Yesterday’s G7 meeting heard the great and the good say that they were prepared to use fiscal measures to fight the virus, where appropriate, and that central banks were also standing by. Then there was a brief interlude where we all thought: ‘is that it?’ Obviously markets did not like that; and then the Fed stepped in within an emergency 50bp rate cut, taking Fed Funds to 1.25%.
Guess what? The market didn’t like that either. Equities tanked, the S&P down 2.8%; bond yields plunged, with the 10-year US Treasury down around 15bp yesterday and a further 2bp this morning to take us clearly through the 1% level I spoke of being inevitable just a few days ago; and USD tanked against most crosses. So aggressive was the Fed action that our US strategist Philip Marey has brought forward his expectation of when we get back to zero lower bound there from September to June. He now sees a 25bp cut at the scheduled meeting on 18 March, again inter-meeting in early April, at the 29 April meeting, and at the 10 June meeting – with risks of more 50bp moves taking us there more lumpily.
“You get nothin’ for nothin’; Tell me who can trust””
For the Fed, and for all of us, the fact that their precious equity market tanked is deeply concerning. So is that fact that the 10-year is sub-1%. Clearly, they would have hoped to have seen stocks up and at last the longer end of the yield curve showing some signs of enthusiasm about all the lovely liquidity that is flowing around. Instead, their 50bp bazooka is—as we feared, and repeatedly stressed—merely a pop-gun in the face of a virus that doesn’t care what the borrowing rate it. Monetary policy alone is going to be useless. Or rather even more useless than it already is.
Logically, in a true pandemic the only way monetary policy can help is to support fiscal policy, for example in overcoming critical supply shortages via capital for new hospitals and local production of key goods (e.g., the WHO warning that protective gear supplies globally are “rapidly depleting”). This is exactly what monetary policy does during a major war: ensure a victory that transcends day-to-day politics. Of course, as we have also pointed out many times before, in doing so we pull back the curtain to reveal not just what its critics allege–a central bank that favours capital over labour and assets over wages–but that the fundamental foundations of how the political-economy works are not set in stone, but rather sand.
“We got what you want; And you got the lust”
Capital is not just accrued from saving, as in the neoclassical model, and bank loans are not just made from deposits. Paul Krugman struggles with this, and so do many others in the economics field, but money as we use it today is endogenous, not exogenous. Banks create it via debt with new loans, which then create deposits; and governments can always create it at will if central banks are willing to help – which they always do in a major crisis.
The key issue is, what is a major crisis? Obviously a war. Yet is this virus? It could well be; and with the 50bp flopping, and QE and reverse repo in the toolkit, and the Fed’s balance sheet as a % of GDP actually low compared to the Eurozone and Japan–and US President Trump hardly shy about expanding the fiscal deficit–the ingredients for this policy cocktail are all arguably in place. The second issue is that once you have shown the public that this can be done in an emergency, you then have to explain to them why it should NOT be done more often. (Or at least, not for them: it’s fine for the financial system, as in 2008-09, for example.)
Moreover, if the US is doing it, everyone else is going to want to do it too, surely? Except it is far from clear that everyone else can: Germany is obviously allergic to this kind of thing; and for smaller countries running trade deficits, more so with twin fiscal deficits, good luck persuading markets that you can be trusted with such a radical monetary-fiscal policy.
“If you want blood, you got it”
So first reactions to what happened yesterday are to smash the USD. Even CNY has rallied hard, despite the fact that the Caixin services PMI out today also collapsed to depression levels of 26.5. Yet once this phase passes, people will see that ONLY the USD has both local and international demand if we are to embrace MMT to fight the virus. What else is international trade going to be conducted and priced in? And note that there is going to be a whole lot less trade if things continue like they are – at which point people will soon flip to wondering where the USD needed to cover record global USD debt is going to come from.
Indeed, here is irony for you. When the US is performing well, with a strong economy, there are plentiful USD available via trade and ‘risk on’ markets. That argues for a weaker USD in many ways. When the US is in recession there are far fewer USD available via trade and ‘risk off’ markets. That argues for a stronger USD in many ways. Only the potential availability of Fed USD swap lines might help mitigate to some degree: and it remains to be seen how generous and (geo)political they might be under this White House. Which given a global recession now inevitable says:
“Blood on the rocks; blood on the streets; blood in the sky; blood on the sheets.”
You wanted that 50bp, Mr Market? You got it.
So let’s wrap up with Super Tuesday. At time of writing, and counting, Joe “Night King” Biden has won handily in Alabama, Arkansas, Maine, Minnesota, Massachusetts, North Carolina, Oklahoma, Tennesse, and Virginia. However, Sanders has won California, Colorado, Utah, and Vermont, and remains ahead in the delegate count at 49% to 39% (Bloomberg has 4%, which perhaps he plans to sell to Biden to make a profit on his USD500m campaign investment so far). In short, the Democrats are a toss-up between putting forwards a candidate who would likely embrace MMT and one who would run screaming from it…vs. a president who is surely more likely to embrace it. (Just look at his Fed tweets.)
ADP Employment Data Signals No Covid-19 Effects… Yet
Following January’s unexpected explosion higher in employment, ADP job growth was expected to slow in February.
The five-year high +291k print in January (dominated by Service economy job gains) was dramatically downwardly revised to just +209k (), which helped create a modest beat in February: +183k vs +170k exp.
Source: Bloomberg
January’s original (Goods +54k, Services +237k) was drastically revised down (Goods +22k, Services +186k) and February saw growth slow further (Goods +11k, Services +172k)
Source: Bloomberg
“The labor market remains firm, as private-sector payrolls continued to expand in February,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.
“Job creation remained heavily concentrated in large companies, which continue to be the strongest performer.”
Under the hood, it was a mixed bag with Natural resources/mining and Manufacturing shedding jobs as Education and Leisure/Hospitality saw the biggest gains:
Mark Zandi, chief economist of Moody’s Analytics, said, “COVID-19 will need to break through the job market firewall if it is to do significant damage to the economy. The firewall has some cracks, but judging by the February employment gain it should be strong enough to weather most scenarios.”
