Policy Validation

(Bloomberg 10/6/20)

Powell Warns of Weak U.S. Recovery Without Enough Government Aid
‘Risks of overdoing it’ are smaller than too little stimulus
GOP opposition to larger fiscal package has hampered a deal
Federal Reserve Chair Jerome Powell warned of a weak U.S. recovery without sufficient government aid and said providing too much stimulus wouldn’t be a problem.

Powell’s remarks Tuesday came amid Republicans’ opposition to a larger relief package that’s kept talks with Democrats at a stalemate in Congress since aid to jobless Americans and small businesses expired in July and August.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said in the text of a speech for a virtual conference hosted by the National Association for Business Economics. “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”

(Bloomberg 10/7/20)

Fed to Debate Bond-Buying Program at Future Meetings

Some U.S. central bankers sought further debate on the future of the Federal Reserve’s asset-purchase program when they met last month, signaling they’d be open to altering or increasing bond buying going forward.

Minutes of the Federal Open Market Committee’s Sept. 15-16 meeting released Wednesday showed that some participants “noted that in future meetings it would be appropriate to further assess and communicate how the committee’s asset-purchase program could best support” the Fed’s dual-mandate objectives.
Policy makers agreed at the meeting to hold rates near zero until the labor market reached maximum employment, and inflation reached 2% -- and was on track to moderately exceed that goal for some time. Forecasts also released on Sept. 16 showed officials didn’t expect the economy to reach those targets until 2023 or 2024, as it gradually recovers from the steep recession inflicted by the coronavirus pandemic.

U.S. central bankers, gathering virtually as a precaution against Covid-19, agreed to keep purchasing Treasury and mortgage-backed bonds at a combined pace of about $120 billion a month.

At upcoming meetings in November and December, officials could seek to give the economy more monetary policy support by increasing the amounts of Treasuries and mortgage-backed securities they buy in an attempt to lower borrowing costs for households and businesses.

Policy Validation

(WSJ 9/23/20)

The Fed last week said it was committed to holding rates near zero until the labor market is strong, inflation reaches 2%, and Fed officials believe inflation will run slightly above 2% for some interval. Mr. Clarida said the Fed would need to reach all three conditions before considering any move to raise rates. Simply reaching 2% inflation wouldn’t on its own satisfy the central bank’s new criteria, he said.

Projections released after last week’s rate-setting committee meeting showed most officials expect it will take three years for inflation and employment indicators to return to levels seen earlier this year, before the pandemic disrupted the U.S. economy.

Mr. Clarida said that would represent a stronger rebound than the one that unfolded over the decade following the 2008 financial crisis. Nevertheless, the Fed’s three-year projection window isn’t long enough for Fed officials to project an overshoot of their 2% inflation target given the severity of the current downturn, he said.

(Bloomberg 9/23/20)

Powell: Fed Studying Treasury Market Performance During Crisis
“What we’re doing is, we’re going back now, as we did after the financial crisis, and we’re looking at where were the stress points, how did all the work we did for the last 10 years, how did it hold up?” says Fed Chair Jerome Powell.
“What happened that was new? And we’re going to be doing a lot of work on that”
“We are doing a lot of work on that and a central part of that will be the Treasury market and what changes do we need to make in and around the Treasury market so that we don’t have this happen again”
Powell answers questions Wednesday before House select sub committee on the coronavirus pandemic.

Policy Validation

(Reuters 9/17/20)

European Parliament votes for new taxes in EU to repay recovery borrowing

The European Parliament voted on Wednesday in favour of assigning new tax revenues to the European Union to repay the bloc’s intended joint borrowing of 750 billion euros ($888 billion) for economic recovery after the COVID-19 pandemic.
Lawmakers voted 455 votes in favour and 146 against, with 88 abstentions, to introduce new sources of revenue - so called “own resources” - to the EU budget that should at least cover the costs related to the recovery plan.
They could include a tax on unrecycled plastic and on goods imported into the EU from countries with less ambitious climate-change fighting standards. Also under consideration is taxing digital giants and extending an EU CO2 emissions trading scheme into the maritime and aviation sectors.

Policy Validation

(Washington AP 9/16/20)

Federal Reserve Sees Rates Near Zero At Least Through 2023

The Federal Reserve expects to keep its benchmark interest rate pegged near zero at least through 2023 as it strives to accelerate economic growth and drive down the unemployment rate.
The central bank also said Wednesday that it will seek to push inflation above 2% annually. The Fed left its benchmark short-term rate unchanged at nearly zero, where it has been since the pandemic intensified in March.
The Fed's statement formalized a change in its policy toward inflation. Fed chair Jerome Powell first said last month that the Fed would seek inflation above 2% over time, rather than just keeping it as a static goal.
The Fed also said Wednesday that it will continue purchasing about $120 billion in Treasurys and mortgage-backed securities a month, in an effort to keep longer-term interest rates low.

