Prior week summary
Global equities plummeted again last week as fears of a prolonged economic slowdown as a result of the COVID-19 virus took center stage and outweighed significant, accommodative monetary policy changes by the Federal Reserve and hopes for a large federal spending bill. The major U.S. equity indices fell over 10% on Monday sparking the Dow Jones Industrial Average’s second-largest daily percentage decline in history, hours after the FOMC decided to cut the target to 0.00% - 0.25% the night prior. The Federal Reserve announced several stimulus measures throughout the week including the establishment of a Commercial Paper Funding Facility, a Primary Dealer Credit Facility, and a Money Market Mutual Fund Liquidity Facility. In addition to these measures, the Federal Reserve also set up temporary U.S dollar liquidity arrangements with the Bank of England, Bank of Japan, and the European Central Bank, among others and encouraged increased use of the discount window. In a statement issued on Thursday, the Federal Reserve said, “The Federal Reserve Board is encouraged by the notable increase in discount window borrowing this week with banks demonstrating a willingness to use the discount window as a source of funding to support the flow of credit to households and businesses.”
As the Federal Reserve announced several changes to monetary policy, Congress worked on passing new federal spending measures in an attempt to limit the economic fallout from the continuing COVID-19 outbreak. On Wednesday, President Trump signed a second virus spending bill expected to cost just over $100B after it passed easily through both the House of Representatives and the Senate earlier in the week. After spending much of last week negotiating the terms of a deal, the Senate failed to pass an emergency $1.4T spending bill on Sunday evening, setting up further negotiations with another vote expected to take place on Monday morning. The bill sought to provide economic relief to individuals and corporations as businesses continue to close as a result of strict lockdown measures enacted by state governments across the country in an attempt to slow the spread of the virus. The bill included $208B in loans to distressed industries, $300B for small businesses to keep employees on the payroll that have been recently terminated or furloughed as a result of the virus, and up to $1,200 per person in direct payments to U.S. citizens. After a week-long recess, the House of Representatives returned to Washington on Sunday and Speaker of the House Nancy Pelosi announced that the House would be, “introducing our own bill and hopefully it’ll be compatible with what they discussed in the Senate.”
The look forward
Market participants will be closely watching developments in Washington as Congress works to pass a massive economic relief bill. While economic data releases have largely taken a back seat to virus-related developments over the last few weeks, all eyes will be on Thursday’s release of jobless claims, which is expected to see a significant increase week over week. Market participants will also get inflation data in the form of the February editions of the Consumer Price Index and Producer Price Index.
Market implied policy path (Overnight indexed swap rates)
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