First Case Of Coronavirus Detected At EU Headquarters In Brussels; German Minister Says Virus “Has Become A Pandemic”: Live Updates
Update (0740ET): German Finance Minister Olaf Scholz has been pushing for Germany to defy its constitutional “debt break” and bolster spending. Now, he’s taking his rhetoric up a notch and defying the WHO to declare the coronavirus outbreak a “global pandemic.”
GERMAN FINANCE MINISTER SCHOLZ TELLS LAWMAKER GERMANY WOULD HAVE “ALL THE STRENGTH” TO COUNTER IMPACT OF CORONAVIRUS IF EPIDEMIC PLUNGED WORLD ECONOMY INTO CRISIS – SOURCES
GERMANY’S SCHOLZ TELLS LAWMAKERS GOV’T IS PREPARED AND READY TO ACT DECISIVELY TO COUNTER CORONAVIRUS – SOURCES
GERMANY’S SCHOLZ TELLS LAWMAKERS ANY FISCAL MEASURES TO COUNTER CORONAVIRUS IMPACT WOULD BE “TIMELY, TARGETED, TEMPORARY” – SOURCES
The FinMin has encountered resistance from within the ruling coalition, and if he’s going to succeed in delivering the fiscal stimulus that Europe so desperately needs, he’s going to need to outmaneuver his rivals.
* * *
Update (0722ET): Japan has confirmed 9 more cases in Osaka.
JAPAN CONFIRMS NINE NEW CORONAVIRUS CASES IN OSAKA AND FIRST IN MIYAZAKI PREFECTURE – KYODO
As we reported last night, Tuesday marked a major shift in the coronavirus outbreak: For the first time, more deaths were reported outside China than inside. And already on Wednesday, we’ve seen some unfortunate firsts: Iraq reported its first death after the virus leaked across the border from Iran.
The EU’s decision not to close borders and impose travel restrictions has come back to bite it: Just a few minutes ago, the European Union confirmed the first case of the virus at EU offices in Brussels. It appears to be tied to the European Defense Agency.
First case of #coronavirus in the EU institutions: the European Defence Agency has cancelled all meetings until 13 March after a senior official tested positive for #COVID_19, according to an internal mail seen by EURACTIV.@gerardofortuna reports.https://t.co/T8mHPm0u4A
Brussels only confirmed its first case in the city a couple of days ago.
Last night, China reported 119 additional coronavirus cases and 38 additional deaths for March 3. That’s compared with 125 additional cases and 31 new deaths the previous day. The new cases bring the total number of mainland cases to 80,270 and death toll at 2,871.
South Korea reported 809 additional coronavirus cases and 4 additional deaths, bringing its total cases to 5,621 and death toll to 32, while Italy’s total cases rose to 2,502 from 2036, and its death toll increased to 79, up from 52 earlier in the day on Tuesday.
Meanwhile, over in Japan, a part-time worker at a McDonald’s in Kyoto has tested positive, prompting the restaurant to close. The cashier attended music events in Osaka on Feb. 15 and Feb. 16, where investigators believe he may have been infected.
Last night, Japanese officials raised the possibility of delaying the Olympics. NTV reports Wednesday morning in the US that Japan would scale back Olympic Torch relay events.
Unsurprisingly, an a global Ipsos poll highlighted by the Guardian showed that a majority of Italians would accept quarantines of cities and towns, though that number climbed to 74% for the UK and 91% for Vietnam.
Q. Are you willing to accept quarantines of cities and towns to manage #coronavirus risk?
As we reported yesterday, Ireland has recorded a second case of coronavirus. However, officials are still planning to go ahead with St. Patrick’s Day festivities when the holiday arrives in a couple of weeks.
While the WHO has embraced alternative greetings, Public Health England, the agency in charge of the UK outbreak, said that while it might recommend people stop shaking hands, “we’re not there yet.
Over in Iran, the health ministry said the coronavirus had killed 92 people, up from 77 the day before, while the number of infections rose to 2,922, Al Jazeera reports. To be sure, reports last week claimed the true death toll had surpassed 200 – and that was a week ago.
Elsewhere in Europe, Bloomberg reports that Italy’s government is weighing a closure of all schools nationwide to contain the coronavirus outbreak. A closure could last 15 days and start this coming Monday, or the Monday following. This comes after officials reportedly considered cancelling all sports games in the country for a month.
Over at the ECB, the central bank has cancelled travel for all members of the Christine Lagarde-led executive board, as well as other employees judged to be non-essential, until 20 April 2020, at which time the central bank will reassess the situation.
The Biden Bounce: Dow Futures Up 666 As Traders Forget About Panicking Fed
Futures have staged a miraculous recovery after yesterday’s historic drop – the biggest ever on a day when the Fed cut rates, and are up some 70 points from yesterday’s close…
… and Dow futures were up a delightfully appropriate 666 points…
… as investors decided to forget all about the Fed’s panicked emergency rate cut and instead took solace from the surprising “Biden Bounce” during Super Tuesday which saw Bernie’s odds for re-election crash, shelving risks of a socialist America, while expectations of an even more forceful global policy responses to the coronavirus kept hopes alive that central banks are just getting started.
Biden, a non-socialist moderate seen as less likely to raise taxes and impose new financial regulations, won primaries in nine states. That set up a one-on-one battle for the Democratic presidential nomination with democratic socialist Bernie Sanders.
In Europe, the STOXX 600 gained 1.5%, on course for a third straight days of gains. Markets in Frankfurt, London .FTSE and Paris gained a similar amount. “After the action from the Fed the market is very, very watchful now for potential moves from other central banks,” said CIBC FX strategist Jeremy Stretch. On Wall Street, S&P 500 futures climbed 1.8% on Biden’s showing, after falling on Tuesday overnight despite the Fed’s rate cut.
The European moves built on gains in Asia, where MSCI’s broadest index of shares ex-Japan rose 0.3%. Asian stocks had a volatile trading session, while purchasing managers’ indexes for Hong Kong and China fell to record lows as the novel coronavirus curtailed business activity.
