The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the repurchase agreement (repo) operational schedule for the upcoming period.
Beginning Thursday, March 12, 2020 and
continuing through Monday, April 13, 2020, the Desk will offer at least
$175 billion in daily overnight repo operations and at least $45
billion in two-week term repo operations twice per week over this
period. In addition, the Desk will also offer three one-month term
repo operations, with the first operation occurring on Thursday, March
12, 2020. The amount offered for each of these three operations will
be at least $50 billion.
Consistent with the FOMC directive
to the Desk, these operations are intended to ensure that the supply of
reserves remains ample and to mitigate the risk of money market
pressures that could adversely affect policy implementation. They
should help support smooth functioning of funding markets as market
participants implement business resiliency plans in response to the
coronavirus. The Desk will continue to adjust repo operations as
needed to foster efficient and effective policy implementation
consistent with the FOMC directive.
Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.
We are headed to $800 billion extra liquidity, which clearly is more than a temporary problem in the banking system. John Adams and I discussed this in a recent post.
Given the current market gyrations, we are going to examine the latest critical data each day, because a week is a long time in politics but a lifetime on the markets at the moment…
RBA Deputy Governor Guy Debelle gave a keynote Address at the Australian Financial Review Business Summit. It was a summary of how the Bank is seeing developments in the economy at the moment. As normal, the story was the economy was doing quite well, until the onset of the coronavirus. And once it passes things will revert to this trend.
They admit that the global economy will be materially weaker in the first quarter of 2020 and in the period ahead. Australia will see at least a 0.5% fall in growth in the current quarter, but it is just too uncertain to assess the impact of the virus beyond the March quarter, he said. Despite the fact that spreads on Australian bank bonds have widened, yields remain at levels that are still very low historically, and banks are strongly capitalised.
Weirdly, he fails to discuss the Fed’s ongoing repo operations and growing balance sheet. John Adams and I released a show on this just today:
Here is the speech in full:
The December quarter national accounts confirmed our assessment that the Australian economy ended 2019
with a gradual pick-up in growth. Growth over the year was 2¼ per cent, up from a low of
1½ per cent. Consumption growth was a little stronger in the quarter, although still
subdued. We had estimated that the bushfires will subtract around 0.2 percentage points from growth
across the December and March quarters, but besides that, economic growth was set to continue to pick up
supported by low interest rates, the lower exchange rate, a rise in mining investment, high levels of
spending on infrastructure and an expected recovery in residential construction.
On the global side, around the turn of the year there were indications that the global economy was
coming out of a soft patch of growth. The trade tensions between China and the US had abated, surveys of
business conditions were picking up and industrial production was improving. Financial conditions were
very stimulatory and supporting the pick-up in global growth.
Since then, there is no doubt that the outbreak of the virus has significantly disrupted this momentum,
initially in China and now more broadly. We do not have a clear picture yet on the disruption to the
Chinese economy caused by the virus and the measures put in place to contain the virus. But the
following two graphs provide some sense of the significant disruption to the Chinese people and
economy.
The coal consumption graph (Graph 1) shows the regular significant decline in production around
Chinese New Year. But this year, the return to normal production has been significantly delayed. There
was no ramp up in production after the holiday period, and we are now more than four weeks past the
point where the Chinese economy is normally back to full-scale production. The straight arithmetic of
losing a substantial amount of output over a period of several weeks implies a significant hit to
economic activity. The road congestion graph (Graph 2) tells a similar story of a protracted period
of low output.
Both show that the Chinese economy is now only gradually returning to normal. Even as this occurs, it
is very uncertain how long it will take to repair the severe disruption to supply chains.
In the meantime, the virus has spread to other countries. They too are beginning to suffer significant
disruptions, the extent and duration of which is unknown at this time.
The conclusion is that the global economy will be materially weaker in the first quarter of 2020 and in
the period ahead.
