Week Ahead - 4/26/20
FOMC THIS WEEK.
First, we see NO cut to short term rates this week by the Federal Reserve at its regular FOMC meeting on Tuesday and Wednesday (28/29). While Bloomberg Opinion columnist, professor of economics at the University of Rochester and previous president of the Federal Reserve Bank of Minneapolis (2009 to 2015), Narayana Kocherlakota, was featured this week calling for Negative Rates (see --> https://www.bloomberg.com/opinion/articles/2020-04-24/coronavirus-economy-the-fed-should-go-negative-next-week) WE are going to have so --- NO --- not happening. The Chairman (Powell) was crystal CLEAR in mid-March, they will focus on LIQUIDITY measures and do not see negative interest rates as even a topic of discussion at this point in time - and that is unlikely to change in the near future. And how are they doing on Liquidity? VERY VERY Good. So good in fact, that on Friday (4/24), the Fed announced that this coming week's daily bond buying would be reducing (tapering) yet again from $15b to $10b. While this is significantly higher than QE3, on a relative basis this is a trend of easing off the accelerator. At the same time, with the Fed backstopping seemingly everything, the Investment Grade (IG) bond issuance in 2020 is staggering, up 63% year-over-year through Mid-April to US$693 billion with over $435 billion priced since the beginning of March alone (an all-time record at $264 billion, up over $80b). The first half of April? A cool $170 billion, over $80b, itself, over March. A tale of two markets (similar to what we are seeing in RMBS, agency vs. everything else). In a positive note, some IG issuance is being prudently used to pay down corporate revolvers. Morgan Stanley notes that IG issuance spiked in the 3mo period prior to beginning of the 1Q01 Recession - look the Recession is here, domestically and globally, BUT, the EARLY moves by the Fed, which has considerably more room to maneuver than the ECB (while separately having the ability to much more easily affect U.S. States via policy than the ECB can Sovg. Countries) are working. As IBs stress test Debt : EBITDA Ratios affected by lower earnings through the Recession, in aggregate, and by sector (withstanding non-IG credits and HY issuers, generalizing) while Net Debt : EBITDA will rise, it will remain below 4.0x, generally in the 2.50x to 3.50x levels (sector dependent) and be readily absorbed - especially in light of suspended share buybacks - BULLISH. Balance Sheet analysis matters here. For more on Negative Interest Rates as a concept (not much meat beyond that), though -- see STL Fed (Dec 19) --> https://www.stlouisfed.org/on-the-economy/2019/december/primer-negative-interest-rates
Expect Powell to be very even keeled and remark on how well the facilities are doing and the minor modifications that are being made. We expect his comments to be taken in stride by market - heads risk wins, tails risk wins - kind of week, potentially - as we've already run into this meeting and there will be some losers of course as technicals on some issues roll over and forward earnings are still of and in focus. We are less bearish than before.
On May 1, the NBA is allowing players in lockdown lifted states to return to practice facilities. No NBA players died did they? King James is READY for ACTION - even his squats are making his legs stronger - he's going to fly, watch him take to the rim - or float even higher with the jumper now. (King James Squat routine could extend his career by another 3-5 years - he looks weak but improving on the squat front compared to how gifted and strong he is otherwise - and that's the point, he's not afraid to show his improvement on this metric from a low base (say compared to an NFL running back)).
As COVID data is mostly incomparable across data sets due to testing protocols and failures, what can be learned / gleaned? Again, no NBA players have died (anecdotal). The NYC data is interesting: co-variance of the deceased of statistical significance of obesity (same as in Italy), pre-existing conditions (same as in Italy), and age (same as in Italy). This is not to say that younger people should not be concerned or take precautions. Data out of 30-somethings in NYC having lethal COVID strokes show the seriousness of this pathogen. Our view is that the lockdowns prevent only the timing of the spread of COVID and its 40 mutations (Iceland data) and its impact on healthcare infrastructure. The vast majority of us are likely to have already gotten this or to get it at some point this year or next - FACT. Here's some interesting data --> in concentrated prison populations in Ohio and Indiana, COVID testing is showing 80-90%+ infection rates - AND - nearly 100% of those asymptomatic. AND this, above any and all, should start to shape U.S. policy to deal with COVID going forward (i.e. the unavoidable, the British herd immunity, perhaps, was the correct policy from the outset) - clearly the domestic economy here is fragile even to be halted dead in its tracks. see e.g. --> https://time.com/5825030/ohio-mass-testing-prisons-coronavirus-outbreaks/
What Can You Do? For starters, preventive OTC measures: Daily Zinc (blocks one of the COVID receptor binding spots), Vitamin D (low prevalence in foods), Vitamin C (1000mg while not sick) supplementation - AND - increase your cardio (10,000 steps to start) - as the virus is a killer if it gets into one's lungs. (And we do not think a SINGLE, not one, Clorox, Bleach, etc. COVID joke is funny).
On the Economic Impact front, Unemployment MASSIVE and still climbing.
U.S. food banks run short on staples as hunger soars --> https://www.reuters.com/article/us-health-coronavirus-foodbanks-insight/u-s-food-banks-run-short-on-staples-as-hunger-soars-idUSKCN2261AY?fbclid=IwAR2941bafTs6qQQ_8UF5cupfb-KKwxMYgqS9iDqm_GBgnSAP-Xee9QskXcQ
U.S. Reels Toward Meat Shortages and the World May Be Next --> https://www.bloomberg.com/news/articles/2020-04-24/meat-threats-grow-with-first-brazil-shutdown-u-s-turkey-halt
Crime is increasing - hearing murmurs of an increase in robberies on Long Island for example.
Where are we Looking for Greenshots? We are monitoring foremost China and what is and is not rebounding there and how fast. --> https://www.scmp.com/week-asia/opinion/article/3081465/coronavirus-think-worst-over-chinas-economy-not-so-fast -- U.S. survey data, also shows a lasting psychological impact (and not just for the U3 folk) but in regard to social distancing from COVID on the U.S. Consumer.
EU showdown looms - Macron's radical bailout plan for 10% of Brussels' GDP stuns Merkel. Look, we are a fan of Macron - he's hip; he's a former Rothschild banker (we are a fan of bankers and separately of Rothschild) - Macron will be listened to more closely to than ITA. --> https://www.express.co.uk/news/world/1273319/EU-crisis-Emmanuel-Macron-Angela-Merkel-France-Germany-Brussels-coronavirus
Russia needs to borrow 1 trillion roubles more to cover non-oil revenue shortfall --> https://www.reuters.com/article/us-russia-finance-siluanov-idUSKCN2270EF?taid=5ea40cafe3c40700015ea325&utm_campaign=trueAnthem%3A+Trending+Content&utm_medium=trueAnthem&utm_source=twitter
FCC may halt U.S. operations of three state-controlled Chinese telecom firms --> https://uk.reuters.com/article/us-usa-china-telecom-idUKKCN2262JA?taid=5ea3c428e3c40700015ea1f2&utm_campaign=trueAnthem%3A+Trending+Content&utm_medium=trueAnthem&utm_source=twitter
‘Don’t be overconfident’: In Covid-19 fight, Modi cautions against complacency --> https://www.hindustantimes.com/india-news/don-t-be-overconfident-in-covid-19-fight-modi-cautions-against-complacency/story-87PJdp7TDV3YtoyyUjaaIK.html
1/2 of L.A. is Unemployed? Apparently so --> https://www.forbes.com/sites/carlieporterfield/2020/04/18/less-than-half-of-los-angeles-county-residents-report-having-jobs-survey-finds/#146e86d25c7d