Category: zerohedge

Update: Emini is now limit down in an absolutely catastrophic response to the Fed’s bazooka; expect negative interest rates across the curve momentarily.

* * *

The Fed may have a very big problem on its hands.

After firing the biggest emergency bazooka in Fed history, one which was meant to restore not just partial but full normalcy to asset and funding markets, Emini futures are not only not higher, but tumbling over 4% at the start of trading – perhaps because the Fed has not only tipped its hand that something is very wrong by simply waiting an additional three days until the March 18 FOMC, but that it can do nothing more to fix the underlying problem...

… while gold is surging over 3% following today’s dollar devastation as US Treasury futures soar, as it now appears that the Fed’s emergency rate cut to 0% coupled with a $700BN QE is seen as note enough by a market which is now openly freaking out that the Fed is out of ammo and has not done enough.

In short, as FX strategist Viraj Patel puts it, “the Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX. Fed making US risky assets relatively more attractive may support $USD”

The Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX. Fed making US risky assets relatively more attractive may support $USD pic.twitter.com/zqBLJ3e1dA

— Viraj Patel (@VPatelFX) March 15, 2020

Developing.

Now that the Fed has fired what appears to be its final bazooka – at least until it cuts rates to negative and/or buys stocks/oil outright should we end up with a full blown financial panic/crisis – the market’s attention will be on whether the Fed has done enough.

And according to some very early indication, the Fed did a lot… but maybe not enough. Take the FRA/OIS which is sharply lower, down by over 20bps in illiquid Sunday trading, but the drop only takes it back to where it was late on Thursday. This means that the market may be expecting even more, and that more did not come – as we explained earlier, STIR traders were hoping for the Fed to backstop and announce a Commercial Paper facility – which would have had the most impact on dollar funding – which did not come, and instead the Fed enhanced international swap lines, cutting the rate by a modest 25bps which while generous may not be sufficient.

As a reminder, with the Fed firing its biggest bazooka ever, the market has to restore normalcy for the Fed’s action not to be in vain, and so far it has failed to do so.

That said, we will get a better sense of what traders are thinking when futures reopen in a few minutes, where anything less than a surge higher could be catastrophic for the Fed.

Dr. Anthony Fauci has just performed a legendary feet for politicos and public servants in Washington: On Sunday, he appeared on all five of the major national “Sunday Shows” of the main news networks: ABC’s “This Week”, CNN’s “State of the Union”, CBS’s “Face the Nation”, NBC’s “Meet the Press” and Fox News’s “Fox News Sunday”, cementing his role as the face of the federal response to the coronavirus outbreak that has emptied out super markets and stoked panic across the US, where nearly 60 have already died.

Overall, his tone was optimistic, but cautious. During his appearance on CNN, Fauci acknowledged that “it’s possible” that “millions could die” from the virus if the US didn’t act quickly to combat the outbreak. During his interview on “Meet the Press,” Dr. Fauci said he would “open” to a 14-day shutdown of schools and businesses in the US. He also said that Americans should be prepared to “hunker down” for a while.

“I think Americans should be prepared that they are going to have to hunker down significantly more than we as a country are doing,” Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said on NBC’s “Meet the Press.”

He told Chuck Todd that all Americans need to be cautious, but people in areas with “obvious community spread” need to be extremely cautious. All people everywhere still need to be practicing social distancing, including young people who think they’re not a high risk for severe infection.

“I’m not saying the rest of the country is okay…but if you are in an area where there is clear community spread you want’ to be very, very, very cautious.”

Though he said we shouldn’t close every school in the country right now, he said local officials need to remain “ahead of the curve”, and even said he would be in favor of some kind of national shut down, if not for 14 days, but for as “long as we could.”

“I would prefer as much as we possibly we could. I think we should be very aggressive and make a point of overreacting.”

On “Fox News Sunday”, Dr. Fauci was asked whether he would support a domestic travel ban. He replied that though it hasn’t been seriously considered, he would be open to a domestic travel ban like what Italy did, and that such a national lockdown wouldn’t be “out of the question.”

“That has not been seriously considered – doing travel bans in the country – though we are keeping a lot of things in mind,” Dr. Fauci said, before ending the interview.

While certain members of Congress were encouraging Americans to go out and live their lives, Dr. Fauci said Americans should avoid bars and restaurants.

“I would like to see a dramatic diminution of the personal interaction that we see in restaurants and in bars.”