In terms of the effect on the Australian economy, we have estimated the direct impact on the education
and tourism sectors in the March quarter. Graph 3 shows the normal profile of visitor arrivals into
Australia. Since January, inbound airline capacity from China has declined by 90 per cent,
which gives a guide to the size of the decline in arrivals from China. Up until recently, tourist
arrivals from other countries had held up reasonably well but that may no longer be true. From our
liaison with the education sector, including the universities, as well as student visa numbers, we have
information on the number of foreign students who have been unable to resume their studies. Graph 4
shows the country of origin of foreign students in Australia.
We have used this information to estimate the impact of the virus in these two sectors of the economy.
The estimate is approximate, but at this stage we think the decline in services exports in the March
quarter will amount to at least 10 per cent, roughly evenly split between lower tourism and
education exports. As service exports account for 5 per cent of GDP, this translates into a
subtraction from growth of ½ per cent of GDP in the March quarter from these two
sources.
Through our business liaison program we are gathering information on supply chain disruptions which are
affecting the construction and retail sectors in particular. Clearly we are still only in the early
weeks of March, so the picture can change from here.
It is just too uncertain to assess the impact of the virus beyond the March quarter.
Our liaison with the resources sector does not indicate any material disruption to exports of iron ore
and coal at this stage. Indeed, iron ore and coal prices have been resilient. Disruptions to Chinese
domestic production of iron ore and coal have been a factor in this, which has resulted in more use of
imported resources. Another is the expectation that the Chinese policy response will involve a
significant amount of infrastructure spending which will benefit bulk commodities. The movements in
these commodity prices stand in contrast to the large decline in the oil price, which will flow through
to LNG prices (Graph 5).
I will now summarise recent developments in financial markets. There has been a large increase in risk
aversion and uncertainty. The virus is going to have a material economic impact but it is not clear how
large that will be. That makes it difficult for the market to reprice financial assets.
Policy interest rates have been reduced in some countries, including Australia, and further reductions
are expected where that is possible. Currently market pricing implies a reduction of between 75 and
100 basis points in the Fed’s policy rate at their meeting next week.
Government bond yields have declined to historic lows, because of the shift downwards in actual and
expected policy rates, reduced expectations for growth and a flight to safety (Graph 6). The
25 per cent fall in oil prices on Monday morning has also led to lower expectations of
inflation. The 10 year US treasury yield reached a low below 35 basis points on Monday,
including a 25 basis point decline at the opening of trade in Asia. It has since risen to be around
65 basis points at the time of writing.
Australian government bond yields have been driven by the global developments. They haven’t
declined as much as US Treasuries, such that the spread between the 10 year yields is now slightly
positive, having been negative over the past two years. At the time of writing, the Australian
government can borrow for 10 years at 75 basis points.
Equity prices have fallen by as much as 20 per cent since their all-time peak of less than a
month ago, although the Australian market rebounded on Tuesday (Graph 7). The falls have been
particularly large for companies in the oil sector, as well as tourism.
Corporate bond spreads have widened. Through the first part of this move, the widening in large part
reflected the rapid shift downwards in the risk free (government bond) curve. Investment grade bond
spreads widened but investment grade yields actually fell (Graph 8). In the last few days though,
we have seen yields rise along with the spreads. The high yield sector has seen a marked rise in yields
and spreads, particularly in the US reflecting the prevalence of energy companies in that market. Bond
issuance has been extremely low, in part because issuers do not want to appear to be in desperate need
of funds in a dislocated market. It is also worth noting that just as equities prices have fallen from
historic highs, so too have corporate bond prices fallen from historic highs.
Liquidity in fixed income markets has been poor at times, including in US Treasuries. The liquidity
environment has changed considerably in the past decade in response to changed regulations. The banking
sector is much less willing and able to warehouse risk and provide liquidity than in the past.[2]
The Australian banking system is well capitalised and is in a strong liquidity position. The Australian
banks had raised a significant amount of wholesale funding before the disruption to markets and deposit
inflows are robust. They are resilient to a period of market disruption. Spreads on Australian bank
bonds have widened, although yields remain at levels that are still very low historically. We have not
seen any particular sign of pressure in our daily market operations to date. The spread between the bank
bill swap rate and the expected policy rate (OIS) has risen in recent days but remains low, nothing at
all like what occurred in GFC.