Markets in the region were mixed, with Jakarta Composite and South Korea’s Kospi gained 2% on a $9.8 billion government stimulus package to mitigate the coronavirus impact. Australia’s S&P/ASX 200 and India’s S&P BSE Sensex Index fell. The Federal Reserve’s emergency interest-rate cut buoyed some markets. Still, the slide in Hong Kong and China PMIs to new lows last month underscored the extent that the public-health emergency may erode company earnings. The Topix declined 0.2%, with Aeon Hokkaido and Usen-Next falling the most. The Shanghai Composite Index rose 0.6%, with Nanjing Chixia Development and Baoding Tianwei Baobian Electric posting the biggest advances
The Fed’s surprise move followed a shift in money market pricing late last week. Futures swung rapidly to anticipate such a cut at the Fed’s March meeting. Now, they imply another 50 basis points of easing by April, even though investors and the Fed itself raised doubts that easing will help deal with a public health crisis.
“If you’re in China and you can direct liquidity exactly where you need to, and have rate cuts where you want them to be, monetary policy is very effective,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. “In the West, in a democracy, monetary policy is less effective – you need to incentivise banks to do what is in to the benefit of the whole.”
Overall, the MSCI world equity index which tracks shares in 49 countries, gained 0.2%. It is still down around 10% falling a brutal sell-off last week as fears over economic damage from the coronavirus gripped markets.
“They’re pushing on a string,” said veteran emerging-markets investor Mark Mobius in a Bloomberg TV interview. “The problem is not so much interest rates, which are already very low globally. The problem is the supply chain coming out of China.” Markets will worsen “unless China can ramp up production,” he said.
As global markets and US rebounded, 10-year Treasury yields slipped even more after breaking below 1% for the first time in 150 years, however they have since posted a bit of a rebound and after hitting 0.93% around the European open, are back above 1.000%.
Eurozone bond yields also held near record lows on Wednesday, with Germany’s benchmark 10-year Bund yield around -0.64%, near six-month lows set on Monday. Some saw the Fed’s extraordinary move as a decision to move hard and early because it expected further economic damage from the spread of the coronavirus.
“They have signalled willingness to take further action, which is why we are seeing a further rally in bonds,” said Tim Drayson, head of economics at Legal & General Investment management. “Some argue that monetary policy can’t fight the supply shock – but it will support demand and confidence.”
Investors were also watching the Bank of England for signs it would follow the Fed. Money markets have moved to fully price in a BoE rate cut of 25 basis points at its next meeting, up from a chance of 80% before the Fed move. Sterling dipped 0.1% against the U.S. dollar and slipped 0.3% against the euro before clawing back some ground.
Elsewhere in FX, the dollar was little changed as Antipodean and Scandinavian currencies advanced as European stock markets rebound after opening lower; the euro erased losses after London came into the market and bunds gave up an early gain, underperforming bonds in the European periphery. Japan’s currency fell against all its major peers, erasing an earlier gain against the dollar, as leveraged accounts covered short positions in dollar-yen after the Nikkei 225 index reversed losses. The Australian dollar extended an advance after growth data for the fourth quarter last year beat estimates.
Looking at the day ahead now, and the data highlight will be the release of the services and composite PMIs for February from around the world. In addition, there’ll be German retail sales for January, the final reading of Italian Q4 GDP and Euro Area retail sales for January. Over in the US there’ll be the ISM non-manufacturing index for February, the ADP employment change for February, and weekly MBA mortgage applications. From central banks, the Bank of Canada will be deciding on rates and the Federal Reserve will be releasing their Beige Book. There’ll also be remarks from incoming BoE Governor Bailey, BoE Deputy Governor Broadbent, and St. Louis Fed President Bullard.
Market Snapshot
S&P 500 futures up 1.7% to 3,049.25
STOXX Europe 600 up 1% to 384.85
MXAP up 0.3% to 157.58
MXAPJ up 0.4% to 519.73
Nikkei up 0.08% to 21,100.06
Topix down 0.2% to 1,502.50
Hang Seng Index down 0.2% to 26,222.07
Shanghai Composite up 0.6% to 3,011.67
Sensex down 0.8% to 38,307.99
Australia S&P/ASX 200 down 1.7% to 6,325.40
Kospi up 2.2% to 2,059.33
German 10Y yield fell 0.3 bps to -0.628%
Euro down 0.09% to $1.1163
Italian 10Y yield fell 14.7 bps to 0.822%
Spanish 10Y yield fell 2.4 bps to 0.164%
Brent futures up 1.6% to $52.70/bbl
Gold spot down 0.2% to $1,637.18
U.S. Dollar Index up 0.1% to 97.26
Top Overnight Headlines from Bloomberg
The European Central Bank said it would restrict all non- essential travel until April 20, Japan’s Olympics minister said it would be possible to delay the summer games to later in the year
Joe Biden cemented a remarkable comeback on the biggest primary night of the Democratic presidential campaign with victories in nine states across the country, including upsets in Texas and Massachusetts, even as Bernie Sanders took the biggest prize of the night, California
China’s car sales fell 80% in February, according to preliminary numbers from the China Passenger Car Association released Wednesday, the biggest monthly plunge on record. Average daily sales improved toward the end of the month compared with the first three weeks, PCA said
The European Union imposed five-year tariffs on steel road wheels from China in a dispute that will ease concerns by manufacturers in Europe about whether revamped EU trade- protection rules are strong enough
Expectations for rate cuts have climbed in Japan and New Zealand in the wake of Federal Reserve’s emergency interest-rate cut, and in Australia there are now signs that traders are starting to prepare for quantitative easing
At Sweden’s central bank the newest policy maker said monetary easing is the wrong way to fight the fallout of the coronavirus while the governor of Norway’s central bank said a “significant” slump in trade triggered by the coronavirus might force him to reassess the outlook for interest rates
Asian bourses traded somewhat mixed following from the weak rollover from Wall St. where all major indices slumped around 3% despite the Fed delivering an emergency rate cut of 50bps, as this failed to alleviate the slowdown concerns from the coronavirus outbreak and the G7 statement on coordinated policy action also provided little in terms of details in which it did not commit to any monetary or fiscal action. Nonetheless, US equity futures partially nursed losses overnight as focus turned to Super Tuesday Democrat Primary results which showed former VP Biden performed well although there was still far to go with the biggest states California and Texas still up for grabs. ASX 200 (-1.7%) and Nikkei 225 (U/C) were lacklustre with Australia pressured by underperformance in tech and the top-weighted financials sector due to virus fallout concerns and the lower interest rate environment, while the Japanese benchmark was indecisive amid a choppy currency and uncertainty regarding the Tokyo Olympics after a minister suggested the event could be held back although Chief Cabinet Secretary Suga later reiterated they will continue to move ahead with preparations. Elsewhere, Hang Seng (-0.2%) and Shanghai Comp. (+0.6%) were temperamental despite speculation the PBoC could lower rates this month and after the HKMA moved in lockstep with the Fed through a 50bps rate cut, as participants also digested further weak data in which Chinese Caixin Services and Composite PMIs printed record lows. Finally, 10yr JGBs surged above the 154.00 level as they tracked the upside in T-notes following the Fed’s emergency rate cut and with the BoJ also in the market for over JPY 800bln in up to 5yr JGBs.
