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Powell expected to urge Congress to back more spending as US economy reels – BNNBloomberg.ca

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Jerome Powell must perform a high-stakes balancing act this week when he’s expected to urge U.S. lawmakers to back more spending for an economy reeling from the impact of the coronavirus pandemic.

The Federal Reserve chairman is scheduled to appear via video conference along with Treasury Secretary Steven Mnuchin before the Senate Banking Committee at 10:00 a.m. ET on Tuesday. They’re testifying on the US$2.2-trillion virus rescue package passed by the Congress in March.

The trick for Powell will be to make his case delicately, not overstepping his role as an unelected central banker and not appearing to take sides in the partisan battle over how much more Washington should do. Overplaying his hand could hurt the credibility of the Fed. Failing to argue persuasively may contribute to insufficient additional support and even deeper economic harm.

“Everything is risky for him right now, but not doing it is risky,” said Julia Coronado, president of MacroPolicy Perspectives. “He’s got to instill a sense of urgency in the Senate.”

Republicans have defended their reluctance to swiftly provide more aid say Powell has not specified the need is imminent. Senate majority leader Mitch McConnell told Fox News on Thursday the Fed chief didn’t say how quickly more money was required, giving lawmakers time to judge the impact of what has already been done.

Mnuchin Cheerleader

Meanwhile Mnuchin’s key role will be as a cheerleader for the recovery. His views may contrast with Powell, whose role is to provide a more frank assessment of the economy, even if the message is gloomy.

The Treasury boss’s job will be to defend his boss’ economy a mere five months before President Donald Trump vies for re-election. So far, while Mnuchin has conceded that there will be some “very, very bad quarters,” he has said that by “next year, we’ll be back to having a great economy just like we had before.”

Mnuchin will also face the heat for some failings of his rapidly executed stimulus programs. Some economic impact payments were sent to the deceased. And US$669 billion in aid to small businesses was plagued with glitches, with money going to public companies and private schools serving wealthy families, while mom-and-pop firms faced website crashes and muddled rules for obtaining the funds.

Powell Focus

Coronado, like other Fed watchers, predicted Powell will mainly rely on the economic data. Despite record federal support already approved by Congress, and a host of emergency Fed lending programs now or soon to be operating, the economy is looking more crippled with each week.

More than 36 million Americans have lost their jobs since February. Countless companies, especially small businesses, are hurtling toward bankruptcy, while states and cities are confronting gaping budget shortfalls that could provoke a massive second wave of layoffs from the public sector.

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The news keeps getting grimmer. Government data on Friday showed U.S. retail sales plunging in April, shattering the prior record set just a month earlier, as the virus shuttered businesses and kept Americans at home.

Powell has already been clear about the limits of Fed lending and remarkably outspoken on the likely need for more fiscal action. In a May 13 webinar hosted by the Peterson Institute for International Economics, he made an argument he’s likely to repeat this week.

“The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” he said. “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

He was also asked during a press conference April 29, if concerns about mounting government debt should make Congress pause over its next move. His answer was unequivocal.

‘Not the Time’

“This is not the time to act on those concerns,” he said. “This is the time to use the great fiscal power of the U.S.”

Democratic Senators at the hearing are likely to ask Powell to repeat those remarks. House Speaker Nancy Pelosi already pounced on Powell’s words to cast him as supportive of the Democrats’ proposal for a new US$3-trillion relief bill.

Republicans have dismissed that package as a left-wing wish list stuffed with unnecessary extras unrelated to the current crisis and begun raising alarms over the deficit. Trump has also said he’s in “no rush” for a new stimulus.

That could put Powell — who was picked to lead the central bank by Trump — in an awkward position if he comes across as falling too hard on the side of Democrats. But he’s well positioned to take that risk.

Bipartisan Outreach

Powell has worked hard since becoming Fed chair at building strong relationships on Capitol Hill on both sides of the aisle, an effort that could help him avoid being painted as partisan. The Fed’s fast actions at the outset of the crisis have also lent the central bank some newfound public support that may help.

A Gallup Poll in April, just as the Fed was responding aggressively to the sudden slowdown, showed public confidence in the Fed chair was at its highest since Alan Greenspan was in charge 15 years ago.

“His approval ratings are getting better and better,” said Carl Tannenbaum, chief economist at Northern Trust Corp. “He’s leveraging that new standing to be much more forceful.”

Still, Powell will know when to stop, said William English, an economics professor at Yale University and a former senior official at the Fed.

Stop Shy

“He’s already clearly on the record saying the situation is pretty bad and they’ll probably have to do more,” English said. “But he’ll stay away from saying what exactly they have to do.”

In other words, he won’t endorse any dollar amounts, or say where Congress should direct the aid.

He will also, Coronado predicted, make it clear that spending taxpayer money is not his job. That power lies with Congress.

“He’ll tell them, if you want to sit there and do nothing when we’re looking at the greatest disruption to the economy any of us has ever seen, that truly is up to the Senate,” she said.

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'No-deal' Brexit threat looms over pandemic-ravaged UK economy – BNNBloomberg.ca

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The threat of a no-deal Brexit is back — and with it the risk that the U.K. economy’s shaky recovery from the coronavirus pandemic will be hobbled.