He added that any elective surgeries should be cancelled: “Anybody who doesn’t need to be in the hospitals…keep them out of the hospitals” he said on “Meet the Press”.

Pressed about the response on “Face the Nation”, Dr. Fauci said the “peak” of the outbreak in the US will hopefully be lower than the numbers seen in Italy. “I want to be overreacting,” Dr. Fauci said. He added that the US is practicing travel bans and containment and mitigation in the country, and while “it is correct that case numbers will go up” he hopes that the US will never get to that “really bad peak”.

While the mortality rate in China looked to be about 3%, a number that is “quite high”, Dr. Fauci noted, he hoped the rate in the US would be around 1%, which is still 10x greater than the flu’s 0.1%.

“Overwhelmingly more people recover from this than have serious trouble,” Dr. Fauci said.

Should Americans get on a plane right now? Fauci was asked on “Face the Nation”.

Dr. Fauci said vulnerable Americans should avoid all travel and avoid public places whenever possible.

“If you’re elderly…you shouldn’t put yourself in a place where you’re around crowded people.”

It may come to the situation that we “strongly recommend…myself personally I wouldn’t go to a restaurant because I have an important job to do” Dr. Fauci said. But he didn’t say whether all Americans should avoid going out, or if he would support blanket closures.

Asked what’s the plan if hospitals get overwhelmed, Dr. Fauci assured his interviewer that the government’s efforts should prevent this from happening, though he couldn’t rule out the possibility that this would happen…and plan for it.

“We’re doing everything we can to make sure that worst case scenario will happen. It’s possible they could be…but if in fact there’s a scenario that’s very severe, it’s conceivable that would happen, which is why we have a strategic national stockpile of ventilators and things like that.

“We would not be being realistic if we weren’t to say that possibility didn’t exist…but there is planning to prevent that.”

As far as how long it will take for the US to “rev up” testing, he said his understanding of where we are with the “companies who are getting involved” is that we will have “enough” tests in a few days, and that the number will only continue to go up.

Watch the interviews below:

Fox News:

CBS:

ABC:

CNN:

NBC:

As the ultra rich Snake Plisken out of the soon-to-be quarantined Manhattan – where at least one bank has are already run out of $100 bills – to fortify themselves against the viral zombie peasant hordes in their impregnable castles in the Hamptons, one thing they’re looking to hoard is cash, which has caused some substantial pressure on financial institutions in the area, according to Bloomberg. At least one New Yorker had his $30,000 cash withdrawal request denied at a Chase bank after being told the limit was $10,000. Meanwhile, bank employees said they were waiting on a “shipment of cash” to fulfill other requests that have been made exceeding the $10,000 amount.

Other branches in the area were unable to help in fulfilling the request, with the East Hampton branch reportedly telling the Southampton branch that it had “two massive withdrawal orders” of its own that it was trying to deal with. Of course, this being the same Hamptons where back in 2011 an infamous ATM withdrawal receipt showed a $99.8 million balance, this is hardly surprising.

JP Morgan maintains that there is plenty of cash available and that ATMs remain “well funded”. The bank also said that sometimes money is not allowed to be taken out in large amounts due to “security” purposes. Bank of America faced similar demands. A branch in Midtown briefly ran out of $100 bills to meet large withdrawals, including some for as much as $50,000 last week. The ATMs did not run out of cash, the NY Times reported.

The cash grab in the Hamptons speaks not only to the affluence of the area, but the panic over the spread of the novel coronavirus. 

The Hamptons looks like a “peak summer Saturday,” said one East Hampton shop owner. “Even the lowly IGA, that place was jammed. I was able to buy some toilet paper. It’s a frenzy. It’s a terror of starving to death is what it looks like.”

For some, the cash scramble is just what the doctor ordered, so to speak. Charlotte Sasso of Stuart’s Seafood Market in Amagansett said the early shift to the Hamptons is actually good for business and giving fishermen a boost: “Just from one boat yesterday we got a load of fluke, flounder, squid, cod, sea bass, monkfish, whiting.”

And of course, Hamptonites are also stocking their liquor cabinets. “People are buying cases instead of a bottle or two,” said the owner of Wines by Morell in East Hampton. 