Top Asian News
Netanyahu Camp’s Lead Narrows, Encumbering Coalition Building
Desperate for Debt Relief, Lebanon Hatches Plan to Avoid Default
Rare Default on Green Bond in India Flags Broader Credit Strains
India’s Sensex Extends Decline on Reports of New Virus Cases
European equities saw a relatively shaky start to the session before eventually moving back into positive territory (Eurostoxx 50 +0.5%) as markets attempt to gauge the efficacy of recent and potential upcoming stimulus efforts from global authorities. Stateside, futures markets are indicating the likelihood of a positive open on Wall St., however, it remains to be seen whether this is a result of genuine optimism over recent policy responses or merely a fleeting paring back of some of yesterday’s declines. Furthermore, attention in the US will also partially be placed on the fallout from the Democratic “Super Tuesday” which saw a stellar performance for former VP Biden who now holds a total of 320 delegates (at the latest count) vs. 252 for Sanders. In terms of how this will effect the broader performance for stocks going forward, analysis is mixed. Some argue that Biden is more market-friendly than Sanders and thus his success should be seen as a positive, whereas others argue that even though Sanders would be detrimental for markets (should he enter the White House), Trump would be more likely to beat him, with Trump viewed by most as the overall most market-positive candidate. Sectoral performance in Europe is higher across the board with outperformance for material, healthcare and consumer staples. Individual movers include Eurofins Scientific (+7.8%) at the top of the Stoxx 600 post-earnings, Dialog Semiconductor (+3.6%) shares have been supported after posting favourable revenue guidance, whilst Rio Tinto (+3.6%) trade higher after a broker upgrade at SocGen. To the downside, the clear outlier is Intu Properties (-20%) after abandoning its equity placement, whilst Metro AG (-4.2%) are lower following reports of a potential tie-up with Sysco; reports that were later rebuffed.
Top European News
Virus Takes Aim at $1.7 Trillion Industry as Tourists Stay Home
Day of Reckoning Nears for Intu After It Pulls Share Sale
Coronavirus Disrupts Johnson’s Bounce as U.K. Services Slow
Billionaire Agnellis Sells PartnerRe to Covea for $9 Billion
In FX, the index and Greenback in general have regained some composure after Tuesday’s slide in wake of the Fed’s early or emergency March policy easing, with the former back above the 97.000 handle within a 97.423-104 range vs yesterday’s 96.926 base. However, Usd/major and EM pairs are mostly softer after FOMC Chairman Powell refrained from signalling that the 50 bp inter-meeting rate cut would likely suffice to protect the US economy from nCoV contagion, leaving the door ajar for more stimulus if necessary.
AUD/NZD/CAD/CHF/SEK/NOK – The Aussie appears to be building a firmer base on the 0.6600 handle vs its US peer on the back of firmer than forecast Q4 GDP data that will feed the notion of no back-to-back or follow up action from the RBA after its ¼ point reduction even though Deputy Governor Debelle warns that the bushfires and coronavirus will have more of an adverse impact on the economy in Q1. This has also lifted Aud/Nzd back above 1.0500 as the Kiwi continues to trail behind awaiting the RBNZ’s response to the COVID-19 outbreak later this month, with Nzd/Usd still struggling to advance beyond 0.6300. On that note, the Loonie is deriving some traction from another rebound in crude prices ahead of the BoC, albeit not as much as the Norwegian Crown given Eur/Nok rooted towards the base of a 10.3045-3730 band, as Usd/Cad pivots 1.3350. In terms of market pricing, -25 bp is baked in, but the probability of a like-for-like Fed move is also high at around 80%, hence options assigning a wide 75 pip break-even for the event. Elsewhere, while the SNB sits tight pending its quarterly review next week, Usd/Chf is holding circa 0.9550 and hardly acknowledging Swiss CPI slipping below zero y/y again, but the Swedish Krona has gleaned support from another upbeat PMI to straddle 10.5500 vs the Euro.
GBP/EUR/JPY – All on the back foot as the Buck regroups, with Cable still unable to sustain gains above 1.2800 and respecting the 200 DMA (1.2830) amidst heightened BoE policy stimulus calls, while Eur/Usd has faded ahead of 1.1200 and hefty option expiries between 1.1200-05 in 1.6 bn as the coronavirus spreads and especially in Italy. Lastly, the Yen has pared gains around 107.00 following comments from BoJ Governor Kuroda indicating a higher level of vigilance for Chinese epidemic effects and a potentially lower bar for a policy response.
EM – Broad recoveries across the region, and with the Lira also acknowledging positive comments from Turkish President Erdogan contending that a ceasefire can be forged at Thursday’s meeting with Russia to try and resolve the ongoing stand-off in Syria.