(MarketWatch 9/10/20)

European stocks edge lower, euro rises as ECB lifts forecasts without talking down currency

European stocks edged lower and the euro rose on Thursday, as the European Central Bank kept interest rates unchanged and offered a slightly more optimistic view of the economy.
Up 1.6% on Wednesday, the Stoxx Europe 600 declined 0.3%.
The ECB lifted its estimate for the eurozone economy this year, now seeing a contraction of 8% versus its previous estimate of an 8.7% drop, as it left 2021 and 2022 forecasts mostly unchanged.
During her introductory comments, ECB President Christine Lagarde did not mention the recent strength in the euro as a matter for concern.
Asked by a reporter, Lagarde said the ECB's governing council discussed the euro appreciation but said it doesn't "target the exchange rate." Lagarde said the ECB will have to "monitor carefully" the rate since it impacts inflation.
The euro traded at $1.1891, vs. $1.1804 on Wednesday.

Policy Validation
(Bloomberg 9/14/20)

Japan’s Suga Wins Ruling Party Race to Replace Premier Abe

Japanese Chief Cabinet Secretary Yoshihide
Suga was elected leader of the ruling Liberal Democratic Party
by an overwhelming majority, ushering in the country’s first
change of prime minister in almost eight years.

(Bloomberg 9/1/20)

Japan’s Suga Favorite to Succeed Abe After Party Limits Vote

Japan’s ruling Liberal Democratic Party adopted a structure for a vote to
replace outgoing Prime Minister Shinzo Abe that could help the premier’s
right-hand man, Yoshihide Suga, take over. Party officials decided on a
system Tuesday that would give more weight to lawmakers in the party
over rank and file members, LDP General Council Chairman Shunichi Suzuki
told reporters.

The move comes as Suga appears to be picking up enough
support among powerful factions of lawmakers, which put him far
ahead of any contender. The system decreases the influence of
regional voters, who have previously shown support for a top
rival, former Defense Minister Shigeru Ishiba, who on Tuesday
officially declared his candidacy.

(Bloomberg 8/27/20)

Treasuries Extend Gains After Fed Unveils New Inflation Approach

Treasury futures rise to session highs after Fed Chair Powell confirms a new approach to policy that takes a more relaxed stance on inflation and on its view of how low U.S. unemployment can go.
Gains are led by long-end of the curve, pushing 5s30s onto lowest levels of the session; yields richer by 1bp to 3bp across the curve
Move is accompanied by sliding inflation breakevens with 10-year tenor dropping around 4bp from near highs of the day
S&P 500 E-mini futures jump to session highs, advancing 0.2% on the day.

(Bloomberg 8/19/20)
Treasuries Fall After FOMC Minutes Are Silent on Asset Purchases
By Elizabeth Stanton
-- Treasuries erased gains and fell to session lows after minutes of the FOMC’s July 29 meeting were largely silent on the prospect of changes to the size or composition of the central bank’s purchases of Treasury securities.
Yields across the curve reached session highs, led by the long end, steepening the curve; 10-year yield erased what remained of an earlier decline of as much as 2.4bp and climbed as much as 1.8bp on the day to reach 0.687% before stabilizing

Policy Validation

(Bloomberg 8/14/20)

U.S.- China Six-Month Trade Agreement Review Delayed: Reuters

The six-month review of the trade agreement
between U.S. and China slated for Saturday has been delayed due
to scheduling issues, Reuters reports, citing sources familiar
with the plans.
* A new date has not been agreed to: Reuters
* NOTE: U.S. Trade Rep. Robert Lighthizer, Treasury Sec. Steven
Mnuchin and Chinese Vice Premier Liu He had been expected to
meet via videoconference on Aug. 15, the six-month anniversary
of the agreement entering into force

(Bloomberg 7/21/20)

Policy Validation

Judy Shelton, President Donald Trump’s contentious pick for the Federal Reserve’s Board of Governors, cleared a key hurdle to confirmation by winning the approval of a majority on the Senate Banking Committee.
She was backed in a party-line vote Tuesday, 13-12. The committee also voted in favor of Fed nominee Christopher Waller, currently director of research at the St. Louis Fed. His nomination passed 18-7.

