Daily Comment (April 1, 2020)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT]

Happy April Fool’s Day!  But please don’t expect any foolishness here!  As always, we soberly review the latest U.S. projections on the course of the COVID-19 pandemic, which have rattled the markets so far this morning.  We also note the Fed has come out of the closet as the world’s central bank (see detailed discussion below), while Europe continues to struggle with a way to support its economy.

COVID-19:  Official data show confirmed cases have risen to 874,081 worldwide, with 43,537 deaths and 185,194 recoveries.  In the United States, confirmed cases rose to 189,633, with 4,081 deaths and 7,136 recoveries (though the recovery data is lagging).  Here is the main chart of infections now being published by the Financial Times:

  • Real Economy.  IHS Markit said its final March PMI for the Eurozone manufacturing sector came in at a seasonally adjusted 44.5, modestly lower than the flash estimate of 44.8 and the final February reading of 49.2 (see data tables below).  In the U.K., the IHS Markit/CIPS manufacturing PMI fell to a three-month low of 47.8 in March versus 51.7 in February.  As with all major PMIs, readings under 50 point to falling activity.
  • Financial System.  In a welcome sign that the junk bond market may be stabilizing after seizing up in early March, junk bond prices have improved a bit this week.  At least two major firms have also been able to float riskier debt.  Below-investment grade obligations are still trading at elevated spreads over U.S. Treasuries, but the improved market dynamics suggest that aggressive fiscal and monetary policy may have turned the tide.  All the same:
  • U.S. Monetary Policy Response.  Launching yet another new rescue program, the Fed said it will temporarily allow approximately 170 foreign central banks and international monetary authorities to borrow dollars by pledging the U.S. Treasuries they hold at the New York FRB.  The new “FIMA Repo Facility” will supplement the currency swap facilities already in place with more than a dozen major central banks.  Amid the global scramble for dollars touched off by the coronavirus crisis, the Fed said a key aim of the facility is to give foreign central banks access to the dollars they need without forcing them into disruptive sales of their Treasury holdings.  The facility will likely be considered especially helpful for smaller emerging markets, though China was probably the key country under consideration.  In a broader sense, the facility may be one of the most radical, risky, and controversial of the Fed’s many moves to counter the crisis as it amounts to a full, unabashed embrace of being the world’s central bank or the global lender of last resort.  That role is clearly at odds with the broader U.S. trend toward deglobalization, and it is out of sync with the administration’s policy of withdrawing from the traditional U.S. role as global hegemon.
  • Foreign Fiscal Policy Response.  The EU continues to struggle to come up with fiscal programs that can cushion the blow from the crisis without generating pushback from the northern creditor members.

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