Drivers for the Week Ahead

  • US policymakers are acting more aggressively; yet as we have seen time and again, added stimulus has had little lasting impact on markets
  • The Fed delivered another emergency rate cut Sunday evening local time; the major central banks announced coordination action to ease dollar funding stresses
  • BOC delivered an emergency 50 bp cut to 0.75% late Friday
  • Eurozone Finance Ministers meet Monday to discuss support measures for the economy
  • SNB meets Thursday and is expected to keep rates steady at -0.75%; BOJ has brought forward its meeting from Thursday to today
  • RBNZ delivered an emergency 75 bp cut to 0.25% early Monday local time

US policymakers are acting more aggressively.  President Trump declared a state of emergency Friday that frees up $50 bln for testing and care for coronavirus victims even as Congress is working on a stimulus bill.  The Fed then delivered an emergency cut over the weekend (see below).  BOC and RBNZ also delivered emergency cuts that were coordinated with fiscal stimulus.  The moves cap off a busy week for policymakers worldwide, but more measures will be seen.

Yet as we have seen time and again this past couple of weeks, added stimulus has had little lasting impact on markets as the virus numbers continue to worsen.  Europe is now reporting more daily cases than China did at its peak.  As of this writing, US stock futures are limit down and Asian bourses are under pressure.  We remain negative on risk assets until the global growth outlook becomes clearer, and that seems a long ways off still.

The dollar took an immediate hit from the Fed cut but has still held up relatively well.  DXY has still recovered nearly two thirds of its recent swoon.  We remain constructive on the dollar but acknowledge greater volatility ahead.  The euro found some support near $1.1050, but sterling remains heavy and is on track to test the October low near $1.22.  USD/JPY remains subject to swings in risk sentiment, but a clean break above the 108 area would set up a test of the February cycle high 112.25.

 

AMERICAS

The Fed delivered another emergency rate cut Sunday evening local time.  The Fed Funds target range was cut a full 100 bp to 0-0.25%, which matches the crisis-era low.  QE was restarted, with the Fed planning to purchase $500 bln USTs and $200 bln of .  This would take the Fed’s balance sheet up to $4.85 trln, which would be well above the post-crisis peak around $4.5 trln.  Other actions were announced, including allowing banks borrow from its discount window for up to 90 days and reducing reserve requirements to zero.  Mester was the lone dissent, favoring a smaller cut to 0.50-0.75% instead.

In related news, the major central banks announced coordination action to ease dollar funding stresses.  The BOC, BOE, BOJ, ECB, SNB, and the Fed will work to enhance existing dollar swap lines.  Pricing will be reduced by 25 bp, and the foreign central banks will begin offering dollar swaps weekly in their jurisdictions with 84-day maturities.

The FOMC meeting Wednesday has thus been rendered meaningless.  If anything, the Fed may try to explain its rationale for a second straight emergency cut in less than a week.  Chair Powell will hold another press conference but it is unlikely to deviate much from the one he gave Sunday evening after the emergency cut.  Powell said the Fed would not release new macro forecasts until June, noting that the value of updated forecasts now seem limited.

The US data highlight will be February retail sales on Tuesday.  Headline sales are expected to rise 0.2% m/m, while ex-auto sales are expected to rise 0.1% m/m.  The so-called control group used for GDP calculations is expected to rise 0.4% m/m.  IP will also be reported Tuesday and is expected to rise 0.4% m/m vs. -0.3% in January.

The regional Fed manufacturing surveys for March start rolling out this week.  Empire survey comes out Monday and is expected at 4.9 vs. 12.9 in February.  Philly Fed survey will be reported Thursday and is expected at 10.0 vs. 36.7 in February.  Manufacturing had just begun to recover from the US-China trade war, but the outlook has gotten cloudier.

There will be a lot of other US data this week.  Monday sees January TIC data, Tuesday sees January business inventories (-0.1% m/m expected) and JOLTS job openings (6401 expected), and Wednesday sees February building permits and housing starts.  Q4 current account data will be reported Thursday, along with February leading index and weekly jobless claims for the BLS survey week containing the 12th of the month (219k expected).  February existing home sales will be reported Friday.

Bank of Canada delivered an emergency 50 bp cut to 0.75% late Friday.  The bank said it stands ready to do more, and comes after a 50 bp cut at its regularly scheduled meeting the previous week.  Similar to the UK and Australia, the central bank coordinated with the government.  Finance Minister Morneau introduced an additional CAD10 bln ($7.1 bln) in new funding for Canada’s two business financing agencies, the Business Development Bank of Canada and Export Development Canada.  WIRP suggests that 25 bp of easing is fully priced in for the next scheduled BOC meeting April 15, with some chance seen of a 50 bp cut.

This is a big data week for Canada.  The highlight will be February CPI data Wednesday, with headline is expected to fall to 2.1% y/y from 2.4% in January and common core is expected to remain steady at 1.8% y/y.  This will be followed by January retail sales Friday, which are expected to rise 0.3% m/m after a flat reading in December.  Earlier in the week, January existing home sales (0.5% m/m expected) will be reported Monday and manufacturing sales (-0.6% m/m expected) will be reported Tuesday.

 

EUROPE/MIDDLE EAST/AFRICA

Eurozone Finance Ministers meet Monday to discuss support measures for the economy.  ZEW reports Germany and eurozone sentiment measures Tuesday.  The ECB meeting seems like ancient history, but we are heartened that Germany finally seems to be coming around to providing fiscal stimulus.

Swiss National Bank meets Thursday and is expected to keep rates steady at -0.75%.  A couple of analysts look for a 25 bp cut that takes the policy rate further into negative territory to -1.0%.  If nothing else, we expect a firm commitment from the SNB to continue with its FX intervention.  Ahead of the SNB meeting, the Swiss government releases updated economic forecasts.

 

ASIA                                                             

Bank of Japan has brought forward its meeting from Thursday to today.  WIRP suggests nearly 70% odds of a cut.  Reports suggest it is “likely to strengthen stimulus” via increased asset purchases, and that it’s unlikely to take rates more negative unless the yen strengthens significantly.  BOJ will reportedly wait to see if the ECB goes more negative, which it did not.  A targeted loan program is said to be likely, and the bank may also purchase more commercial paper and corporate debt to help firms cope.

Japan has a heavy data week.  January core machine orders will be reported Monday and are expected to contract -1.1% y/y.  February trade will be reported Wednesday, with exports expected to contract -4.2% y/y and imports by -14.1% y/y.  February national CPI will be reported Thursday, with headline and ex-fresh food inflation expected to both ease a couple of ticks to 0.5% y/y and 0.6% y/y, respectively.

RBA minutes will be released Tuesday.  At that meeting, the bank cut rates 25 bp to 0.5% and left the door open for further easing.  February jobs data will be reported Thursday.  Jobs are expected to rise 10k vs. 13.5k in January.  WIRP suggests another 25 bp cut to 0.25% is fully priced in for the next meeting April 7, with significant odds of a larger 50 bp cut to 0% even though the RBA has signaled 0.25% was likely the effective lower bound, after which a policy of yield curve control was likely.

Reserve Bank of New Zealand delivered an emergency 75 bp cut to 0.25% early Monday local time.  The bank said it will remain at that level for at least the next twelve months.  Because 0.25% is widely viewed as the lower bound, the bank said that it would turn to QE for the first time ever if further easing is required.  The upcoming March 25 RBNZ meeting has been canceled.  The government is expected to deliver details of a fiscal stimulus package soon.  Q4 current account data will be reported Wednesday, followed by GDP Thursday.  Growth is expected to slow to 1.8% y/y from 2.3% in Q3.