(Bloomberg 7/20/20)

The euro climbed to a four-month high, European bond spreads narrowed and stocks rose as leaders made progress in negotiating a historic stimulus package. U.S. equity futures were mixed with the S&P 500 coming off a three-week rally.
Italy’s 10-year bond yield spread over Germany, a key gauge of risk in the region, fell to the lowest level since March.
In Europe, leaders appeared close to reaching an agreement on a rescue package. The four governments that have been holding up negotiations are ready to agree on a key plank of the deal, two officials said. The Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros ($450 billion) of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations.

(Bloomberg 7/6/20)

Short-End of Yield Curve Climbing
Yields are heading higher at the front end of the Treasury curve on
hints of skepticism about the usefulness of yield curve control. The two-year is at a session high of 0.16%.

Policy Validation

(Bloomberg 7/1/20)

Fed Officials Were Unconvinced on Need for Yield-Curve Control
By Christopher Condon

Federal Reserve officials had “many questions” about the benefits of yield-curve control when they discussed its pros and cons during their meeting in early June.

“Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy,” minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets.

U.S. central bankers left interest rates near zero at the session, which was conducted via video conference. They also agreed to keep purchasing Treasury and mortgage-backed bonds at a pace of about $120 billion a month.

In a press conference that followed, Fed Chair Jerome Powell said officials were “not even thinking about thinking about raising rates.”

Policy Validation

(Reuters 6/24/20)

The European Central Bank agreed to give vital documents to German authorities to prove the proportionality of ECB policies, two sources said, in a step to defuse a challenge threatening to undermine its powers to keep the euro zone together.

In a compromise deal, the ECB agreed on Wednesday to give unpublished documents underpinning its policy decisions to Bundesbank chief Jens Weidmann, who can then present them to the German parliament and government, as demanded by the court ruling.

The sources added that while the documents are unpublished, many were already provided to the European Court of Justice when it discussed and cleared the disputed asset purchase programme, the sources said.

(Bloomberg 6/10/20)

Treasuries Surge Led by Belly as Fed Puts Floor Under Bond Buys

Treasuries ended sharply higher after receiving a boost during U.S. afternoon from FOMC decision to maintain the pace of asset purchases at “at least at the current pace” of around $80 billion a month and projection that interest rates will remain near zero through 2022. Intermediate sector led the post-FOMC advance, richening the 2s10s30s fly. Long end lagged, however yields across the curve finished the U.S. session near daily lows.
Yields ended richer by 3bp to 9bp across the curve, pivoting around the 7- to 10-year sector; 10-year yields shed ~8bp to 0.744%, flattening 2s10s by more than 5bp; long-end yields fell 5bp-6bp on the day, leaving 5s30s steeper by 1.6bp after erasing 2.6bp of flattening that occurred before the FOMC actions

Policy Validation

(Bloomberg 6/10/20)

The Federal Reserve put a floor under its large-scale asset purchases and projected interest rates will remain near zero through at least 2022 as policy makers seek to speed the economy’s recovery from the coronavirus recession.
“To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” the Federal Open Market Committee said in a statement Wednesday following two-day policy meeting.
A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
The Fed’s quarterly projections -- updated for the first time since December, after officials skipped their March release amid the burgeoning pandemic -- showed all policy makers expect the federal funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.

(Bloomberg 6/4/20)

Europe’s Stoxx 600 turns slightly positive, paring a drop of as much as 0.8% after ECB boosts its stimulus program.
Banks almost wipe out drop of as much as 2.2%
ECB adds EU600b to its pandemic purchase program and extends it to at least June 2021, says will reinvest PEPP holdings until at least end of 2022

(Bloomberg) -- Italian bonds and the euro reversed losses after the European Central Bank boosted its emergency bond-buying program by more than expected.
The yield on Italy’s 10-year bonds fell 16 basis points to 1.39% and the euro extended its rally to the longest since 2011 after the ECB topped up its pandemic stimulus by 600 billion euros ($674 billion), beating estimates by 100 billion euros.

*Euro Rises to $1.1243 After ECB Decision From $1.1203 Beforehand

Policy Validation

(Bloomberg 5/29/20)

China “unilaterally imposed control over Hong Kong’s security,” President Trump says at White House news conference.

Trump says he’s directed his administration to eliminate policies that give Hong Kong special treatment, incl. extradition treaties, export controls

Trump says investment firms should not expose clients to China risk

U.S. to sanction Chinese officials involved in smothering Hong Kong autonomy, Trump says

Says he’s establishing working group to study Chinese companies listed in the U.S.

