence the importance of the debate on the shape of the recovery.
In the USA, as elsewhere, the paralysis of activity caused by the Covid-19 pandemic has affected the production of statistics, which have become harder to interpret. The rebound in hourly wages in April indicated by the “pulse” is a false signal and should be treated with caution: it can be explained by the collapse in hours worked, against which wages always show a certain inertia. Not only is the information gathered from companies incomplete, but there may well have been a lag between the shutdown of businesses and the stopping of wages [...]
Pressure on dollar liquidity created an urgent need for action from the US Federal Reserve (the Fed). Assuming its role as the global lender of last resort - the consequence of its position as the issuer of the international trade and reserve currency - the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008. In order to extend the reach of its dollar supply, the Fed has also created a repo facility for the central banks of countries that do not have dollar swap agreements. The high fees charged, however, will limit take-up, depriving the markets of what could be a significant calming influence.
The measures taken by the US Federal Reserve (Fed) since 15 March have already had a major impact on the balance sheets of commercial banks resident in the United States*. Their reserves held at the Central Bank have considerably increased following their role as intermediaries for the Fed’s securities purchases, emergency loans and liquidity swaps. As in 2008-2014, the Fed’s quantitative easing policy has also created a disconnect between growth in loans and growth in deposits on banks’ balance sheets. Since most of the Fed’s securities purchases have been from non-bank agents, customer deposits have grown more quickly than loans
Americans and the US economy, like many other countries, will pay a heavy price for the Covid-19 pandemic. Although the virus seemed to be slowing for a moment, it was spreading rapidly again as we went to press, with more than 30,000 new cases reported daily. The economy is beginning to show signs of slumping...
The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country. Arriving belatedly on US soil and long belittled by President Trump, the virus is now spreading rampantly, to the point that WHO is now preparing to declare the United States the pandemic’s new epicentre. With its federal structure, the US has taken a scattered approach, leaving each state to decide whether or not to introduce lockdown measures. Although the White House has closed the country’s borders (to the European Union and Canada, among others), it was reluctant to restrict domestic movements of goods and people. Foreseeing recession, the markets have plunged and the central bank has launched a veritable monetary “Marshall Plan”.
In the end, the US Federal Reserve (Fed) did not wait for the next corporation tax payment deadline in April before intervening in the money market. In an attempt to stave off the risk of pressures on the market as a result of the coronavirus outbreak, it increased the scale of its repo transactions on Monday 9 March. At the end of last week, demand for cash from primary dealers far outstripped what the Fed was offering. Although the Fed has injected nearly USD 480 billion in additional central bank money since mid-September, the liquidity position (immediately available cash) at major US banks has not improved. On the one hand, bank reserves with the Fed have increased by only USD 280 billion, due to the growth in the Treasury’s general account
As part of the Federal Reserve’s strategy review, the introduction of a target range for inflation is being discussed. Such a range could provide flexibility in the conduct of monetary policy. It could also take into account past shortfalls in inflation. Introducing a range when inflation is below target runs the risk of being perceived as not being bothered by the inflation shortfall. This would call for an asymmetric range but this increases the risk of market turbulence when a tightening cycle starts.