Exchange rate volatility has been very low for a considerable period of time, but has picked up in the
past few days. However it still remains considerably lower than volatility in other financial markets.
The yen has appreciated by as much as 10 per cent against the US dollar, as Japanese
investors repatriate funds, as normally occurs in these type of situations (Graph 9). More
surprisingly, the euro has also appreciated against the US dollar. Market intelligence indicates
that part of the reason for this is the liquidation of trades that were funded in euros and invested in
higher yielding assets such as emerging market bonds. The sharp narrowing in the interest differential
with the US has also contributed.
The Australian dollar has depreciated by 6 per cent since the beginning of the year to decade
lows against the US dollar and on a trade-weighted basis (Graph 10). This will provide a
helpful boost to the Australian economy and has occurred despite the prices of the bulk commodities,
iron ore and coal, remaining resilient.
Turning to monetary policy, the Board met last week and decided to lower the cash rate by 25 basis
points to 0.5 per cent. This decision was taken to support the economy by boosting demand and
to offset the tightening in financial conditions that otherwise was occurring.
The reduction in the cash rate at the March meeting was passed in full through to mortgage rates. The
cash rate has been reduced by 100 basis points since June. This has translated into a reduction in
mortgage rates of 95 basis points. This has occurred through the combination of a reduction in the
standard variable rate of 85 basis points, larger discounts to new borrowers and existing borrowers
refinancing to take advantage of larger discounts. While a lower and flatter interest rate structure
puts pressure on bank margins, it is important to remember that the easing in monetary policy will help
support the Australian economy which in turn supports the credit quality of the banks’ portfolios
of loans.
The virus is a shock to both demand and supply. Monetary policy does not have an effect on the supply
side, but can work to ensure demand is stronger than it otherwise would be. Lower interest rates will
provide more disposable income to the household sector and those businesses with debt. They may not
spend it straight away, but it brings forward the day when they will be comfortable with their balance
sheets and resume a normal pattern of spending. Monetary policy also works through the exchange rate
which will help mitigate the effect of the virus’ impact on external demand.
The effect of the virus will come to an end at some point. Once we get beyond the effect of the virus,
the Australian economy will be supported by the low level of interest rates, the lower exchange rate, a
pick-up in mining investment, sustained spending on infrastructure and an expected recovery in
residential construction.
The Government has announced its intention to support jobs, incomes, small business and investment
which will provide welcome support to the economy. The combined effect of fiscal and monetary policy
will help us navigate a difficult period for the Australian economy. They will also help ensure the
Australian economy is well placed to bounce back quickly once the virus is contained.
Reuters is reporting that payments on mortgages will be suspended across the whole of Italy after the coronavirus outbreak, Italy’s deputy economy minister said on Tuesday.
“Yes,
that will be the case, for individuals and households,” Laura Castelli
said in an interview with Radio Anch’io, when asked about the
possibility.
Italy’s banking lobby ABI
said on Monday lenders representing 90% of total banking assets would
offer debt moratoriums to small firms and households grappling with the
economic fallout from Italy’s coronavirus outbreak.
The Reserve Bank of New Zealand, Te Pūtea Matua, is taking
proactive steps to ensure it is well positioned to effectively and efficiently
manage New Zealand’s monetary policy in an environment of very low interest
rates.
In a speech launching its Principles on Using Unconventional Monetary Policy,
Reserve Bank Governor Adrian Orr said as kaitiaki (caretakers) of Te Pūtea
Matua, the Bank’s activities involve continuous assessment of our monetary
policy framework, including the most effective tools and their best
application.
Mr Orr said the Reserve Bank
has not, and still does not, need to use alternative monetary policy
instruments to the OCR, but it is best to be prepared.
“An inability to predict
what might happen next is no excuse for not preparing for what could happen.
That’s true for businesses, governments and central banks. It is in light of
both economic theory and recent global experience that we have been assessing
what alternative monetary policy tools may be available to the Reserve Bank of
New Zealand – and their relative desirability. We are fortunate, unlike many
other OECD economies, to have the time to prepare for such possible needs.”
