Dollar Soft, Equities Down Despite Passage of Senate Stimulus Bill

  • Spain is quickly becoming the next epicenter of the Covid-19 crisis; the dollar remains under pressure
  • The US senate approved the $2 bln stimulus plan by a 96-0 vote just before midnight last night; US jobless claims data will be the main focus today
  • The ECB has removed issuer limits on its most recent emergency EUR750 bln bond purchase program; reports suggest ECB officials are broadly in favor of activating OMT
  • UK reported weak February retail sales; BOE meeting is likely a non-event
  • Czech National Bank is expected to cut rates 50 bp to 1.25%; Singapore announced more stimulus as Q1 GDP disappoints; BOK started bond purchases; India announced stimulus measures

The dollar is broadly weaker against the majors as risk sentiment worsens despite the US Senate passing its stimulus bill last night.  Yen and Swissie are outperforming, while sterling and the dollar bloc are underperforming.  EM currencies are mixed.  MYR and IDR are outperforming, while ZAR and TRY are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei falling 4.5%.  MSCI EM is up 0.9% so far today, with the Shanghai Composite falling 0.6%.  Euro Stoxx 600 is down 1.7% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 6 bp at 0.81%, while the 3-month to 10-year spread is down 3 bp and stands at +92 bp.  Commodity prices are mostly lower, with Brent oil down 1.6%, copper down 2.0%, and gold up 0.1%.

Spain is quickly becoming the next epicenter of the Covid-19 crisis. The country saw new cases jump by nearly 8K yesterday with 738 death, with reports of sever strains in its heath system and overflowing intensive care wards. Spain (and Italy) have now more confirmed total deaths than China. Increase testing has continues to spur a sharp increase in confirmed cases in the US, now at around 68.5K with over 1,000 deaths.

The dollar remains under pressure.  DXY is down four straight days after the Fed announced open-ended QE, yet it has only retraced about a third of its March rally.  As we noted in our recent piece, the greenback softened after QE was first introduced in 2008 and then expanded in early 2009, but then recovered.  Retracement objectives from the March rally come in near 99.805 (38%), 98.821 (50%), and 97.837 (62%).  The euro is trading at the highest level since March 19 but will find it hard to extend those gains if the ECB continues to expand QE (see below).  Sterling is having trouble breaking above $1.20, while USD/JPY remans heavy as it breaks below 110.



The US senate approved the $2 bln stimulus plan by a 96-0 just before midnight last night.  There was some last minute drama as Democratic Senator Sanders warned that he would hold up the vote on the bill unless Republican Senators Graham, Sasse, and Scott dropped their opposition to expanded unemployment benefits.  In fact, the Senate blocked the amendment proposed by Sasse modifying that provision.  The House should vote on the bill Friday.

There is some very tentative good news from the beleaguered US high yields sector. The selloff seems to be stabilizing a bit, even in the energy sector. This surely had a lot to do with the performance of oil futures, which has also stabilized over the last few sessions. However, oil is down some 2% this morning, so it this will be an important test for the US HY energy sector.

US jobless claims data will be the main focus today.  Current Bloomberg consensus for weekly jobless claims this Thursday is 1.64 mln.  However, the range of estimates is huge, going from 360k all the way up to 4.4 mln.  Given Canada’s early read, the consensus is much too low, as its 1 mln claims filed last week is roughly equivalent to 10 mln jobless claims for the US.  While 10 mln is clearly way too high, the truth is likely to be somewhere in between.

The regional Fed manufacturing surveys for March will continue to roll out.  Kansas City reports today and is expected at -10 vs. 5 in February.  Earlier this week, Richmond Fed came in at 2 vs. -10 expected and -2 in February while last week, Empire survey came in at -21.5 vs. 3.0 expected and 12.9 in February and Philly Fed survey came in at -12.7 vs. 8.0 expected and 36.7 in February.  Advance goods trade (-$63.4 bln expected), wholesale (-0.2% m/m expected) and retail inventories (-0.1% m/m expected) will also be reported today.

