FOMC, Oil and a second wave
Welcome to another blog update of the Weekly Overview series:
In this week…,
- Latin America remains the Covid-19 pandemic hot spot. Brazil now reports more than 32,000 new cases daily. A second wave of cases in the states of Arizona, Texas, Florida and California, that were among the first in the US to begin reopening their economies, raises alarm after new infections pushed the total count past 2 million. In the U.K, Prime Minister Boris Johnson, faces growing backlash from Conservative MPs led by Chancellor Rishi Sunak to reopen the economy faster.
- The Federal Reserve eased the term of its Main Street lending programme, cutting in half the minimum loan size to $250,000 and extending for another year the length of the loan to encourage more businesses and banks to participate. “Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery” in Chair Powell words.
- OPEC+ signed off on Saturday a new deal for a production cut of 9.6 million barrels a day next month, a tighter limit than the 7.7 million barrels a day for July in the previous deal. This comes with the adoption of a stricter approach to ensure habitual laggards such as Iraq or Nigeria comply with the cut requirements. “Demand is returning as big oil-consuming economies emerge from the pandemic lockdown” said the Saudi Energy Minister.
- Mike Pompeo, the U.S Secretary of State compared Chinese actions on Hong Kong with the Nazi Germany as China’s trade surplus hit a record. China replied arguing that unlike the U.S, China has not taken part in any war for 32 years. The market was not affected by the words war within the U.S-China trade war. China’s trade surplus widened sharply to $62.93 billion in May, far above market expectations of a $39 billion surplus.
- The ECB has set up a task force to look at the idea of a “bad bank” that will warehouse unpaid loans in the wake of the coronavirus outbreak, including credit cards, car loans and mortgages, according to one of the people familiar with the plan. The bad bank would issue bonds which commercial banks would buy in exchange for portfolios of unpaid loans, improving their leverage ratios eliminating toxic assets out of their balance sheet.
- WTI Crude Oil dropped around 7% on Thursday following the release of the Energy Information Administration weekly report. Oil inventories surged by 5.72 million barrels in the week ended June 5th of 2020 above market expectations of a 1.738 million fall. Gasoline inventories went up by 0.866 million barrels, above forecasts of a 0.071 million increase.
A Dovish Federal Reserve
“We’re not even thinking about thinking about raising rates” said the Federal Reserve Chairman Jerome Powell at the Federal Open Market Committee on Wednesday. Powell confirmed the central bank would continue doing whatever it takes to restore full employment and stable prices. Almost all officials forecast its key interest rate (Funds rate) will be held near zero through 2022, rising to 2.5% over an indefinite long-term period.
The FOMC announced it would maintain the pace of the balance-sheet increase at about $80 billion a month of Treasuries purchases and $40 billion for mortgage-backed securities. Asked about the risk of provoking an asset bubble with the current asset purchases, Powell said they are not focused on moving prices in a particular direction.
The dollar slumped as the Fed released the economic predictions. The Fed still views the virus as a considerable risk for the economy. Officials estimate U.S GDP will contract by 6.5% this year before rebounding 5% next year and 3.5% in 2022; unemployment rate declining to 9.3% in the final quarter from 13.3% in May. Inflation is expected to remain below the 2% target in 2022, at 1.7%.
As usual, I leave here the S&P500 1-week performance heat map and a link to the FT Coronavirus Tracker:
Have a good weekend