In commodities, WTI and Brent prices are firmer this morning, following yesterday’s emergency stimulus action by the Fed as markets are firmly on the look-out for action elsewhere, but more pertinently for the complex itself is reports pertaining to OPEC, as the JMMC meeting gets underway today. Comments this morning point towards Russia and Saudi holding bilateral discussions but reports note that Russia are likely to make their decision on cuts at the last moment. In terms of the magnitude of cuts sources point towards a cut around the 1mln mark, but that any figure above the 600k BPD initial JTC recommendation must be considered. These reports have coincided with upside in the crude complex, which saw WTI briefly surpass the USD 48/bbl mark; however, this upside has occurred alongside a general grinding higher in risk sentiment so its unclear how much of the move can be directly attributed to the OPEC commentary. Indicative scheduling for this week’s OPEC events saw the JMMC commence from around 11:00GMT today, with OPEC set to meet tomorrow before the entire OPEC+ committee convenes on Friday. As well as a decision on any additional cuts, focus will be placed on remarks around compliance as countries such as Russia are still not meeting their quota. Looking ahead, today sees the EIA weekly release, which is expected to see a build of 3.333mln barrels which, if correct, is just shy of double yesterday’s API crude build at 1.7mln. In terms of metals, it has been a relatively steady day for spot gold that is currently just shy of the USD 1650/oz mark, which appears to be capping price action and is in proximity to yesterday’s high; after the metal was supported on the emergency FOMC cut.
US Event Calendar
7am: MBA Mortgage Applications, prior 1.5%
8:15am: ADP Employment Change, est. 170,000, prior 291,000
9:45am: Markit US Services PMI, est. 49.4, prior 49.4
9:45am: Markit US Composite PMI, prior 49.6
10am: ISM Non-Manufacturing Index, est. 54.9, prior 55.5
2pm: U.S. Federal Reserve Releases Beige Book
DB’s Jim Reid concludes the overnight wrap
From my calculation that’s the 8th emergency inter-meeting Fed cut in my 24.5 years of working in financial markets so it feels like a landmark event especially as the other six have occurred in three clusters (98, 01, and 07/08). Yesterday afternoon we looked at what happened to the S&P 500 in the week, six months, and one year after these last 7 emergency cuts. The medium price move after these cuts were +2.8% (1w), -4.3% (6m) and -9.2% (1yr). When you consider the average 1yr price return (excluding dividends) for the S&P 500 is around 6% then that is a considerable 6 months and one year under-performance when the Fed deems it necessary to do an emergency cut. We’ve put the table in the pdf if you click the full link. 1998 was the big positive outlier as you didn’t see a subsequent recession and we moved into maximum bubble phase with the extra stimulus. That would be the bull hope. However for now the market will debate whether they have fired too much of their armoury too early. With Fed Funds now in the 1-1.25% range it feels a little like the flood defences to zero have seen a big erosion over the last 24 hours. Long-term readers will know that I think the Fed balance sheet will explode in the years ahead with the forward debt profile of the US (and other countries to be fair). I suspect this accelerates that move. To be fair to the Fed they were probably damned if they did and damned if they didn’t.
After the 50bp cut around at 10am EST the Fed said the move was unanimous and mentioned in their statement afterwards that “the coronavirus poses evolving risks to economic activity.” In his press conference, Chair Powell acknowledged the economic implications, saying that “the virus, and the measures that are being taken to contain it, will surely weigh on economic activity, both here and abroad for some time.” He also left open the prospect of further easing, saying that “we will use our tools and act as appropriate to support the economy”. This is the first 50bps move in either direction since the GFC and the market closed pricing in 3.01 25bp cuts, to lower rates a further 75.2bps by the January 2021 meeting, relative to yesterday’s 2.98 cuts and 74.6bps. So the 50bps cut has just led to the market pricing an extra 50bps anyway over the last 24 hours. In response, our US Economics team have accelerated this timeline and now expect another 50bp cut at the March meeting, a move that would be consistent with the historical experience of inter-meeting actions. The situation remains highly fluid, however, and positive developments related to financial markets or the coronavirus spread could justify a delay in any further easing. They will reassess this call ahead of the March meeting. See more at the link here.
Looking at the market reaction, it wasn’t encouraging that the S&P 500 fell sharply after the move. To be fair we went from -1% to just shy of +1.5% in the three minutes after the move, before fading for the rest of the session to be down -3.68% at one point and then settling to -2.81% at the close. We still closed +4.26% above levels before the Fed statement on Friday night for reference. With S&P futures up +1.27% this morning on a stunningly good night for Biden (more below), that gap from the lows has edged a bit wider for now.
10yr Treasuries surged following the decision, with yields falling -16.4bps on the day to another record low of 0.999% yesterday, while the 2s10s curve steepened for a 7th consecutive session, ending up a further +3.8bps. Treasuries are at 0.972% as we type. With US rates hitting new lows across the curve bank stocks led losses yesterday followed by technology stocks. Gold was the major beneficiary following the decision though, ending the session up +3.24%, its largest daily advance since the day after the Brexit referendum. The VIX climbed 3.40 points to finish at 36.82, its 4th close in a row over 30 – the first time that’s happened since November 2011 on the US credit downgrade. US HY spreads widened +8.7bps, at their widest closing levels since 2016.
Overnight in Asia markets are trading mixed with continued high volatility. The Kospi (+2.20%) is leading the gains on the back of the announcement of KRW 11.7tn stimulus by the government and expectations of a rate cut from the BoK at its unscheduled emergency meeting today which is currently underway. Meanwhile, the Nikkei (+0.08%) is trading flat but the Hang Seng (-0.11%) and Shanghai Comp (-0.39%) are down. The Japanese yen is down -0.24% this morning after being up by +1.12% yesterday.
As for overnight data releases, China’s February Caixin services PMI came in at a shocking 26.5 against expectation of 48 (which may not have fully adjusted after the weekend’s numbers), marking the lowest reading (by a very long way) since the series began and in turn bringing the composite PMI to 27.5 (vs. 51.9 last month) also the lowest since the series began. Japan’s final February services PMI came in one tenth higher than flash read at 46.8 while composite PMI was in line with flash read at 47.0. We also have the Bank of Canada rate decision today and markets are now pricing in a 66% chance of a 50bps cut which is substantially up from the start of trading yesterday when markets were expecting just a 25bps cut.
In other news, Bloomberg is reporting overnight that the BoJ is likely to consider downgrading its economic assessment this month due to the expected impact from the coronavirus outbreak. The BoJ meeting is due on March 18-19th. Elsewhere, the latest on the virus is that the WHO head has said that the coronavirus doesn’t transmit as efficiently as influenza but the fatality rate is higher at 3.4%, based on reported cases. Earlier, the fatality rate was assumed to be around 2%.