The second revision for Q4 GDP will also be reported today, with growth expected to remain steady at 2.1% SAAR.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 3.1% SAAR vs. 2.7% previously.  Elsewhere, the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.5% SAAR vs. 1.6% previously and Q2 growth at 0.1% vs. 1.1% previously.  Both models will be updated Friday.

The problem with these models is that they are real-time and not particularly forward looking.  The Atlanta Fed acknowledges this and just added this statement to their website:  “In particular, it does not capture the impact of COVID-19 beyond its impact on GDP source data and relevant economic reports that have already been released. It does not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the model.”



The ECB has removed issuer limits on its most recent emergency EUR750 bln bond purchase program. Recall that the self-imposed limit forces the ECB to buy only a third of each member state’s debt. As one would expect, Italian, Portuguese and Spanish debt was the biggest beneficiary, with their respective 10-year yields falling over 10 bp.  It’s clear that the Fed has opened the door for the ECB to follow it down the past of eventually unfettered bond buying. We will be publishing a longer piece today about potential expansion of the ECB’s bond purchases.

Indeed, reports suggest ECB officials are broadly in favor of activating Outright Monetary Transactions (OMT).  This shouldn’t come as a huge surprise but its welcome news nonetheless.  Despite being part of Draghi’s “whatever it takes” moment, OMT has never been used.  By allowing unlimited purchases of member country bonds that are under attack, OMT would be the first step towards outright monetization of fiscal deficits.  Now that the Fed and others have opened the door, the ECB really has no choice but to follow suit.  If QE is seen as dollar-negative, then OMT should be seen as euro-negative.

Elsewhere, additional borrowing to combat the coronavirus is making its way through Germany’s legislature. The lower house approved it Wednesday while the upper house will vote this Friday.  The extraordinary spending authorization is part of legislation that’s meant to protect jobs and businesses. The new borrowing of EUR156 bln ($169 bln) is equivalent to around 4.5% of GDP and is half of Germany’s normal annual expenditures.

UK reported weak February retail sales.  Headline sales fell -0.3% m/m vs. 0.2% m/m expected and a revised 1.1% (was 0.9%) in January.  As a result, the y/y rate came in flat vs. 0.7% expected and a revised 0.9% (was 0.8%) in January.

Bank of England meets today but this has become a bit of a non-event after last week’s emergency meeting.  This is the first regularly scheduled meeting under new Governor Andrew Bailey, but he has already shown a willingness to act quickly and aggressively.  Minutes from the two emergency meetings will be released today and should give markets some insight of what may come next.  Of note, the BOE recently expanded the range of collateral they accept to include bonds issued by banks and state-run corporates.

Czech National Bank is expected to cut rates 50 bp to 1.25%.  However, analysts are split between no cut and cuts of 25 bp, 50 bp, and 75 bp.  Since its emergency 25 bp cut last week, EUR/CZK has risen about 5%.  The bank’s own model suggest each 1 ppt move in the currency is equal to 25 bp of easing, and so it may not feel compelled to cut rates so aggressively this week.



Singapore’s government came out with another large stimulus package, this time worth some $33 bln. This time around, officials will draw on national reserves for the first time since 2009. The total stimulus is now worth around 11% of GDP, while the budget deficit is expected at -7.9% of GDP for FY2020 vs. -2.1% previously forecast.  Despite it still being March, Singapore reported advance Q1 GDP data and it wasn’t pretty.  The economy contracted -10.6% q/q (-2.2% y/y) vs. -8.2% q/q (-1.4% y/y) expected), and it will likely get worse in Q2.  February IP was reported at -1.1% y/y vs. -3.2% expected.  MAS has moved up its semiannual meeting from early April to March 30.  Rising risks to growth suggest the MAS will loosen policy then by adjusting its S$NEER trading band.

The Bank of Korea was the latest country to announce a bond purchase program. They will conduct weekly (every Tuesday) repo operations to provide an “unlimited” amount of liquidity. The stated duration is three months, but they can reconsider in July.

India’s government also announced a new stimulus package, this one to the tune of $22.6 bln. This follows yesterday’s announcement that the country will extend the lockdown to a national scale. The new package will include direct cash transfers to ease the economic fallout.