The US markets has a good day – with the Dow making the biggest percentage rise since 1932, at more than 11%, in a bear market bounce. Expect more volatility ahead.
The USS&P 500 futures is also higher:
However the volatility index is still in extended territory:
The Trump administration and Senate Democrats closed in on a nearly $2 trillion stimulus plan and economic rescue package after days of tense negotiations.
Wall Street found reprieve from a month of crashing stocks and financial panic after Treasury Secretary Steven Mnuchin and Senate Minority Leader Charles Schumer (D-N.Y.) announced early Tuesday morning that they expected to clinch a stimulus deal.
Negotiations between Mnuchin and Schumer continued throughout Tuesday as details about the stimulus plan emerged. Schumer said Tuesday that the federal government will pay the full salaries of furloughed workers for up to four months under the emerging stimulus deal, which may get a vote as soon as Tuesday.
The Senate bill will also provide about $500 billion to the Treasury Department to backstop Federal Reserve loans to industries facing a liquidity shortage because of a loss of business related to the coronavirus crisis.
The financial crisis is now in full swing, and credit markets are at the epicentre of current events, as owners of mortgage bonds and other asset-backed securities try to sell billions of dollars in assets, amid reports that there are significant investor withdrawals from these funds.
Bloomberg reported that Funds who buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.
Further Federal Reserve support, and other Central bank support is being sought. Raises the question, who should be supporting who, and should financial speculators really be bailed out?
Amid the selling, the Structured
Finance Association, an industry group for the asset-backed securities
market, asked government leaders on Sunday to step in and help boost
liquidity in the market.
In a letter to
U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman
Jerome Powell, the industry group said that “the future path of the
pandemic has significantly disrupted the normal functioning of credit
markets.”
The group asked them to
“immediately enact a new version of the Term Asset-Backed Securities
Loan Facility,” a financial crisis-era program that helped support the
issuance of securities backed by consumer and small-business loans. Such
a measure, the group said, would help enhance the liquidity and
functioning of crucial credit markets.
“The overwhelming supply of
securities for sale to meet redemptions has put significant downward
pressure on almost all segments of the bond market,” Szilagyi said in
the statement.
The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings.
“The coronavirus has resulted in
severe market dislocations and liquidity issues for most segments of the
bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed
statement on Sunday. “The Fund is not immune to these dislocations” and
“like many other funds, is moving expeditiously to address the
unprecedented market conditions.”
The best way to obtain favorable
prices is to offer a wider range of securities for bid he said,
declining to discuss the amount of securities the fund put up for sale.
The AlphaCentric fund plunged 17% on Friday, bringing its total decline for the week to 31%.
“We
can most likely expect a continuation of price volatility across the
bond market spectrum until the panic selling and market uncertainty
subsides or government agencies intervene to support the broader
fixed-income market,” Szilagyi said
A $46 billion emergency supplemental funding proposal the White House budget office submitted to Congress last week to battle the coronavirus outbreak has ballooned to $242 billion in the Senate amid frenzied negotiations. Lawmakers remain deadlocked on several key provisions. Via The Hill.
A
summary of the supplemental spending legislation provided to
stakeholders by the Senate Appropriations Committee says it would
provide $75 billion for hospitals, $20 billion for veterans’ health
care, $11 billion for vaccines, therapies and diagnostics and $4.5
billion for the Centers for Disease Control and Prevention.
More
than 75 percent of the $242 package — approximately $186 billion — will
go to state and local governments, fulfilling a central Democratic
demand to bail out cash-strapped states such as New York.
The
supplemental would also provide $20 billion for public transportation
emergency relief, $10 billion for airports and $5 billion for the
Federal Emergency Management Agency disaster relief fund, according to
the summary document.
Other
items include $12 billion to the Pentagon, $10 billion in block grants
to states, $12 billion for K-12 education and $6 billion for higher
education.
The
pending Senate appropriations measure is significantly larger than the
$45.8 billion request the Office of Management and Budget submitted
earlier this week to “address ongoing preparedness and response
efforts.”
A
huge chunk of the money, $119.4 billion, would go to the Departments of
Labor, Health and Human Services, Education and related agencies.
The Departments of Transportation, Housing and Urban Development and related agencies would receive $48.5 billion.
Bank of America, Bank
of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan
Stanley, State Street, and Wells Fargo, in a statement via the Financial
Services Forum, agreed to temporarily suspend share buybacks for the remainder of 1Q and through 2Q 2020.
