A medical personnel member takes samples of person at a “drive-thru” coronavirus testing lab set up at Somerville Hospital in Somerville, Massachusetts on March 18, 2020.
Joseph Prezioso | AFP | Getty Images
Markets face more violent swings in the coming week as investors watch out for a rising number of coronavirus cases and new data that could show how the virus is slamming the U.S. economy.
The past week crushed stock investors, with the Dow Jones Industrial Average posting a 17.3% decline, its worst week since October 2008. But the stressed-out credit markets were at the vortex of pain with a standstill in corporate paper and spreads widening in all areas, from corporates to mortgages.
As economists looked for an even sharper economic downturn from the impact of social distancing, the Federal Reserve in the past week continued to fire away with new programs and liquidity to grease the wheels of nervous markets. By Friday, the dollar stopped its surge, and the Treasury market was a little calmer, with the benchmark 10-year yields sliding under 1% after a wild ride higher earlier in the week.
“The Fed is buying about $70 billion in off-the-run Treasurys today. That brings their total purchases this week to $300 billion,” Incapital chief market strategist Patrick Leary said Friday. “$160 billion was the highest we saw in any week during the financial crisis.”
In the week ahead, fresh data on manufacturing and the service sector is due Tuesday when Markit releases its flash Purchasing Manager Indexes.
Consumer sentiment data will be important when it is released Friday, but the big tell for the economy will be weekly unemployment claims on Thursday, which are expected to show the impact of massive layoffs at restaurants, stores and other businesses that were forced to close or reduce activity to prevent the spread of the virus.
Claims rose by 33% in the past week to 281,000, an unprecedented jump outside of times of natural disasters. Some strategists say the claims could easily jump to 1 million or more.
“We’re going to start to see the magnitude of the coronavirus impact on the economy. We already started to see some of it in the weekly claims, and now we’re going to get a clearer picture,” said Michael Arone, chief investment strategist at State Street Global Advisors. Arone said he’s watching the PMI data. “This data is going to inform us how bad it could get, give us some guidance, some rough rules of the road. Right now, it’s sell first, ask questions later.”
Economists increasingly expect a very sharp but quick recession, starting now. Goldman Sachs economists expect a shocking 24% contraction in second-quarter gross domestic product after a 6% decline in the first quarter. The economists expect unemployment to shoot up to 9% from 3.5%, but they see a rebound with growth at 12% in the third quarter.
“I expect that we’ll see abnormal volatility in markets until we begin to see that infection curve flatten, or we see some type of health remedy, vaccine or some solution. I don’t think we’re going to see that in the next few weeks at least,” said Arone.
Leary and others believe there is more room for the Fed to expand its arsenal, and that could include corporate debt purchases. Investment grade corporate debt funds and exchange-traded funds saw record outflows of nearly $44 billion in the last week, according to Bank of America.
The Fed has already slashed interest rates to zero, added $1 trillion in daily repo operations, and created facilities to help commercial paper, money markets and municipal debt. The dollar has rocketed higher since March 9, and the Fed expanded swap lines with other central banks, which helped stop the dollar’s run on Friday.
With the dollar the world’s reserve currency, companies, investors, banks and other institutions worldwide are looking to raise cash and they want it in greenbacks, the safest, most liquid currency. That rapid move to cash put a strain on the foreign exchange market, and sent the dollar higher and other currencies sharply lower.
“I think the market is going to be looking for indications that there’s some sort of stabilization, or maybe even a hint of stabilization and that policymakers are taking the right action. I think we’re not yet at that cathartic moment of peak pessimism,” said Ben Randol, foreign exchange strategist at Bank of America. “I’m watching what’s going to happen over the weekend because some pretty big numbers [of new virus cases] could come out, not just in the U.S. but in other countries.”
Strategists say it would not be surprising to see more Fed policy moves in the week ahead, and a big fiscal stimulus package is expected to come up in Congress on Monday, to ease the impact of job losses on individuals and help companies weather the downturn.
John Briggs, head of strategy at NatWest Markets, said the bond market responded to the Fed’s actions to make more dollars available, seeming to slow the sale of Treasurys by those parties looking to raise cash. “Things are settling into ranges Friday afternoon, because we can’t take it anymore,” he said.
“The amount of policy thrown at this market was staggering. … Liquidity infinity is what I’m calling it,” he said. “By the weekend, the whole country is literally going to be shut. You have claims at state unemployment offices skyrocketing. What’s the good news over the weekend? That they’re going to pass this bill? That’s already in the price.”
Monday
8:30 a.m. Chicago Fed National Activity Index
Tuesday
9:45 a.m. Markit Manufacturing PMI flash
9:45 am. Markit Services PMI flash
10 a.m. New home sales
Wednesday
8:30 a.m. Durable goods
9 a.m. Housing price index
Thursday
8:30 a.m. Jobless claims
8:30 a.m. Q4 GDP [final]
8:30 a.m. Advanced economic indicators
Friday
8:30 a.m. Personal income/spending
8:30 a.m. PCE price index
10 a.m. Consumer sentiment
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
©2024 Bloomberg L.P.
The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
Author of the article:
Published Apr 18, 2024 • 2 minute read
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
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The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
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Article content
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
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Article content
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
Article content
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