(Dow Jones 5/22/20)

Investors' concerns over escalating U.S.-Chinese tensions that re-emerged Thursday -- are spilling over into the Friday trading session as the three-day Memorial Day weekend approaches.
Dow Jones Industrial Average futures are off 0.4%, S&P 500 futures have fallen 0.3% and futures on the Nasdaq Composite declined 0.5%.
Overseas stocks are lower as well, led by a drop of 5.6% in Hong Kong, where stocks plunged in response to a Chinese plan to impose new national-security laws. The U.K.'s FTSE 100 Index is off 1%, while Japan's Nikkei 225 Index fell 0.8%.
Oil is also down in early Friday trading, ending a 6-day hot streak with a thud. Benchmark crude-oil futures are down almost 7%.

(Policy Validation - Dow Jones 5/22/20)

WASHINGTON -- U.S. senators are introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong, and the legislation also would penalize banks that do business with the entities.
Sen. Chris Van Hollen (D., Md.) and Sen. Pat Toomey (R., Pa) said they had been working on the bill already but Thursday's developments made the legislation more urgent. They said they will urge Senate leaders to take up the matter quickly.
Earlier Thursday, China signaled it will impose new national-security laws on Hong Kong, dealing a blow to the territory's autonomy as Beijing moves to stop widespread pro-democracy protests that have challenged leader Xi Jinping.
"We would impose penalties on individuals who are complicit in China's illegal crackdown in Hong Kong," Mr. Van Hollen said. He called the move by Beijing "a gross violation" of China's agreement with the U.K. to preserve more freedom and autonomy in the territory.
Mr. Toomey called the move by China "very, very deeply disturbing."
Last year, President Trump signed a bill designed to show solidarity with pro-democracy protesters in Hong Kong, despite expressing concerns it could complicate U.S.-China trade talks.

Minutes of the Federal Open Market Committee
April 28–29, 2020
Excerpt:
While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions. Some participants commented that the Committee could make its forward guidance for the path for the federal funds rate more explicit. For example, the Committee could adopt outcome-based forward guidance that would specify macroeconomic outcomes—such as a certain level of the unemployment rate or of the inflation rate—that must be achieved before the Committee would consider raising the target range for the federal funds rate. The Committee could also consider date-based forward guidance that would indicate that the target range could be raised only after a specified amount of time had elapsed. These participants noted that such explicit forms of forward guidance could help ensure that the public's expectations regarding the future conduct of monetary policy continued to reflect the Committee's intentions. Several participants observed that the completion, most likely later this year, of the monetary policy framework review, together with the announcement of the conclusions arising from the review, would help further clarify the Committee's intentions with respect to its future monetary policy actions. Several participants also remarked that the Committee may need to provide further clarity regarding its intentions for purchases of Treasury securities and agency MBS; these participants noted that, without further communication on this matter, uncertainty about the evolution of the Federal Reserve's asset purchases could increase over time. Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee's forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.

(Politico 5/20/20)

In another sign of worsening relations, the Senate on Wednesday passed a bill that threatens to delist Chinese companies from American stock exchanges unless they submit to U.S. auditing requirements. Some of the biggest Chinese companies have refused to conform to those requirements with little consequence.

"It says to all the companies out there in the world, including, but not limited to China: You want to list on an American exchange, you have to submit an audit, and the SEC has the right to look at that audit, and audit the audit," said Sen. John Kennedy (R-La.) in a floor speech describing the legislation, which he co-sponsored with Sen. Chris Van Hollen (D-Md.).

Only the latest China cut: The bill was the second piece of bipartisan legislation targeting China the Senate passed in two weeks. Last Thursday, the upper chamber passed the Uyghur Human Rights Policy Act of 2020, which would sanction Chinese officials who played a role in the mass detention of Muslims and other minority groups in China’s Xinjiang province.