With Wall Street desperate for  the Fed to announce emergency measures on Sunday (after disappointing last week), and ideally before the futures open, Jerome Powell did not disappoint and moments ago the Fed announced a barrage of emergency measures which included:

• Welcome back ZIRP: Fed cuts rates by 100bps to 0-25bps from 1.00 -1.25bps. This is in addition to the 50bps rate cut on March 3, which means that in just under two weeks the Fed has cut rates by 150bps to zero.
• Fed officially launches QE5 (no more “Non-QE” bullshit), consisting of “at least” $500BN in Treasury purchases and $200 billion in MBS.
• Boosting intraday liquidity: The Fed announces Measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements
• Reserve requirements cut to zero: The Fed cuts reserve requirement ratios to zero percent effective on March 26.
• Coordinated swap lines: The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements. The pricing on the dollar liquidity swap arrangements is cut by 25 basis points, so the new rate will be the US dollar overnight index swap (OIS) rate plus 25 basis points.

Amusingly, the Fed announces that the emergency action wasn’t unilateral, with Loretta J. Mester voting against the action, as she was “fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.”

The full statement is below (link):

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 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. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

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.

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to 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; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board’s website.

On the topic of all important Swap Lines, which we said there is a distinct chance could be unviled, the Fed issued the following announcement:

Coordinated Central Bank Action to Enhance the Provision of U.S. Dollar Liquidity

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16.1 The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of U.S. dollar funding markets.

The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.

Finally, here is what the Fed is doing to boost day-to-day credit, including encouraging banks to use the Discount Window (good luck with that), encouaring the use of intraday credit and cutting reserve requirements to zero.

Federal Reserve Actions to Support the Flow of Credit to Households and Businesses

The Federal Reserve is carefully monitoring credit markets and is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. In addition to actions taken by the Federal Open Market Committee, including actions taken in coordination with other central banks, the Federal Reserve Board announced a series of actions in support of these goals. These actions are summarized below.

Discount Window

Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25 percent, effective March 16, 2020. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range. Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates should help encourage more active use of the window by depository institutions to meet unexpected funding needs. To further enhance the role of the discount window as a tool for banks in addressing potential funding pressures, the Board also today announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis. The Federal Reserve continues to accept the same broad range of collateral for discount window loans.

Intraday Credit

The availability of intraday credit from the Federal Reserve supports the smooth functioning of payment systems and the settlement and clearing of transactions across a range of credit markets. The Federal Reserve encourages depository institutions to utilize intraday credit extended by Reserve Banks, on both a collateralized and uncollateralized basis, to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.

Bank Capital and Liquidity Buffers

The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.

Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest firms have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets. The U.S. banking agencies have also significantly increased capital and liquidity requirements, including improving the quality of regulatory capital, raising minimum capital requirements, establishing capital and liquidity buffers, and implementing annual capital stress tests.

These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses. The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.

Reserve Requirements

For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework.

In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.

With all due respect to Thursday’s massive repo expansion, this is the Fed’s bazooka. It also means that after this, the Fed – which just cut rates to zero and launched QE5 – is now out of ammo, as Powell will have to cut rates to negative next and/or buy stocks outright for further monetary stimulus, something that would require the permission of Congress. And since that is unlikely absent a total collapse in the financial system, we are now down to fiscal stimulus and US politicians acting in a bipartisan fashion. Which may be a huge gamble.

Curiously, in this barrage of emergency actions, the one which arguably was most needed, a commercial paper facility, was missing. As such, it wouldn’t be unthinkable to see the dollar funding squeeze worsen after the initial euphoria fades on Monday despite the launch of enhanced global swap lines.

The good news is that at least there is nothing more the Fed can announce on Wednesday, absent buying single stocks and ETFs of course, and as such all attention will now be on Congress and what additional fiscal stimulus the Fed can push through.

After initially denying that they would be publishing a national Coronavirus website following an announcement by Trump administration announcing their participation, the Silicon Valley tech giant announced that they have entered into a partnership with the government to launch the site after all.

“We are fully aligned and continue to work with the US Government to contain the spread of COVID-19, inform citizens, and protect the health of our communities. (1/6) https://t.co/eI1uXra6AB

— Google Communications (@Google_Comms) March 15, 2020

President Trump thanked Google during a Friday press conference for developing a website “very quickly” to facilitate testing – which he said 1,700 engineers were working on.

The site will help people evaluate their symptoms and direct them to a nearby “drive through” location for testing (while conveniently tracking potential cases).

Following the announcement, the New York Times reported that “Trump’s comments caught Google completely off guard and executives rushed to issue a statement on Friday afternoon to temper expectations.”

Yet on Sunday, Google CEO Sundar Pinchai confirmed that the site is set to launch on Monday.