The Reserve Bank typically implements monetary policy by controlling the Official Cash Rate but as interest rates fall, this tool could be pushed to its limit in the future. Given this, in recent years, the Reserve Bank has been considering the unconventional monetary policy tools and policy framework that it would use to meet its policy targets.
The work to develop the
Reserve Bank’s preparation for unconventional monetary policies has involved:
Identifying the suite of possible ‘unconventional monetary policy tools’ available to the Reserve Bank;
Defining and making explicit the criteria the Reserve Bank would use to assess these tools, against both each other and also alternative policies all together (e.g., fiscal policy options);
Considering the relative benefits and costs of the tools, so as to operate on a ‘least surprise’ basis, and to ensure the Reserve Bank works in collaboration and with the agreement of fiscal authorities;
Considering not just the monetary policy efficacy of the tools, but also broader considerations related to our financial stability and efficiency mandate; and
Ensuring the tools are actually able to be utilised, including working with the important financial institutions that make up our system.
“We are confident of our
success in assessment and implementation, but we are also aware that these
tools work best when supported by wider stabilisation policies and additional
macroprudential considerations. In the event we ever had to use these
unconventional tools, our goal would be to ensure a strong and sustained
increase in economic activity, with inflation expectations remaining
well-anchored on our target mid-point.”
In the coming weeks the
Reserve Bank will release a series of technical papers explaining the tools in
more detail, examining their pros and cons, and outlining how they would
potentially be used.
Note:
The principles and speech do
not discuss current economic conditions or the Reserve Bank’s outlook for the
Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25.
The Bank remains prepared in
its business continuity role to ensure a well-functioning financial system,
including ongoing consumer and business access to credit and cash, liquidity to
the banking system and a stable payments and settlements system.
Something weird is happening to the mortgage market judging by the bevy of messages I have received in the past few days. Lenders, including those from the big 4 who have made a provisional commitment loan for a property transaction have pulled the pin before the final commitments are made.
In some cases, the loan is now being priced higher than indicated despite the rate cuts) , in other cases they just said no.
At least two DFA followers have been left high and try, and are trying to source alternative finance at short notice.
May just be a glitch, or this could be something more significant given the rising funding costs we are seeing in reaction to the global market uncertainties. A sign perhaps the mortgage market is freezing up?
For those with a property transaction in train, it is worth checking the small print if you have a mortgage ready to go – be sure it is fully unconditional, else you may be caught short!
And if you have experience this recently, let me know. This is something I need to monitor.
New data released today by the Australian Financial Complaints Authority (AFCA) has shown that complaints about home loans have increased by 20 per cent in the last six months of 2019.
The data shows that CBA and Westpac have the largest proportion of complaints, with the CBA Group at 890 and Westpac Group 639 of the complaints made.
This increase has been driven by financial firms failing to respond to requests for assistance, the conversion of loans from interest only to principal and interest and issues with responsible lending.
Credit card complaints were 2,750 in the same period.
The data, which has been made freely available
to the public through AFCA’s Datacube shows
that between July and December last year, the financial services ombudsman
received 2,201 complaints about home loans, that’s 367 per month, on average.
AFCA Chief Operating Officer Justin
Untersteiner said that it was disappointing to see the increase but making the
data available to the public was an important step in increasing transparency.
“Every six months, AFCA releases data which allows Australians to see how many complaints their insurer, bank, financial adviser, superannuation fund or other financial firm has received and how they have responded to those complaints,” Mr Untersteiner said.
“Rebuilding trust in the Australian financial services will be a long journey and one that requires effort across the entire sector.
“Transparency is key in this transformation and we have made significant changes in the way we report our data and decisions to make them more accessible to the public.
“The data also shows that we are getting very few complaints about financial advice, just 30 per month, and complaints against debt buyers or collectors rose by just five per cent. “Our hope by releasing this data is that we see improvements and the industry takes action to reduce the number of complaints that end up at AFCA.”
CBA cut interest rates by as much as 0.30% across its savings accounts yesterday, exemplifying the tactics many banks are using to help recoup the costs incurred from reducing home loan rates by the full 0.25% March cash rate reduction. Via Australian Broker.