As British and European Union negotiators head into the last round of talks scheduled before a key summit this month, chances are growing that the U.K. will end the post-Brexit transition period on Dec. 31 without a free trade agreement in place — spelling turmoil for businesses.

Instead of postponing its final parting with the bloc because of the coronavirus, the U.K. government has so far ruled out any delay. That may be, critics say, because Brexiters calculate the cost of leaving without a deal will be obscured by the far more extensive damage wreaked by the virus.

To Sanjay Raja, an economist at Deutsche Bank AG, a no-deal Brexit would halve the pace of growth next year to 1.5 per cent. The U.K. in a Changing Europe, a research group, estimates gross domestic product could be crimped by eight per cent over 10 years as trade barriers and a reduction in productivity hit output.

“It may be less politically costly for the U.K. to do no deal in the midst of a pandemic, but economically I’m not sure about that at all,” said Jonathan Springford, deputy director of the Centre for European Reform. “It might be that they’re able to get away with it — but I don’t think it changes the view that no deal would impose quite sizable economic costs.”

Citigroup Inc. says the size of the shock could even force the Bank of England to take the controversial move of cutting interest rates below zero because fiscal policy and other tools may not be enough.

Companies now have to think of how to prepare for Brexit while dealing with the fallout from coronavirus. Many are shuttered, indebted and struggling to pull through the lockdown.

The additional debt firms are carrying will make adjusting to Brexit more difficult, according to Alan Winters, director of the U.K. Trade Policy Observatory at the University of Sussex.

The re-introduction of trade barriers with the EU and changes to trading relationships with other countries will require a major re-orientation of exports, he wrote late in May. Heavily indebted firms are less likely to invest in developing new export markets.

“It’s a tense conversation at the moment,” said Allie Renison, head of Europe and trade policy at the Institute of Directors. “Companies are struggling with their survival, and there’s not a narrative yet from government saying to prepare, but they are saying the transition is ending.”

While both the U.K. and the EU insist a deal is still their preferred outcome, the deadlocked talks and the limited time left available mean risk no agreement will be reached is rising: analysts at Eurasia Group now put the odds of that outcome at 55%. EU Trade Commissioner Phil Hogan told RTE last month that the U.K. “can effectively blame Covid for everything.”

If the sides can’t strike a deal by the year-end, the U.K. will default to trading with the bloc on terms set by the World Trade Organization. That means British manufacturers of goods such as cars, pharmaceuticals, plastics, and precision tools could face new costs and significant disruptions to their just-in-time supply chains in Europe.

For Patrick Minford, chair of the pro-Brexit group Economists for Free Trade, leaving on anything but WTO terms would mean Britain would “lose the gains of free trade with the rest of the world.” It’s also better that the U.K. stays out of the EU’s expensive coronavirus recovery plan, he said. “When you add them both up, it’s pretty serious, really, and we’re much better off leaving.”

The fracturing of supply chains due to the coronavirus is one wake-up call to the upheaval that could be on the way. More than 80% of small and medium-sized manufacturers say the pandemic has affected their supply chains, and while some say contingency plans for Brexit have proved useful in preparing for the situation, others are facing shortages.

The pandemic has also led to discussion of bringing supply chains closer to home, particularly as the U.K. struggled to fly in emergency supplies while factories were closed and most workers stayed away.

U.K. Cabinet Office minister Michael Gove last week touted the “phenomenon of re-shoring” and said “we’re seeing how countries can increase resilience.”

But moves to shorten supply chains further could likely lead to goods becoming more expensive, according to Springford of Centre for European Reform. What is more, the U.K.’s geographical proximity to the EU means it’s likely to stay an important trade partner.

Philip Hammond, a former U.K. finance minister who campaigned to stay in the bloc, said last week that the government should at least seek a temporary trade deal to protect jobs.

Since the U.K. is such an open economy, “we will be more exposed than most developed economies to any headwinds in international trade during the recovery,” he said. “We really can’t afford to layer on top of that, during a very difficult recovery period, a sort of self-inflicted shock.”

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Global shares gain on hopes for regional economies reopening – CTV News

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TOKYO —
Global shares are higher Tuesday on optimism about moves to reopen economies from shutdowns to contain the coronavirus pandemic.

France’s CAC 40 jumped 1.9% in early trading to 4,851.37, while Germany’s DAX surged 3.2% to 11,961.53. Britain’s FTSE 100 added 0.9% to 6,219.95. U.S. shares were set to climb with Dow futures gaining 0.4% to 25,576.00. The S&P 500 future contract added 0.4% to 3,064.88.

Investors have been balancing cautious optimism about the reopening of businesses against worries that widespread protests in the U.S. over police brutality could disrupt the economic recovery and widen the virus outbreak.

Japan’s benchmark Nikkei 225 rose 1.2% to finish at 22,325.61, and Hong Kong’s Hang Seng gained 0.8% to 23,912.07. South Korea’s Kospi added 1.1% to 2,087.42. Australia’s S&P/ASX 200 rose nearly 0.3% to 5,835.10, while the Shanghai Composite edged up 0.1% to 2,918.94.