In a Sunday tweet, Trump slammed the “Fake and Corrupt News,” for not calling Google.

The Fake and Corrupt News never called Google. They said this was not true. Even in times such as these, they are not truthful. Watch for their apology, it won’t happen. More importantly, thank you to Google! https://t.co/AuvpbXNouW

— Donald J. Trump (@realDonaldTrump) March 15, 2020

This means that the resistance media, looking for any excuse to tarnish Trump’s image in the face of a national emergency, just made tremendous fools of themselves for calling Trump a liar.

Remarkable new details about Trump’s wildly incompetent hyping of coronavirus website:

* Google exes caught completely off guard

* Alphabet CEO Sundar Pichai hadn’t even talked to Kushner by then

* Trump keeps making stuff up on many other frontshttps://t.co/HMqUEpHSnE pic.twitter.com/63o7hXmdtb

— Greg Sargent (@ThePlumLineGS) March 15, 2020

The news media has been trying to report on the spread of the coronavirus. The president is flatly wrong below and he’s trying to increase mistrust in the media during a health crisis. https://t.co/qrPUdw3vO8

— Maggie Haberman (@maggieNYT) March 15, 2020

President Trump, Vice President Mike Pence, Dr. Anthony Fauci (after doing five interviews earlier in the day) and the rest of the White House Coronavirus Task Force will deliver their latest update on their efforts at 5 pm, following the latest team meeting in the situation room.

Will Trump & Pence announce an interstate travel ban? Dr. Fauci said earlier he’d be open to it, though it would create some Constitutional hangups.

Watch Live:

Friday’s record 2000 Dow point surge will likely be cut in half if the spread bettors at IG are correct in indicating that the Dow is set to open about 1,000 points lower.

Meanwhile, in FX markets which are already open, moves appear relatively calm with the dollar modestly higher across most pairs expects the Yen, which however crashed on Friday as the US dollar funding squeeze hit levels not seen since the crisis.

Two caveats: this level is just indicative based on a handful of traders in a market vacuum, and ignores all the positional reflexivity and negative gamma that will emerge violently on the scene one futures do open for trading, where a crash as big as this will likely drag futures even lower… or not. The truth is nobody knows what happens next as the market has never before found itself in such a place.

Two: even if futs open about 4% lower, where they go from there will depend on the Fed. If, as BofA expects, the Fed announced a Commercial Paper facility, watch out above, as futures soar limit up as the dollar funding crisis is set aside for the time being. On the other hand, if the Fed does nothing and disappoints “whisper” expectations of a late Sunday intervention, then all bets are off.

While it will probably not come as a surprise to anyone who read our earlier post to “Brace For A Record Decline in GDP“, but moments ago Goldman – which last week called the bear market just hours before it officially materialized, and cut its year-end S&P price target to 2,450 which the S&P almost hit late on Thursday – finally capitulated on its optimistic take for the US economy, and in a note published moments ago by its chief economist Jan Hatzius, Goldman said that it expects US economic activity “to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals. Emerging supply chain disruptions and the recent tightening in financial conditions will likely add to the growth hit.”

As a result, the bank is now expecting Q2 GDP to crater -5%, down from its prior forecast of 0%, and the biggest quarterly GDP contraction since the peak of the financial crisis when GDP cratered by 8.4%.

Goldman lays out the details of how it gets to this worst GDP print in 12 years below:

Over the last week, the number of coronavirus cases in the US has risen rapidly. In response, business and government leaders have begun much stronger measures to combat the spread of the virus. Even with monetary and fiscal policy turning sharply further toward stimulus—we expect a 100bp rate cut on Wednesday and a fiscal impulse of 1-2% of GDP—these shutdowns and rising public anxiety about the virus are likely to lead to a sharp deterioration in economic activity in the rest of March and throughout April.

Virus fears have already begun to lead US consumers and businesses to reduce spending on activities such as travel, entertainment, and restaurant meals. Airlines have eliminated a significant share of flights, conferences have been called off, major cruise lines have canceled all cruises, theme parks have shut down, and hotel occupancy has fallen sharply in cities with early virus outbreaks. Among sports leagues, the professional and college basketball, hockey, and soccer seasons have been cancelled, as have major golf and tennis events, and the baseball season has been postponed. Data from online restaurant reservations also points to a large drop in restaurant visits, especially in the worst affected cities such as Seattle.

