IMF cites important risks to the outlook for US economy

IMF on the US.

The IMF is out with a series of headlines on the US economy as the coronavirus risks increase.  They say:

  • Cites important risks to outlook for US economy including resurgence in coronavirus cases, systematic increase in property
  • Significant increase in US debt levels creates vulnerabilities; sees risk of extended period of low or negative inflation
  • Repairing US economy will take prolonged period, further policy efforts needed to boost demand, support most vulnerable
  • US should reverse existing trade barriers, tariff increases that are undermining stability of global trade
  • US treatment of undervalued currencies as countervailable subsidy poses significant risk to global trading system
  • Sees areas where US financial oversight could be tightened to further mitigate systematic risks
  • US financial system has proven resilient, but crisis at early state and banks should continue to restrain capital distribution plans
The statements do not give a warm fuzzy feeling

Bank of Canada holds rates at 0.25%, as expected

Highlights of the Bank of Canada rate decision

  • Prior was 0.25% (this is the effective lower bound for Canada)
  • BOC pledges to keep rates at 0.25% until inflation target hit
  • BOC to continue $5B per week in QE; repeats buying will continue “until the recovery is well underway”
  • BOC stands ready to adjust its programs if market conditions warrant
  • Says economic decline “considerably less severe than the worst scenarios presented in the April MPR”
  • BOC sees 40% of activity recovered in Q3 but then “the Bank expects the economy’s recuperation to slow as the pandemic continues to affect confidence and consumer behaviour and as the economy works through structural challenges”
  • Central scenario in in MPR shows economy not likely to return to pre-COVID levels until 2022
  • Sees 2020 GDP down 7.8%, up 5.1% in 2021 and up 3.7% in 2022
  • Says Q2 activity estimated to have fallen about 15% below its level at the end of 2019, economy appears to have bottomed in April
  • Sees US GDP down 8.1% in 2020, up 3.4% in 2021 and up 4.3% in 2022
  • Global GDP forecast down 5.2% in 2020 and up 5.2% in 2021
  • The path for CPI in the next year largely reflects the influence of energy prices
The big news here is this line:
“The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
That’s forward guidance indicating no hikes until 2% inflation is ‘substantially achieved’. That last phrase leaves them some wiggle room but this is conditional forward guidance.
Macklem will hold a briefing at 1500 GMT (11 am ET)
Forecasts in the MPR:
BOC forecasts for developed world

NASDAQ closes at a new all time record level

Now erases 203 point decline and close higher for the 1st time in 4 days

The major US stock indices are closing the day near highs for the day.

  • The NASDAQ closed at a record high surpassing the previous high of at 10020.35
  • The NASDAQ has closed at a record low for the 20th time in 2020
  • Apple closes at record high
  • Dow industrial average erased a 203 point decline
  • NASDAQ post longest win streak of 2020 (7 trading days)
  • NASDAQ is up around 12% on the year
  • Dow close higher for the 1st time 4 days
The final numbers are showing:
  • S&P index rose 20.45 points or 0.66% at 3118.19
  • NASDAQ index rose 110.35 points or 1.11% at 10056.42
  • Dow industrial average close up 150.81 points or 0.59% at 26024.23

Trump to order new restrictions on H-1B visas by Monday

Trump spoke with a Fox interview Saturday, flagging the expected visa cutbacks will be announced.

  • plan to restrict employment-based visas could affect an estimated 240,000 people
  • across technology, finance & hospitality
  • won’t affect certain workers who are already in the US
  • will be very few exclusions
  • “In some cases you have to have exclusions. You need them for big businesses where they have certain people that have been coming in for a long time”
Trump visa

Bridgewater warns of a lost decade ahead for stocks

Bridgewater Associates is a Ray Dalio founded US investment firm. Via an analysts’ note:

Analysts at the firm are warning of a lost decade ahead for equity investors.
  • U.S. corporate profit margins could reverse the strong growth seen in recent years.
  • these margins have provided a substantial portion of the excess return of equities over cash
  • reversal is more than merely the current cyclical downturn in earnings
  • “Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked”
  • “U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization.”
Also warn on rising corporate debt due to the efforts made on the coronavirus pandemic.

