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FOMC-day is usually a good one for risk assets

  
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The FOMC day effect on the stock maret

The Fed put is real.
US equity futures have turned slight higher now and that aligns them with a dovish trade that’s clear in the dollar, rates and gold.
Historically, that’s a good bet.
Study after study shows that Fed day is one of the best ones for stock markets of the year. Back in 2016, Bespoke Investment Group tallied that since 1995 the average return of the S&P 500 on FOMC day is +0.34% compared to +0.03% on the average day otherwise.
The FOMC day effect on the stock maret
Longer-term studies show the same effect (and here).
Could today be the day that Powell takes away the punchbowl? It’s certainly possible but all these studies show that the jitters are always high and the reality is generally positive.

Full statement from the FOMC April 2020 decision

  
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FOMC statement from April 2020

Below is the full statement from the April 2020 FOMC rate decision

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses. Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

Federal Reserve says rates to stay at bottom until economy on track

  
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Federal Reserve rate decision highlights April 29, 2020

Federal Reserve rate decision highlights April 29, 2020
  • Rates unchanged in a range of 0.00%-0.25%, as expected
  • Fed says rates to stay at lower bound until economy has weathered recent events and on track to achieve unemployment and inflation goals
  • Fed funds rate 2-year projection vs 1.6% prior
  • Fed funds rate 3-year projection vs 1.9% prior
  • Fed funds rate long-term projection vs 2.50% prior
Powell will host a virtual press conference at 1830 GMT. The next scheduled meeting is June 9-10

3 reasons why USD/JPY is heading back down to 105

  
Analysis, Forex
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A note via ING forecasting lower for USD/JPY, to 105 in three months

(1) Japan’s GPIF probably will not pour money into overseas bonds when $/JPY is above 110
(2) the rally to 112 was largely down to USD funding strains, which should reverse into April
(3) Japan’s large current account surplus will see JPY favoured in a recession.
Its a detailed note, but this snippet on point2:
  • Amongst many fire-fighting measures, the Fed and the US Treasury have since re-introduced schemes to support the CP market directly (CPFF & MMLF) and measures to support investment grade corporate issuance (PMCCF and SMCCF)
  • Along with the promise for unlimited QE, the Fed has managed to introduce some calm into money markets
  • We expect even calmer conditions once the Japanese financial year-end has passed (March 31st) and the Fed starts its CPFF program in April. A turn-around in the basis swap should take some upside pressure off USD/JPY. 

Full text: Federal Reserve announces extensive new measures to support the economy

  
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Full text of the Federal Reserve announcement

The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include:

  • Support for critical market functioning. The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, theFOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
  • Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
  • Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
  • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
  • Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include:

  • The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
  • The expansion of central bank liquidity swap lines;
  • Steps to enhance the availability and ease terms for borrowing at the discount window;
  • The elimination of reserve requirements;
  • Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
  • Statements encouraging the use of daylight credit at the Federal Reserve.

Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.

The Federal Reserve will continue to use it full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.

Read it here.

Morgan Stanley expects FOMC to cut 75bps(50 on March 18, 25 in April)

  
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Morgan Stanley has slashed their US 2020 GDP growth forecast to 1.5%

  • from 1.8% previously

Projections for the Fed:

  • 50 bps rate cut in March
  • 25bps in April

MS add that if recession:

  • Fed to cut to zero
  • & restart QE
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PS. I am seeing (again) the ‘central bank rate cut is ineffective therefore they won’t and we need fiscal stimulus instead’ comments.
This is, unfortunately, a very common mistake that is made.
I posted this ahead of the RBA meeting last week (before the RBA cut its cash rate) , just change around the names:
  • Some folks will argue rate cuts will be ineffective against the virus, which is the wrong argument, of course rate cuts won’t cure a virus! Sheesh. The central bank move, if it comes,  will be predicated on taking action to avert too much economic harm. Some folks will argue that a rate cut will be ineffective for this, that government stimulus (fiscal) would be better, and they have a fair point … but you have to remember a rate cut is the tool available to the central bank, they can’t provide fiscal stimulus. “The RBA should stand firm and force the government to act” is another argument. Unfortunately this is no time for dick swinging contests (its a male-dominated sphere) and the RBA will not play this game.

What’s priced in for the Federal Reserve now?

  
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We’re done with Fedspeak until the March 18 decision

The bond market has gone haywire today and with the VIX at 50, the market is begging for more help from the Fed.
Still, US stocks are only down 9% year-to-date so maybe the Fed will want to save some ammunition? We will see on March 18.
The final Fed comments before the blackout came from Rosengren, who was talking about more Fed asset and securities purchases beyond government-backed securities. So if we’re already talking about beyond the zero bound, maybe we will be there before long.
The Fed funds futures market is now pricing in 50 basis points of easing on March 18 and a 51% chance of a 75 bps cut. The 10-year inverted below T-bills today and well below Fed funds so it’s certainly on the table. That would leave rates at 0.25-0.50% and leave the Fed with only one traditional cut and that’s 65% priced in for Sept.

Powell superman

FOMC minutes: Current policy stance to ‘remain appropriate for a time’

  
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Highlights of the Jan 28-29, 2020  FOMC meeting minutes:

  • Conditions expected in Q2 for T-bill tapering
  • Saw risks to economic activity as ‘somewhat more favorable’ than at previous meeting
  • Expected economic growth to continue at a ‘moderate pace’
  • Cited easing of trade tensions, receding risks from Brexit and stabilizing global growth as reducing downside risks
  • Generally expected trade uncertainty to remain somewhat elevated
  • Agreed threat from virus ‘warranted close watching’
  • Once reserves reach ample levels, regular open market operations will be required over time to accommodate trend growth in Fed’s liabilities and maintain ample reserves
There has been little market reaction to the headlines.
We have heard all these messages before from Powell and other Fed members. It’s a rare moment when the message is very much united and consistent. The market continues to doubt there will be a long period of watching with a 78% chance of a cut priced in at the July meeting.

Federal Reserve FOMC January meeting minutes this week – preview

  
Analysis, Economy
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The minutes of the Federal Open Market Committee meeting will be published on Wednesday 19 February 2020  at 1900GMT

A couple of snippets on what to expect and look out for, via Scotia.
  • Watch for frequency of citation references to how the committee views downside risks to the outlook
  • Recent references to downside risks have fanned market pricing for easing
  •  (chart 2). During the press conference on January 29th, Powell guided that there had been a Further clues regarding expectations for the mid-year announcement of the strategic review are possible
  • watch for further discussion of the merits of average inflation targeting around a 2% goal
  • balance sheet policy guidance … we might develop a further understanding of the range of FOMC opinions
  • coronavirus and its potential impact. Watch for any further discussion and the range of views on the implications for world and domestic growth and inflation. 
The minutes of the Federal Open Market Committee meeting will be published on Wednesday 19 February 2020  at 1900GMT

Here are all the changes in the FOMC statement (blink and you’ll miss it)

  
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This is how the statement from the Federal Open Market Committee changed in January from December.

Sheesh. Not much. What there is is slightly more dovish (but its a bit of a hair-split isn’t it?)
This is how the statement from the Federal Open Market Committee changed in January from December. 
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