While we are not assuming an Italy-style national shutdown in the US, the experience of countries like Italy, Spain and France offers some indications of the impact that extreme local-level quarantines could have. In Italy, for example, all retail stores except drug stores and grocery stores are closed, all restaurants are closed, hotel occupancy is at a small fraction of capacity, and some factories have closed temporarily while many others are operating below normal levels because workers are resisting going to work out of fear of getting sick.

Exhibit 1 provides illustrative estimates of how large the GDP impact of these consumption cutbacks could be at their peak in the worst-affected areas. The bottom of the exhibit shows our assumptions about the peak magnitude of cutbacks—for example, we assume an 80% decline in spending on sports and entertainment and a 50% decline in hotel and restaurant spending. We have scaled up some of our earlier estimates based on preliminary signals from US cutbacks to date and from the experiences of other economies that went through large outbreaks earlier this year. The bars in the exhibit multiply these assumed cutbacks by the GDP share of each category to estimate the impact on the level of GDP.

In total, our assumptions about consumption cutbacks in these categories imply a peak hit to the level of GDP in the worst-affected areas of 6-7%. Reductions in home sales of the sort seen in other virus-hit economies and in business investment would add to the hit to GDP. The impact on US GDP growth depends on what share of the country is affected at a particular time, how close the affected areas come to the peak hit shown in Exhibit 1, and how long the retreat from normal economic life lasts. Our baseline scenario assumes the largest impact in April, with many areas of the US experiencing about two-thirds of the peak effect shown in the chart.

Naturally, this being Goldman, the bank just has to error on the side of optimism, and so it does, noting that its baseline assumption is that “activity will start to recover after April and that H2 will see strong sequential growth, but the specifics depend on a number of important questions. Some are medical, including the extent to which social distancing and seasonally higher temperatures will reduce infections as well as whether good treatments will emerge. Others are behavioral and economic, including how quickly reduced infections will bring back everyday activities and how effective easier monetary and fiscal policy will be in providing support.”

And just to confirm it really has no idea, or visibility about what happens in the period it expects a super surge in GDP, Hatzius caveats that “the uncertainty around all of these numbers is much greater than normal.”

In short, while Goldman has no idea if and how the V-shaped recovery will take place, it is certain it will, and it now sees Q3 GDP surging +3%, up from +1%, and even higher, or +4% in Q4, from +2¼%, with further strong gains in early 2021.

Yet despite the sharply higher second half GDP forecasts, the bank still cuts its 2020 GDP forecast down to +0.4%, from 1.2%, which even in this optimistic, V-shaped recovery scenario, would be the worst annual GDP since the crisis.

What is perhaps most amusing about Goldman’s note is that it manages to incorporate a discussion of whether this catastrophic contraction – which will magically be limited to just one quarter – is classified as a recession.

Would the NBER business cycle dating committee classify our new forecast as a recession, given that it involves only one quarter of strictly negative growth? It is not entirely clear, but we think the answer is probably yes. The committee has noted previously that even a contraction of just a few months can meet its recession definition if it is sufficiently deep.

One shudders to think what the real GDP will be at the end of the year, when Goldman’s V-shaped recovery never materializes, and instead the far more probably L-shaped “recovery” emerges.

Following in the footsteps of the Bank of Canada which on Friday was the latest bank to announce an “unexpected” rate cut, following a barrage of central bank easing on Friday morning, moments ago New Zealand became the latest bank to join the “emergency” rate cut fray when the RBNZ announced an unexpected, whopping 75bps rate cut bringing the policy rate to just 0.25%, the lowest on record.

Dipping into armageddon calendar guidance, in its statement, the RBNZ said the rate will remain at this level for at least the next 12 months, suggesting it may well go lower.

The central bank also said the negative economic implications of the COVID-19 virus continue to rise, warranting further monetary stimulus, noting that “since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.”

And since “financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes”, the “negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.”

Of course, that’s the same identical script followed by every major central banks which has been quick to blame the coming economic Armageddon on the viral pandemic.

And since the rate cut will do nothing to stabilize the economy, which is crippled as a result of the pandemic, the Monetary Policy Committee also “agreed that should further stimulus be required, a Large Scale Asset Purchase program of New Zealand government bonds would be preferable to further OCR reductions.”

Translation: Kiwi QE coming (say that fast 5 times), and the currency has reacted appropriately, with the NZD plunging as low as 0.5944 after closing 0.6134 on Friday, the lowest level since May 2009.