In Southeast Asia, where shutdowns are beginning to ease, Indonesia’s benchmark jumped nearly 2.0% and Singapore’s surged 2.3%.

Despite the bright mood across the region, fears persist about a possible resurgence in coronavirus outbreaks.

There were 34 new confirmed cases in Tokyo on Tuesday, seeming to reaffirm growing risks as people begin to mingle more in crowded commuter trains with the reopenings of more offices, schools, restaurants and stores. The daily numbers had dropped below 20 recently.

Critics had said Japan’s relaxation of its pandemic precautions was premature, and Japanese media reported that Tokyo Gov. Yuriko Koike plans to announce a “Tokyo Alert” requesting residents of the capital to try harder at social distancing.

Despite such concerns and the widespread unrest erupting in many U.S. cities, hopes for a quick recovery from the worst global downturn since the 1930s have spurred recent rallies.

The protests that have rocked American cities for days have so far not had much impact on financial markets. But the violence and damage to property may hinder the re-opening of the economy. Crowds gathering to protest injustice and racism also could touch off more outbreaks.

But Robert Carnell, regional head of research for the Asia-Pacific region at ING, warned against too much optimism.

“How long can markets remain buoyant?” he asked. “The honest answer, and one that may save you five minutes is, `I don’t know.’ “

This week will provide market watchers more insight on the impact that the coronavirus is having on U.S. workers and employers. Payroll processor ADP issues its May survey of hiring by private U.S. companies on Wednesday. The next day, the government releases its weekly tally of applications for unemployment aid.

On Friday, the government reports its May labour market data. Analysts surveyed by FactSet expect the report will show the economy lost 9 million jobs last month.

In other trading, benchmark U.S. crude oil added 42 cents to US$35.86 a barrel in electronic trading on the New York Mercantile Exchange. It fell 5 cents to $35.44 a barrel on Monday. Brent crude oil, the international standard, gained 59 cents to $38.91 a barrel.

The U.S. dollar rose to 107.72 Japanese yen from 107.58 yen. The euro climbed to $1.1158 from $1.1136.

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Australia central bank sees glimmer of hope as economy restarts after pandemic shutdown – The Guardian

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By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually re-opens during what is likely to be the worst quarter since the Great Depression.

The Reserve Bank of Australia (RBA) left rates at 0.25% at its monthly policy meeting in a widely expected decision, and said the “accommodative approach will be maintained as long as it is required.”

In a short post-meeting statement Governor Philip Lowe said the RBA was prepared to scale up government bond purchases if needed to ensure three-year yields held around 25 basis points.

Australia’s A$2 trillion ($1.4 trillion) economy is experiencing its biggest contraction since the 1930s in the current quarter but “it is possible that the depth of the downturn will be less than earlier expected,” Lowe added.

A significant decline in new infections, earlier-than-expected easing of restrictions and signs that hours worked stabilised in early May auger well for a recovery.

“There has also been a pick-up in some forms of consumer spending,” Lowe added.

States and territories across Australia have been easing social distancing regulations at differing paces in recent weeks, slowly ending a partial lockdown ordered in March, having largely contained the COVID-19 pandemic.

Australia, which has about 7,200 coronavirus cases, has not reported a death from the disease for more than a week.

The country’s success in containing the virus has sent the Aussie dollar soaring to five-month highs. Yet, that is leaning against monetary stimulus and won’t be welcome by the RBA.

The central bank made no mention of the exchange rate in the statement.

Highlighting the depth of the pandemic-driven global economic downturn and the fallout on Australia, many economists expect interest rates to remain at record lows for at least two more years.

Some are even predicting negative interest rates, though Lowe has ruled it out.

“While we have also become more optimistic about the outlook for the economy in recent weeks, we still expect the unemployment rate to jump to nearly 9% by Q3,” said Capital Economics analyst Marcel Thieliant.

He expects the central bank to announce an expansion of its government bond buying programme at its August policy meeting.

“And we only expect the unemployment rate to fall below 7% by 2022. That would leave it far above the RBA’s estimate of the natural rate of 4.5%, underlining that the RBA will miss its full employment mandate for years to come.”

Q1 GDP MAY DODGE CONTRACTION

Official data out earlier showed Australia boasted a record current account surplus last quarter as firm export prices and a fall in imports provided a timely boost to growth.

Other data out on Tuesday showed government spending also added to growth in the March quarter, while companies reported better sales and profits than many expected.

The figures led analysts to upgrade their forecast for first-quarter gross domestic product due Wednesday with some saying the economy might not have shrunk in the quarter as previously feared.

GDP had been forecast to show output contracted 0.3%, the first fall since early 2011.

“A small positive print cannot be ruled out,” said Su-Lin Ong, chief economist at RBC Capital Markets.

“But the likely collapse in activity in the current quarter and accompanying impact on the labour market…is a sharp and deep shock through the whole economy with likely lasting ramifications.”

(Reporting by Swati Pandey; Editing by Shri Navaratnam)

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