“This facility, broadly speaking, is exactly what the market needed”, SocGen’s Subadra Rajappa (who, in November, nailed a call for US 10-year yields to plunge in 2020) told Bloomberg, in an e-mail on Monday.
She was, of course, referring to the Fed’s latest effort to assuage market concerns and support the US economy, which is broadly expected to fall into a depression-like slump in Q2. The Fed on Monday pledged unlimited QE, announced two facilities for buying corporate bonds and credit ETFs, and announced new measures aimed at getting credit to small businesses and helping state and local borrowers.
Subsequently, the Fed released yet another statement, its third of the day. In it, banks are encouraged to use their TLAC buffer to lend to households and businesses. “The technical change mirrors an interim final rule announced last week by the bank regulatory agencies that applies to a firm’s capital levels”, the statement reads.
The commitment to open-ended asset purchases is a “transmission mechanism that will provide initially for better liquidity in the Treasury market, especially in the repo market heading into month- and quarter-end”, SocGen’s Rajappa added, noting that the actions were “warranted because the stresses have been mostly in the corporate bond market”.
Although equities will likely remain under pressure (even if volatility subsides), the Fed’s moves on Monday should go a long way towards bolstering liquidity – after all, the Treasury market now has an unlimited backstop, after a harrowing two weeks that found the largest (and ostensibly deepest) market in the world malfunctioning (see here and here).
“The Fed’s buying, unlimited in nature, is a huge step in returning liquidity to the financial markets”, Gary Pollack, head of fixed income at DWS Investment Management told Bloomberg over the phone, calling it “a psychological boost for markets”.
“The Fed headlines… are an unprecedented escalation of their ‘bazooka'”, Nomura’s Charlie McElligott wrote.
“The Federal Reserve is now throwing everything at financial markets – essentially what is unlimited QE”, ING remarked, in an e-mailed note. “The risk is that this wall of support from the Fed and [any] positive reaction in markets may give Congress a sense that it has more time and the pressure to deliver a package is reduced”, the bank went on to caution, adding that “with initial jobless claims set to surge by in excess of 2 million this week alone – it would be higher, but jammed telephone lines and crashed website mean not everyone can register – this all means that there is a large and rapidly growing proportion of the population who were living paycheck to paycheck facing immense strain and hardship”.
Meanwhile – and this would be hard to believe coming from any other leader of a developed country, but it makes sense emanating from the White House – Donald Trump is apparently thinking about opening things back up “against the advice of health professionals”, because he’s concerned about forecasts for Q2’s GDP collapse. That’s according to sources who spoke to Bloomberg.
Starting last Thursday, the sources said, Trump began to float the idea of watering down the 15-day “stay at home” guidance from the CDC.
Anthony Fauci is adamant about letting science (i.e., facts) dictate the policy response, although he did allude to the economic damage in an interview with Science Magazine on Sunday.
“If you knock down the economy completely and disrupt infrastructure, you may be causing health issues, unintended consequences, for people who need to be able to get to places and can’t”, he said, adding that “you do the best you can [and] I’ve emphasized very emphatically at every press conference that everybody in the country, at a minimum, should be following the fundamental guidelines”.
Lloyd Blankfein on Sunday tacitly suggested America should get back to work despite the fact that New York is currently the epicenter of the outbreak.
“Extreme measures to flatten the virus ‘curve’ is sensible – for a time – to stretch out the strain on health infrastructure”, Blankfein said, before chiding that “crushing the economy, jobs and morale is also a health issue [so] within a very few weeks let those with a lower risk to the disease return to work”.
Some might be inclined to call Blankfein’s ad hoc medical musings irresponsible, especially coming as they did on a weekend that saw the death toll in Spain and Italy surge, which should serve as a cautionary tale for the US.
Gary Cohn, meanwhile, sounded a similar tone.
“Is it time to start discussing the need for a date when the economy can turn back on?”, he wondered, without even a hint of irony to account for the fact that the economy just began to power down in earnest about 72 hours ago.
“Policymakers have taken bold public health and economic actions to address the coronavirus, but businesses need clarity”, Cohn added. “Otherwise they will assume the worst and make decisions to survive”.
Of course, Trump would have to override state and local officials if he really wanted to force the issue on lifting shelter-in-place orders and restarting the economy faster than some medical professionals advise, as Bloomberg’s reporting suggests. If he did that, and the death toll from the virus mounted, voters would likely punish him at the polls.
I want to leave you with a few additional excerpts from the above-cited Science interview with Fauci. I make no judgment on who’s “right” or “wrong” (between the medial community and those arguing for a rapid restart of the US economy just days after it was effectively shuttered), but what I would say about the following is that some of it comes across as a bit unnerving.
From Science Magazine:
Q: How are you managing to not get fired?
A: Well, that’s pretty interesting because to his [Trump’s] credit, even though we disagree on some things, he listens. He goes his own way. He has his own style. But on substantive issues, he does listen to what I say.
Q: You’re standing there saying nobody should gather with more than 10 people and there are almost 10 people with you on the stage. And there are certainly more than 10 journalists in the audience.
A: I know that. I’m trying my best. I cannot do the impossible.
Q: What about the travel restrictions? President Trump keeps saying that the travel ban for China, which began 2 February, had a big impact [on slowing the spread of the virus to the United States] and that he wishes China would have told us 3 to 4 months earlier and that they were “very secretive.” [China did not immediately reveal the discovery of a new coronavirus in late December 2019, but by 10 January, Chinese researchers made the sequence of the virus public.] It just doesn’t comport with facts.
A: I know, but what do you want me to do? I mean, seriously Jon, let’s get real, what do you want me to do?
Q: Most everyone thinks that you’re doing a remarkable job, but you’re standing there as the representative of truth and facts but things are being said that aren’t true and aren’t factual.
A: The way it happened is that after he made that statement [suggesting China could have revealed the discovery of a new coronavirus 3 to 4 months earlier], I told the appropriate people, it doesn’t comport, because 2 or 3 months earlier would have been September. The next time they sit down with him and talk about what he’s going to say, they will say, by the way, Mr. President, be careful about this and don’t say that. But I can’t jump in front of the microphone and push him down. OK, he said it. Let’s try and get it corrected for the next time.
Q: You have not said China virus. [Trump frequently calls the cause of the spreading illness known as coronavirus disease 2019 (COVID-19) a “China virus” or a “Chinese virus.”]
Q: And you never will, will you?