Four headlines hit at virtually the same time to undercut sentiment

Risk trades leg lower in a big way

Commodity currencies and stocks were caught in a quick downdraft after at least four headlines hit at virtually the same time:
  • Florida virus cases spike
  • Beijing moved to phase-2 containment on the latest virus outbreak, closing schools
  • Texas virus hospitalizations rose 8.3% to hit a record
  • Powell indicated that corporate bond buying probably won’t be aggressive and is more of a contingency
The S&P 500 is up just 0.45% after rising nearly 3% at the open.
Trump rant about Powell incoming…

All eyes on the Fed now

The dollar keeps weaker ahead of the Fed

The greenback isn’t getting much of a reprieve despite a slight pullback in equities during European morning trade, with the dollar still seen weaker across the board.

The franc is a notable gainer, and is posting decent gains of around 1.7% against the greenback so far this week after SNB sight deposits declined for the first time since January – in a sign that the SNB is relaxing a little after months of heavy intervention.
But in any case, all eyes are on the Fed later today with a couple of main points being any indication of yield curve control and how the Fed will assess the current economic situation and what will be their response to that i.e. will they keep the party going?
  • Expects the Fed to clarify its intentions on asset purchases
  • Fed has scaled purchases back as overall functioning has improved
  • Expects the Fed to shift its commitment from daily purchases ($4.5 billion in both Treasuries and agency MBS) to a monthly purchase rate of $80 billion in Treasuries and $60 billion in agency MBS instead
  • Does not expect a change in forward guidance
  • Expects median assessment of monetary policy to include keeping Fed funds rate at zero lower-bound through the end of 2022
Danske Bank
  • Not expecting the Fed to make any significant changes to policy stance
  • Looking for two things i.e. whether or not the Fed will change its forward guidance and changes to asset purchases to a monthly figure
  • Thinks it is too early for Fed to change forward guidance at this stage
  • Fed will make clearer what conditions for tightening policy moving forward
  • Does not think the Fed will gain much by shifting to monthly asset purchase target
  • Does not expect the Fed to implement yield curve control (YCC)
  • US jobs report should keep policymakers more upbeat going into the meeting
  • But it is unlikely to substantially change decisions/forecasts
  • Says that the forward guidance is likely to be paired with a weak form of YCC
  • Commitment mostly to front-end yields to reflect policy path implied by guidance
  • Economic projections should show a median for no rate hikes through 2021
Deutsche Bank
  • Expects the Fed to take its first step away from a crisis prevention back towards the goal of providing accommodative support for the recovery
  • Expects the Fed to announce open-ended QE consistent with monthly purchases of Treasuries of between $65 billion and $85 billion
  • Forward guidance should be enhanced to reaffirm commitment to keep rates low
From the expectations above, it shows that the market is expecting the Fed to dial back some of its earlier commitments i.e. daily asset purchases as they are no longer necessary, considering that market conditions are well maintained for now.
WCRS 10-06

White House says Trump remains open to another virus relief package

The money is coming

Trump wouldn’t be saying that if Senate leaders weren’t on board. I don’t think Democrats are going to discover some fiscal discipline so it certainly looks likely.
The contours of it are another story and that could be a problem. Trump continues to talk about a payroll tax cut but I think that’s unrealistic. He might just be saying it as election fodder.

All Trump’s announcements on China were rumored or reported. Market breathes a sign of relief

Nothing new here

Nothing new here
Markets shuddered early in Trump’s talk because there was a lot of sound and fury but when he got to the actual policies, there was nothing new.
It’s a series of studies and minor measures. Every one of them was rumored, leaked or reported ahead of time.

Trump lambastes Twitter, says it is doing nothing about the lies and propaganda from China

Trump tweets out more criticism against Twitter

Twitter is doing nothing about all of the lies & propaganda being put out by China or the Radical Left Democrat Party. They have targeted Republicans, Conservatives & the President of the United States. Section 230 should be revoked by Congress. Until then, it will be regulated!

And so the drama continues to unfold. Once again, just be mindful of the situation here in case it creates further negative spillovers for tech stocks in general.