“The decision on
buybacks is consistent with our collective objective to use our
significant capital and liquidity to provide maximum support to
individuals, small businesses, and the broader economy through lending
and other important services,” the group wrote, citing the COVID-19
pandemic as an “unprecedented challenge”
President Trump is suspending flights from Europe for the next 30 days because of the virus, a decision likely to ripple throughout the global economy. The president said such travel restrictions would apply to “trade and cargo,” but the White House later clarified that goods from Europe would still be able to enter the country. Via The Hill.
Trump said he will
“soon be taking emergency action [to] provide financial relief …
targeted for workers who are ill, quarantined, or caring for others due
to coronavirus,” without specifying how he would do so.
The
president also said he would instruct the Small Business Administration
to extend low-interest loans to businesses in coronavirus hot spots to
overcome steep declines in activity, and would ask Congress to approve a
temporary payroll tax suspension that has fallen flat among lawmakers.
Trump
also did not address a several issues that Democrats consider essential
to any coronavirus aid plan, including provisions to expand
unemployment insurance and ensure that low-income children don’t miss
meals due to school closures. The House is set to vote on a bill with
those measures and others, including federal paid sick leave, on
Thursday in a bid to force the Senate to pass the legislation quickly.
More than 1,000 cases of coronavirus have now hit the U.S.
Earlier, President Trump insisted the U.S. is not suffering through a financial crisis in an Oval Office address to the country about the coronavirus outbreak on Wednesday.
“This is not a financial crisis. This is just a temporary moment of time that we will overcome together as a nation,” Trump said.
Dow Jones industrial average futures plunged after Trump’s address, projecting a loss of more than 800 points when markets open on Thursday.
The US Federal Reserve Board on Wednesday approved a rule to simplify its capital rules for large banks, preserving the strong capital requirements already in place.
The “stress capital buffer,” or SCB,
integrates the Board’s stress test results with its non-stress capital
requirements. As a result, required capital levels for each firm would
more closely match its risk profile and likely losses as measured via
the Board’s stress tests. The rule is broadly similar to the proposal
from April 2018, with a few changes in response to comments.
“The stress capital buffer materially
simplifies the post-crisis capital framework for banks, while
maintaining the strong capital requirements that are the hallmark of the
framework,” Vice Chair for Supervision Randal K. Quarles said.
The SCB uses the results from the Board’s
supervisory stress tests, which are one component of the annual
Comprehensive Capital Analysis and Review (CCAR), to help determine each
firm’s capital requirements for the coming year. By combining the
Board’s stress tests—which project the capital needs of each firm under
adverse economic conditions—with the Board’s non-stress capital
requirements, large banks will now be subject to a single,
forward-looking, and risk-sensitive capital framework. The
simplification would result in banks needing to meet eight capital
requirements, instead of the current 13.
The SCB framework preserves the strong
capital requirements established after the financial crisis. In
particular, the changes would increase capital requirements for the
largest and most complex banks and decrease requirements for less
complex banks. Based on stress test data from 2013 to 2019, common
equity tier 1 capital requirements would increase by $11 billion in
aggregate, a 1 percent increase from current capital requirements. A
firm’s SCB will vary in size throughout the economic cycle depending on
several factors, including the firm’s risks.
To reduce the incentive for firms to take
on risk and further simplify the framework, the final rule does not
include a stress leverage buffer as proposed. All banks would continue
to be subject to ongoing, non-stress leverage requirements.
Large banks have substantially increased
their capital since the first round of stress tests in 2009. The common
equity capital ratio of the banks in the 2019 CCAR has more than doubled
from 4.9 percent in the first quarter of 2009 to 12.2 percent in the
fourth quarter of 2019, with total capital doubling to more than $1
trillion.
Also on Wednesday, the Board released the
instructions for the 2020 CCAR cycle. The instructions confirm that 34
banks will participate in this year’s test. CCAR consists of both the
stress tests that assess firms’ capital needs under stress and, for the
largest and most complex banks, a qualitative evaluation of the
practices these firms use to determine their capital needs in normal
times and under stress. Results will be released by June 30.
I discuss the US election, and the Democratic Primaries with American in OZ Salvatore Babones, Associate Professor, University of Sydney and author of the award winning book The New Authoritarianism: Trump, Populism, and the Tyranny of Experts.