Turning to super Tuesday, Former Vice President Joe Biden solidified the idea that this might rapidly become a two person race now and he may well be the clear frontrunner again after turning party endorsements and a big South Carolina outperformance into a successful Super Tuesday. It continues to be likely that no one will win a majority of pledged delegates according to fivethirtyeight.com’s model, but now Joe Biden looks to have path to a plurality of delegates. This could lead to the nomination, especially because he would likely get a majority of super delegates on the second ballot. The concern for Biden coming into the night was that Sanders would build too large of a lead in states like California and Texas, the biggest and third-biggest delegate prizes of the night. However while Biden may still end the night with less overall delegates than Sanders – based on what the California and Texas vote counts ends up as – there is now a clear path forward for Biden that may not have existed a week ago in a field with a divided moderate vote. There is now renewed pressure on Joe Biden to continue performing both electorally and on the debate stage (next one is 15-Mar) as we move forward, because he was in the presumptive winner position before and then fell off that perch.
Joe Biden started the night well by building on his strength in South Carolina over the weekend into winning more Southeastern states, picking up Virginia, North Carolina, Alabama, Oklahoma, Arkansas, and Tennessee. Overall Biden has now officially won 8 states. Biden won Minnesota, a state Sanders won 4 year ago. Until recently Minnesota was expected to vote for their home Senator Klobuchar and Biden was not particularly close, but following her dropping out and endorsing of Biden, he was able to win it. This shows just how important the last few days were as the moderate wing came together behind Biden. Biden showed strength in the northeast where he won Massachusetts, Senator Warren’s home state – who has indicated she will not drop out yet, but that is a very disappointing result for her and she may still yet in coming days. He is currently leading in Maine, which would be an upset considering Sanders is the neighboring Senator. Biden is slightly up in Texas and gaining, which would be a major upset as Sanders was banking on running up the vote there.
Senator Sanders has officially won 3 states and will likely win in California which is the biggest prize of the night. At first glance it doesn’t look promising for Michael Bloomberg. Anyway overall Super Tuesday has been a big win for Biden with Sanders being dealt a notable blow. He is still in the race but is now having to catch up against the moderates rallying behind Biden.
Before all this and completing the picture from yesterday, European equities closed half way between the 3 minute Fed rally and the bulk of the US declines and so held on to gains with the STOXX 600 up +1.37%, its strongest day in a month. European sovereign debt also seemed to benefit from the Fed’s surprise move, with the spread of Italian 10yr-bunds falling by -14.6bps yesterday, in its largest move tighter in nearly six months. That came in spite of the fact that the number of Italian cases of the coronavirus has risen to more than 2,000. 10yr bunds yields were relatively unchanged on the day themselves, down -0.1bps. EURUSD strengthened beyond 1.12 for the first time since early January, before paring back some gains to close at 1.118. Even as risk assets were selling off hard, Oil stayed fairly unchanged (Brent -0.08%) and is up c.+1.40% this morning on news that an OPEC+ committee is recommending virus-related cuts of their own ahead of the meeting tomorrow/Friday to try and boost slumping oil prices.
The decision from the Fed came after the conference call earlier in the day between G7 finance ministers and central bank governors. In their subsequent statement, it said that “we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.” On the fiscal side, it also said that “G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.” However, the policymakers didn’t lay out any specific moves for what they’d do next.
Economic data releases have understandably taken a back seat over the last 24 hours, but we did get some key Euro Area data, with the flash CPI reading falling to 1.2% as expected, while the core CPI reading rose to 1.2%, also in line with expectations. The releases coincided with inflation expectations for the Euro Area coming off their record lows, with five-year forward five-year inflation swaps moving up +4.42bps to 1.152%. Meanwhile the Euro Area unemployment rate remained at 7.4% as expected, remaining at its joint lowest since April 2008. Finally, the UK construction PMI surprisingly rose to 52.6 (vs. 49.0 expected), its highest level since December 2018.
To the day ahead now, and the data highlight will be the release of the services and composite PMIs for February from around the world. In addition, there’ll be German retail sales for January, the final reading of Italian Q4 GDP and Euro Area retail sales for January. Over in the US there’ll be the ISM non-manufacturing index for February, the ADP employment change for February, and weekly MBA mortgage applications. From central banks, the Bank of Canada will be deciding on rates and the Federal Reserve will be releasing their Beige Book. There’ll also be remarks from incoming BoE Governor Bailey, BoE Deputy Governor Broadbent, and St. Louis Fed President Bullard.
Saudis Urge More Than 1 Million Bpd Oil Cut To Prop Up Prices, Russia Opposes
Update (0800ET): The Wall Street Journal reports that Russia opposes the Saudi plan to deepen OPEC+ cuts by 1.2mm b/d.
Developing…
* * *
As we detailed earlier, Brent crude futures were up 75 cents, or 1.45%, at 52.61 a barrel at 0700ET Wednesday after a three-day move of +10%, following expectations that major oil producers could make significant production cuts at the OPEC meeting on March 5.
Brent has tumbled into a bear market, down 26.5% in 38 sessions, following the outbreak of Covid-19 in China, now spreading across the world, has slashed global oil demand.
“This is a sudden, instant demand shock,” said Jim Burkhard, vice president and head of oil markets at IHS Markit Ltd.
“The scale of the decline is unprecedented.”
OPEC+ Joint Ministerial Monitoring Committee, the body that oversees production, will meet on Wednesday, ahead of the formal meeting, to discuss cuts. Saudi Arabia is urging OPEC+ to come to an agreeance ahead of Thursday for a reduction of 1 million barrels per day to compensate for lost demand seen by the virus crisis, Bloomberg notes.
“The recommended 600,000-barrel-a-day additional cut for the second quarter of 2020 will be seen as too little,” Mohammad Darwazah of consultant Medley Global Advisors said in a note. “It is clear that the group is mulling a deeper production pullback.”
The push for deep cuts comes as crude had its worst weekly decline since the 2008 financial crisis on mounting macroeconomic headwinds developing because of the virus spread, which forced Saudi Arabia to demand Russia jump on board with production cuts.
