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.
According to its first estimate, Q4 19 US growth reached 2.1% q/q (saar), matching expectations. No bad news is good news. The fact that the growth rate is keeping pace with the two previous quarters (it has notably been its average pace since the start of the cycle mid-2009) can also be seen positively. Growth remains moderate however and its breakdown paints a mixed picture. In fact, the very positive contribution of net exports saves the day. But this positive contribution results from a negative evolution: the plunge in imports, also to be weighed against the very negative contribution of change in private inventories. On the personal consumption expenditures side, the significant deceleration was expected after two quarters of very strong growth
The dichotomy between economic and market trends has widened, in a context of accommodating monetary policy and rising corporate debt. Risks taken by institutional investors (pension and investment funds, life assurance companies) have increased, as has the vulnerability to any adverse shocks or changes in expectations. 2020 – an election year – is unlikely to bring calm. Welcome as it is, the truce in the trade war with China takes in the bulk of existing tariff increases, without producing any fundamental changes in the position of the US administration and its limited appetite for multilateralism.
In the last three months, the US Federal Reserve has injected more than USD 360 bn of central bank money through repurchase agreement operations (repo) and outright purchases of T-bills. It will ramp up its intervention further between now and 31 December, to remove the risk of losing control of short-term rates again because of the specific needs of market participants as they approach their financial year-end. By the year-end, if the volume of demand for repo transactions reaches the total amount offered by the Fed, USD 650 bn of central bank money will have been injected. However, even that huge amount of support could prove insufficient
The latest data on unemployment and job creation have surprised on the upside. They continue to be better than the long-term average. This strong labour market supports household confidence, which remains well above the long-term average, and retail sales, which did slightly better than expected. However, several numbers have come in below expectations and are below historical averages. This points towards a slowing economy, despite the satisfactory GDP data for the third quarter. Noteworthy in this respect are the two ISM indices. In addition, like in numerous other countries, industrial production is under pressure.
The 2014 reform of US money market funds led to a massive reallocation of cash from funds invested in private debt (prime funds) to funds invested in public debt (government funds)*. Foreign banks, traditional borrowers of prime funds, were deprived access to US dollars, while the US Treasury, federal agencies and American banks attracted fund inflows**. With the improvement in average returns over the past two years, the savings collected by government funds and prime funds have both increased sharply, up USD 450 bn and USD 430 bn, respectively
In recent weeks, equity markets performed well. Focussing on the US, it is hard to argue that this reflects an improvement in the earnings outlook or a perspective of more rate cuts than hitherto expected. This would imply that a decline in the required risk premium was the key driver. US treasury yields also increased significantly, which probably reflects to a large degree an increase in the term premium. The decline in the equity risk premium and the increase in the bond term premium were driven by a common factor, namely a reduction in economic tail risk on the back of progress in the trade negotiations between the US and China and a stabilisation of certain survey data
On 10 October 2019, US banking regulators increased the application thresholds for the capital and liquidity requirements imposed on large banks. Whilst the new rules do not change the prudential requirements for the eight biggest banking groups, they do reduce the burden for large regional banks. The number of banks subject to the Basel Liquidity Coverage Ratio (LCR) requirement will be reduced and the definition of core equity relaxed to some degree. In general terms, the rules as finalised over the past two months will significantly narrow the scope of application of Basel 3 in the USA. Given concern over lending trends in certain segments and the continued economic slowdown in the US, this relaxation of regulations catches attention.
Do fluctuations in uncertainty have a symmetric or asymmetric effect on the economy? The question is important considering that since last year, uncertainty has been acting as a headwind to global growth. Moreover, recent news about the US-China trade negotiations and Brexit have raised hope that uncertainty may have peaked and that growth in activity could accelerate. Empirical research shows that an increase in uncertainty has a bigger effect on the economy than a decline, in particular in a subdued growth environment. This would suggest that, should the decline in uncertainty be confirmed, the pick-up in growth would be very gradual.
Concerned about reducing pressure in the money markets, the Federal Reserve (Fed) will proceed with outright securities purchases in addition to its repurchase agreement operations (repo). At the end of the year, between USD 365 bn and 400 bn* in central bank money could thus be injected into the current accounts of banks. Given the current amount of the outstanding liquidity lent, the upward trend in currency in circulation and the foreseeable rebuilding of the Treasury account with the Fed, the banks’ reserves with the central bank are unlikely to increase by more than USD 130 bn by the end of the year (to a total of nearly USD 1600 bn, the April 2019 level)
The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019, and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve -- which no longer provides forward guidance on upcoming policy moves – is bound to lower its key rates again.
On 16 and 17 September, US money markets seized up. Excess demand for cash pushed overnight rates sharply higher. The Fed had to step in as a matter of urgency to re-establish control over short-term rates by injecting central bank money through repurchase agreement operations (repo). This lack of liquidity is not a new phenomenon. It is true that the situation was exacerbated by an irksome combination of factors. But there have been clear signs of a shortage of liquidity for more than a year now. The underlying issue is the regulatory liquidity requirements imposed on banks. The rebuilding of the Treasury current account with the Fed, against a background of insufficient reserves at the central bank, threatens further pressure
The manufacturing purchasing managers’ index of the Institute for Supply Management (ISM) has continued its decline in September, reaching 47.8%. The non-manufacturing ISM has registered a big drop of 3.8 percentage points and is now at 52.6% — a very low print for a non-recessionary period. Against this background, bond yields have declined significantly reflecting increasing worries about recession risk, rising expectations about additional Fed easing and a greater flight to safe havens. The labour market data for September however brought some relief. Nevertheless, we expect the Fed to continue to cut rates.
Although August industrial production and retail sales beat expectations, key data with respect to September have sent conflicting signals. Both the manufacturing and non-manufacturing ISM came in below expectations, creating a lot of nervousness in the run-up to the release of the all-important labour market data. They brought relief with 136.000 jobs having been added in September (versus a Bloomberg consensus of 145.000) and, in particular, an unemployment rate of 3.5%, which is well below the consensus of 3.7%...