I discuss the US election, and the Democratic Primaries with American in OZ Salvatore Babones, Associate Professor, University of Sydney and author of the award winning book The New Authoritarianism: Trump, Populism, and the Tyranny of Experts.
At first glance, the latest data – which came out on Feb. 7 – look pretty good. They show nominal hourly earnings rose 3.1% in January from a year earlier.
But the operative word here is nominal,
which means not adjusted for changes in the cost of living. Once you
factor in inflation, the picture changes drastically. And far from
representing a “blue collar boom” – as the president put it in his State of the Union address – the real, inflation-adjusted data show most U.S. workers have not benefited from the growing economy.
As an economist who studies wage data, I think it’s paramount that we take a step back and look at what the data really show.
Business journalists and financial markets
tend to focus on the monthly data. These figures are only reported in
nominal or current terms because the inflation data doesn’t come out
until later.
A more complete set of wage and pay data
is reported quarterly. The latest release came out in December for the
third quarter. These figures are not only adjusted for inflation but
also include fringe benefits, which account for just under a third of
total compensation.
At first blush, it makes sense to focus
primarily on the first set. Newer data is, well, newer, and market
participants and companies prefer the latest information when making
decisions about investments, hiring and so on.
But the effect of inflation means that the same US$1 bill buys less stuff over time as prices increase.
From December 2016 to September 2019, nominal wages rose 6.79% from $22.83 to $24.38. But after factoring in inflation, average wages barely budged, climbing just 0.42% in the period.
Incorporating fringe benefits into the picture adds another wrinkle.
The inflation-adjusted or real value of
fringe benefits, which include compensation that comes in the form of
health insurance, retirement and bonuses, declined 1.7% in the
three-year period.
Altogether, that means total real compensation slipped 0.22% from the end of 2016 to September 2019.
Of course, workers in different sectors
have fared differently. The Trump administration has singled out
manufacturing workers – who it says are the main beneficiaries of its
trade war and other policies intended to support the sector – as having
benefited from a “blue collar boom” in wages.
The nominal data for manufacturing workers
hardly support a boom but they do show an increase of 2.22% since
Donald Trump took office.
The adjusted data, however, make it look
more like a bust, with wages plunging 3.88% in the period. And, again,
the situation is worse when we add in fringe benefits, which brings the
decline to 4.33%.
So next time you read a story about a rise in pay, try to see if it reports the wage data in nominal or real terms, and if it includes fringe benefits too. If it’s only nominal wages, the numbers may mean a lot less than they seem.
Author: David Salkever, Professor Emeritus of Public Policy, University of Maryland, Baltimore County
The fears relating to the coronavirus and weakish consumer sentiment from the US, plus the Feds hold decision turned the tables on the US yield curve overnight, with the 3-month rate 2 basis points higher than the 10-year at one point. Its slightly positive now… but this is a sign of uncertainty.
Plus a measure of core U.S. inflation released on Thursday showed price pressures slowed to an annualized 1.3% in the fourth quarter from 2.1%, a weaker figure than analysts had expected. And below the Fed’s target.
The dip will be seen as some as a warning signal because it has inverted before each of the past seven U.S. recessions. The last inversion was at the height of the trade war.
But it also is driven by the thought that the Fed may need to pump more liquidity into the market, despite the assurance they were planning to ease back their open market operations in the next few months. This means buying more treasuries out along the curve. – Price up means yields fall.
Clearly, investors are looking for some form of safety and buying Treasuries out the curve is really the only way to do it.
And Bloomberg says that falling yields also triggered other market dynamics which are exacerbating the move. Convexity hedging — when mortgage portfolio managers buy or sell bonds to manage their duration exposure — is back in play. As yields fall, they make purchases.
The
sequence of a swift drop in yields and curve flattening unleashing
convexity-linked forces that re-starts the cycle is a recurring feature
of the Treasury market .
A massive wave of convexity-related hedging in the swaps market
in March helped send 10-year yields to levels then not seen since 2017.
That came after the Fed took an abrupt shift away from policy
tightening they had been doing in 2018. The Fed went on to cut rates
three times over all of 2019.
Other factors may be at work now as well. Structural demand for long-dated Treasuries — linked to liability-driven investment and hedging from foreign investors including Taiwanese insurers — has helped to drive the curve flatter, according to Citigroup Inc.
We think its too soon to know whether this is an over-reaction, but once again it underscores markets are on a hair trigger. So expect more volatility ahead.