“With demand-side uncertainties having already dragged Brent futures about 19 percent lower since the start of the year … oil’s upside appears significantly capped amid persistent concerns over the coronavirus outbreak,” said Han Tan, market analyst at FXTM.
Ahead of tomorrow’s big meeting, Saudi Arabia and other OPEC members will spend most of Wednesday persuading Russia to join with output cuts to prop up prices.
Iranian Oil Minister Bijan Namdar Zanganeh told reporters on Wednesday that Russia will decide on production cuts at the very last minute.
A significant output cut by OPEC on Thursday could help to normalize oil demand and inventories in the second half of the year. Still, the global slowdown that started several years ago, has left the oil industry saturated with large stockpiles.
South Carolina mom Debra Harrell worked at McDonald’s. She couldn’t afford day care for Regina, her 9-year-old daughter, so she took her to work.
But Regina was bored at McDonald’s.
One day, she asked if she could just play in the neighborhood park instead. “I felt safe there,” tells me in my new video, “because I was with my friends and their parents.”
“She had her cellphone, a pocketbook with money in it,” says Debra. “She had everything she needed.”
Regina was happy. Debra was happy.
But one parent asked Regina where her mom was, and then called the police. Officers went to McDonald’s and arrested Debra.
In jail, they berated her.
“You can’t leave a child who is 9 years old in the park by herself!” said one officer. “What if some sex offender came by?”
People interviewed by the media were also outraged.
“What if a man came and just snatched her?” asked one.
“This day and time, you never know who’s around!” said another.
But what are they talking about? Crime in America is way down, half what it was in the ’90s. Reports of missing children are also down.
If kids are kidnapped or molested, it’s almost always by a relative or an acquaintance, not by a stranger in a park.
Nevertheless, prosecutors charged Debra Harrell with “willful abandonment of a child,” a crime that carries up to a 10-year sentence.
They also took Regina away from her mom—for two weeks. “I would cry as night because I was really scared,” Regina told me. “I didn’t know where I was, or what was going on.”
Fortunately, attorney Robert Phillips took Debra’s case for free. He didn’t like the way police and media portrayed her.
“Here was this black female that society gives a hard time. ‘Welfare queens, living at home, not getting a job!’ Well, that’s what she was doing,” he said. “She was out working, trying the best she could to take care of her child. And now we’re beating her up because we didn’t like the way she took care of her child.”
The cops said that Harrell should have sent her daughter to day care. But even if she could have afforded it, it’s not clear that day care is safer. “We found 42 incidents of sexual molestations, rapes in day cares,” said Phillips. “We couldn’t find (in South Carolina in the last 20 years) a single abduction in a park.”
Philips blames people in my business for scaring people about the wrong things. “The media has brought up this ‘stranger danger’ to where, if you’re not under the protective wings of mom and dad 24/7, then you’re exposing your child to some unknown danger.”
That has frightened police and child welfare workers into taking absurd steps when parents leave children alone.
In Maryland, police accused parents of child neglect for letting their kids roam around their neighborhood.
In Kentucky, after police reported a mom who left her kids in the car while she dashed into a store, child welfare workers strip-searched the kids to make sure they weren’t being abused.
This doesn’t protect kids. It mostly scares parents into depriving their kids of chances to learn. “When you don’t let them spread their wings, that’s when they get in trouble!” says Debra.
She was fortunate that her case got enough attention that even Nikki Haley, then South Carolina’s governor, asked that Regina be given back to her mom.
Prosecutors finally dropped the child abandonment charge.
It’s just not right that when stranger kidnappings are increasingly rare, police and child welfare workers are more eager to punish parents who let kids play on their own.
“A Utah law guarantees that giving kids some reasonable independence isn’t ‘neglect,'” says Lenore Skenazy, of the nonprofit Let Grow, “More states need this!”
Of course, some parents are so neglectful that government should intervene.
But as lawyer Phillips put it, they should intervene “only if you are subjecting your child to a real harm. We should not have unreasonable intrusions by the government telling us every little detail how to raise our children.”
COPYRIGHT 2020 BY JFS PRODUCTIONS INC.
from Latest – Reason.com https://ift.tt/32UREjh
via IFTTT
South Carolina mom Debra Harrell worked at McDonald’s. She couldn’t afford day care for Regina, her 9-year-old daughter, so she took her to work.
But Regina was bored at McDonald’s.
One day, she asked if she could just play in the neighborhood park instead. “I felt safe there,” tells me in my new video, “because I was with my friends and their parents.”
“She had her cellphone, a pocketbook with money in it,” says Debra. “She had everything she needed.”
Regina was happy. Debra was happy.
But one parent asked Regina where her mom was, and then called the police. Officers went to McDonald’s and arrested Debra.
In jail, they berated her.
“You can’t leave a child who is 9 years old in the park by herself!” said one officer. “What if some sex offender came by?”
People interviewed by the media were also outraged.
“What if a man came and just snatched her?” asked one.
“This day and time, you never know who’s around!” said another.
But what are they talking about? Crime in America is way down, half what it was in the ’90s. Reports of missing children are also down.
If kids are kidnapped or molested, it’s almost always by a relative or an acquaintance, not by a stranger in a park.
Nevertheless, prosecutors charged Debra Harrell with “willful abandonment of a child,” a crime that carries up to a 10-year sentence.
They also took Regina away from her mom—for two weeks. “I would cry as night because I was really scared,” Regina told me. “I didn’t know where I was, or what was going on.”
Fortunately, attorney Robert Phillips took Debra’s case for free. He didn’t like the way police and media portrayed her.
“Here was this black female that society gives a hard time. ‘Welfare queens, living at home, not getting a job!’ Well, that’s what she was doing,” he said. “She was out working, trying the best she could to take care of her child. And now we’re beating her up because we didn’t like the way she took care of her child.”
The cops said that Harrell should have sent her daughter to day care. But even if she could have afforded it, it’s not clear that day care is safer. “We found 42 incidents of sexual molestations, rapes in day cares,” said Phillips. “We couldn’t find (in South Carolina in the last 20 years) a single abduction in a park.”