(ITC Capital Markets 5/8/20)

Summary: US Front End Rates: Negative Interest Rate hype fades:report downplays; Powell Wed 9am ET

-We saw another surge in front-end futures Friday as the negative rate ‘hysteria’ continued through the early part of the session

-Front-end came “off the boil” in the afternoon with some focus on a consultancy piece (SGH Macro) that poured cold water on the potential for NIRP, speculating Fed leadership (including potentially Powell) may be out next week to actively signal they have no intention of pursuing negative rates

(Bloomberg 5/12/20)
Fed Funds Futures Continue to Price Out Odds of Negative Rates

Traders continue pricing out the chances of negative policy rates as Federal Reserve officials pushed back on deploying them.
July 2021 contract pricing a negative implied rate as of May 11; negative rates were priced as early as the March 2021 contract on May 8
Fed Presidents Evans, Bostic, Harker, Barkin and Bullard have said they don’t see negative rates being used in the U.S.
Wrightson ICAP expects Chairman Powell will “try to tamp down speculation that the Fed will take its policy rate below zero” during Wednesday’s webcast

(Bloomberg 5/13/20)
Treasuries Extend Gain, Stocks Slide; China Sanctions Introduced
Treasuries extend advance spurred by strong demand for 10-year auction after GOP senators introduced China sanctions legislation, leaving yields richer by 1bp to 545bp across the curve.
Long end leads the move higher, pushing 2s10s, 5s30s to flattest levels of the session
S&P 500 lower by 0.6% after paring gains
Treasuries were already headed higher after 10-year auction stopped 1.2bp through the WI level despite record $32 billion size and lowest-ever auction yield

(Bloomberg 5/12/20)
Trade Friction Over Virus Blame Saps Risk Appetite
Risk sentiment suffers a setback following President Trump’s decision to pull federal money out of Chinese equities and Beijing’s move to suspend meat imports from four Australian abattoirs. S&P futures fall as much as 1% and Asian indexes retreat; Hang Seng drops 1.8% and ASX 200 loses 1.3%; Kospi 0.8% lower. Shanghai Composite slips 0.6%, H shares 1.7% weaker. 10-year Treasuries hover near 0.69%; JGB futures edge higher on strong bond auction and Kuroda’s pledge to ease more if needed. The dollar strengthens against all G-10 majors except yen; Aussie underperforms. WTI July futures hold near $25.20; gold returns above $1,700/oz.

(Bloomberg 3/23/20)

Germany Ready to Back a Rescue Plan to Help Italy Weather Virus
Berlin sees ESM credit line for Italy with minimal conditions
Finance ministry not ready to move on joint coronavirus bonds
By Birgit Jennen and Viktoria Dendrinou

German officials are ready to help Italy get through the coronavirus pandemic and are prepared to support an emergency loan from the euro area’s bailout fund.

The preferred option in Berlin would see Italy granted an enhanced credit line by the European Stability Mechanism with minimal conditionality, according to a German official with knowledge of the government’s thinking. While Chancellor Angela Merkel has said she’s happy to discuss Italy’s request for jointly issued coronavirus bonds to shore up euro members’ finances, the official said Germany isn’t ready to move forward with that idea.

BTPs Extend Gains; Germany to Help Italy Combat Virus Crisis
By James Hirai

BTPs rise, extending outperformance over peripheral peers, after Germany says it is prepared to help Italy weather the impact of the coronavirus.
Italy’s 10-year yield falls as much as 7bps to 1.56%, paring its underperformance over bunds to 2bps at 197bps

(FT 3/24/20)

Global stock markets swung higher on Tuesday, buoyed by the latest efforts by the US Federal Reserve to support the economy, as the turbulence that has taken hold over the past few weeks showed little sign of abating. European bourses jumped in morning trading, with the continent’s Stoxx 600 index rallying 4 per cent. London’s FTSE 100 rose more than 3 per cent, while Frankfurt’s Dax advanced 5.3 per cent. The rally in Europe followed on from significant rises in Asia in response to the Fed’s pledge to buy an unlimited amount of bonds. “This is the Fed’s ‘whatever it takes’ moment,” wrote analysts at Invesco, referring to then-European Central Bank governor Mario Draghi’s 2012 pledge to save the euro. That was, they noted, “one of the most aggressive monetary easing programmes in the history of central banking”.

Federal Reserve announces extensive new measures to support the economy

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

(Bloomberg 2/17/20)

Treasury Futures Dip, BOJ Rate-Cut Pricing Firms After GDP Miss

Treasury futures are a touch lower. Long-end JGBs gain, while BOJ rate-cut pricing gently firms after the nation’s Q4 GDP miss estimates.

Japan’s gross domestic product shrank at an annualized pace of 6.3% from the previous quarter in the three months through December, the biggest slide since a previous tax increase in 2014, according to a preliminary estimate by the Cabinet Office Monday.


Economists surveyed had predicted a fall of 3.8%, flagging the adverse impact of the tax hike, weak global demand and typhoon disruption. The far worse-than-expected outcome showed that some of the government confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package.