Two weeks before the major’s home loan
reductions come into effect, the ongoing bonus rates on its Goal Saver
account have been reduced by 0.25%, its pensioner security account by up
to 0.25% and its Youth Saver account by 0.30%; the NetBank Saver
account was unchanged, with an ongoing rate of just 0.10%
“CBA is one of six banks so far to cut
deposit rates since last week’s cash rate cut, with dozens more expected
to follow,” said RateCity.com.au research director Sally Tindall.
“It’ll be interesting to see how far
Westpac, NAB and ANZ shave their rates, seeing as they’ve already taken
the knife to some of their savings rates this year.
“In this low rate environment, finding a
savings rates above inflation can feel like finding a needle in a
haystack, but they are out there.”
The highest rate currently on offer is 2.25%, which can be found at neobanks 86 400 and Xinja Bank.
However, they’re “unlikely to stick around”, according to Tindall.
Last week, Xinja announced no new Stash
savings accounts will be able to be opened for an indefinite period, in
order to take care of existing customers.
For now, the neobank will maintain its
2.25% rate, with no strings attached and interest paid from the first
dollar up to $245,000, calculated daily and paid monthly.
“When faced with higher than expected deposit flows, and an RBA
rate cut, most banks would just drop deposit interest rates, hurting
existing customers while chasing new ones. That’s not what Xinja is
about,” said CEO and founder, Eric Wilson.
“Xinja offers a different way of banking, and that extends beyond technology to how we treat our customers.”
However, Wilson did reiterate the Stash account has a variable rate which may go up or down in the future.
“Right now, in what are turbulent times, we want to stand by the rate we have offered,” he said.
“But there are three things we have to
balance: the RBA rate cut makes it more expensive for Xinja to hold
deposits at the same rate before the launch of our lending program;
there has been an unprecedented uptake of Xinja Bank by Australians; and
now, how we – as a new bank – manage the costs of those deposits. “
IHS Markit suffered a temporary outage on its intraday and same-day services for credit-default swap pricing on Monday amid a huge move wider in credit spreads. Via IFR.
The data
provider’s European high-yield CDS index – the iTraxx Crossover –
jumped about 120bp on Monday to nearly 500bp, its highest level since
2013 and on track for its sharpest one-day gain on record, according to
Refinitiv data.
That came amid plunging
oil prices on concerns over an escalating price war between Saudi
Arabia and Russia. It adds further fuel to the prolonged sell-off in
credit markets over the past two weeks, which was initially triggered by
concerns over the economic impact of the spread of the coronavrius.
The
massive move wider in credit spreads and enormous volatility in CDS
prices led IHS Markit’s system to mark a lot of the pricing data it
received from banks that trade these credit derivatives with a “low
confidence score”, according to a person familiar with the matter.
Because of the volatility of prices “the system didn’t trust the data it received,” the person said.
“IHS
Markit is experiencing technical difficulties with the Intraday and
Sameday services for CDS Single Name and Credit Indices as of 9 March
2020,” IHS Markit said in an email to clients earlier on Monday.
“Our technical and infrastructure teams are working to resolve the issue and will have an update in the next 2 hours.”
A spokesperson for IHS Markit said the disruption was temporary.
IHS
Markit is a central source for data in the CDS market, collating and
aggregating pricing information from trading desks for single-name and
index CDS.
It is a highly unusual
occurrence for it to report a temporary outage and underlines the
extraordinary volatility in financial markets at present.
Traders
have said liquidity – or the ease of buying and selling debt in large
size – has been deteriorating in recent sessions amid the prolonged
selloff in credit markets. The iTraxx Crossover index leapt 56bp on
Friday. It has now more than doubled in less than three weeks from just
219bp on Feb. 21.
US high-yield debt
markets are particularly vulnerable to a large drop in oil prices as
many of the issuers in that market are energy companies.
“The
weekend oil market developments could barely have come at a worse time
for the US HY market,” credit strategists at Deutsche Bank wrote in a
note to clients. “Already starved of liquidity following the sell-off
over the last two weeks, a near 20% plunge for oil overnight is likely
to result in carnage in the market today.”