Philips blames people in my business for scaring people about the wrong things. “The media has brought up this ‘stranger danger’ to where, if you’re not under the protective wings of mom and dad 24/7, then you’re exposing your child to some unknown danger.”
That has frightened police and child welfare workers into taking absurd steps when parents leave children alone.
In Maryland, police accused parents of child neglect for letting their kids roam around their neighborhood.
In Kentucky, after police reported a mom who left her kids in the car while she dashed into a store, child welfare workers strip-searched the kids to make sure they weren’t being abused.
This doesn’t protect kids. It mostly scares parents into depriving their kids of chances to learn. “When you don’t let them spread their wings, that’s when they get in trouble!” says Debra.
She was fortunate that her case got enough attention that even Nikki Haley, then South Carolina’s governor, asked that Regina be given back to her mom.
Prosecutors finally dropped the child abandonment charge.
It’s just not right that when stranger kidnappings are increasingly rare, police and child welfare workers are more eager to punish parents who let kids play on their own.
“A Utah law guarantees that giving kids some reasonable independence isn’t ‘neglect,'” says Lenore Skenazy, of the nonprofit Let Grow, “More states need this!”
Of course, some parents are so neglectful that government should intervene.
But as lawyer Phillips put it, they should intervene “only if you are subjecting your child to a real harm. We should not have unreasonable intrusions by the government telling us every little detail how to raise our children.”
COPYRIGHT 2020 BY JFS PRODUCTIONS INC.
from Latest – Reason.com https://ift.tt/32UREjh
via IFTTT
Northern Italy currently is the center of the COVID-19 outbreak in Europe. So far, 17 Italians have died as a result of the new coronavirus, and 650 have been infected. Schools in the region have been shut, universities have suspended lessons, companies have asked their staff to work from home, and many theaters, cinemas, and bars are closed. The virus caused the cancellation of the last two days of the Venice Carnival, which attracts thousands of visitors every year. And the area south of Milan, where Italy’s first COVID-19 cases were reported, is under quarantine.
Epidemics are not new in Northern Italy, which was at the center of trade routes throughout the Middle Ages and the Renaissance. In fact, Venice was the first city to develop methods to contain and treat virulently contagious diseases. Back then, the authorities isolated people with symptoms in lazarets (ships permanently at anchor and used for quarantine) on islands outside the city, and restricted the movements and interactions of healthy Venetians during a 40-day quarantine period.
Evidence is mixed as to whether these measures were effective. Milan lost almost half its population to the plague in 1630, and Venice lost approximately 30%. But the mortality rate could have been much higher had the authorities not fought the contagion the way they did.
Modern medicine and healthier living standards have greatly reduced the frequency of epidemics, significantly slowed the pace of contagion, and slashed mortality rates. The overall mortality rate from COVID-19 currently is around 34 per thousand, with elderly people and those with health problems being most at risk. Epidemics in early modern Northern Italy, by comparison, had mortality rates of 300-400 per thousand.
The big question now is whether the Italian authorities’ COVID-19 containment measures are commensurate with the scale of the problem, or too draconian.
Moreover, are these steps dictated by genuine public-policy goals, or mainly by political considerations?
Managing critical risks and strengthening resilience are key public-policy objectives. An outbreak of a highly contagious flu in a densely populated area needs to be contained even if the mortality rate is negligible, because an epidemic will cause hospitals and health-care systems in many areas to collapse. And, as with financial crises, it is always better to prevent a crisis than to confront one, because the latter entails huge economic, social, and political costs.
Ex post measures aimed at containing the spread of COVID-19, such as quarantines and travel bans, don’t seem to work in our age of mobility and economic integration. After the United States government announced at the end of January that it would temporarily refuse entry to foreign nationals who had recently traveled within China, Italy’s government banned direct flights to and from China. But this measure – adopted in response to pressure from the populist right-wing League party – will create tensions with China, a major trading partner that buys about $16 billion worth of Italian exports each year. Nor does the flight ban solve the problem of monitoring indirect arrivals to Italy from China.
The ban may rebound on Italy in other ways, too. Its European neighbors, for example, may be tempted to impose entry bans on Italians in order to appease popular anxiety and anti-foreign sentiment. Already, the French far-right leader Marine Le Pen has urged France’s government to suspend the Schengen Agreement and introduce border controls with Italy. And earlier in February, the Austrian authorities briefly blocked trains entering the country from Italy.
Epidemics affect different countries in different ways, and national policymakers must tailor their responses accordingly. At the same time, governments should coordinate measures aimed at protecting health-care workers and vulnerable individuals and countries. The lesson from Italy so far is that a lack of coordination among local governments, coupled with political fragmentation, puts all containment measures at risk by encouraging more people to leave the worst-affected areas. Many university students, for example, have already returned home from Northern Italy. So, containment measures in one place may succeed only in shifting the problem elsewhere.
The current expectation is that the COVID-19 virus will continue to spread within Italy and throughout the rest of Europe. Although the numbers remain tiny – there currently are only 41 confirmed cases in France, for example – the panic level is high enough to open the door to potentially restrictive measures.
Given today’s poisonous political climate, can we be sure that governments will not introduce measures that override existing legislation and restrict individual rights and freedoms? Might people infected with the COVID-19 virus lose their right to health treatment when abroad, for example? Or might they be prevented from returning to their own country, as US President Donald Trump announced would be the case for infected Americans overseas? In that respect, the COVID-19 outbreak has highlighted the absence of an international legal framework to deal with pandemics.
Meanwhile, the outbreak will have a significant impact on the Italian economy, and likely tip it into recession. Northern Italy is the country’s economic engine, with per capita GDP of approximately €35,000 ($38,000) – compared to the national figure of €28,000 – and a 67% employment rate (against 59% nationwide). But major trade events such as the Milan Furniture Fair have been canceled or postponed, business trips have been scrapped, and uncertainty is rife. Furthermore, virus-related cancellations are already hitting the country’s tourism industry, which accounts for 14% of GDP.
Having long been saddled with a sluggish economy – real GDP grew by just 0.2% in 2019 – Italy is now faced with a recession. Along with Germany’s economic slowdown and the uncertainty of Brexit, the country’s COVID-19 affliction is further grim news for Europe.
