Weekend news update
In a dramatic move on Sunday evening, the FOMC announced that it moved the target range for Federal Funds down to 0% - 0.25% and cut the discount window rate 1.50% to 0.25%. Additionally, the Federal Reserve announced that it will increase its holdings of Treasury securities by $500B and holdings of agency mortgage-backed securities by $200B over the coming months. In a statement announcing the changes to monetary policy, the Federal Reserve emphasized its willingness to aid financial markets through turbulent times saying, “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” and noted, “The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”
The Fed’s large-scale intervention in markets appears to be aimed at facilitating proper functioning in the Treasury markets, and potentially, to buy time for a coordinated fiscal response. Liquidity in financial markets is a necessary precondition for the banking system to provide credit to companies and consumers that may prove to be necessary to help soften the impact of large-scale cash flow disruptions related to the spread of the virus. While market conditions are notably more difficult than normal, they have yet to approach the levels that prevailed in the 2008 timeframe. A strong capital position in the banking system is currently a source of strength and early indications show that there is a willingness to lend. Over the weekend a consortium of the largest banks in the U.S. agreed to stop share buybacks to support lending activities. The group announced that, “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.”
Please reach out to your Chatham representative for anything we can do to help you through this difficult time.
Prior week summary
U.S. equities whipsawed last week entering bear market territory with the Dow Jones Industrial Average falling over 10% on the week and posting its largest one-day percentage decline since 1987. Investor sentiment soured from the offing last week as Saudi Arabia broke from the OPEC+ alliance, driving energy prices far lower, and reports of an increasing number of infections and deaths both across the globe and within the U.S. dominated headlines. The spread of the virus has caused sweeping event cancelations and school closures across the country with some major cities in harder-hit states banning gatherings of over 100 people. As of Sunday evening, the global infection count stands at ~165,000 with over 6,000 succumbing to the virus. In an effort to combat both the spread of the virus and the negative economic consequences resulting from COVID-19, the White House announced support for stimulative initiatives, such as a payroll tax cut and paid sick leave, as well as, a travel ban that will suspend travel with the entirety of Europe, including Ireland and the U.K. The World Health Organization officially declared COVID-19 a global pandemic on Wednesday noting, “In the past two weeks the number of cases outside China has increased thirteenfold and the number of affected countries has tripled. We’re deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction.” On Sunday evening, the CDC recommended canceling gatherings of over 50 people for the next eight weeks.
The Federal Reserve took a number of emergency actions over the course of the week in an attempt to provide stability and inspire confidence in the financial markets. On Thursday afternoon, the Federal Reserve announced that it would begin purchasing Treasury securities across the maturity spectrum and would offer $1T in short-term funding on a weekly basis to address, “Highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
The look forward
Market participants will be digesting this weekend’s major changes to monetary policy as well as the newest developments related to the COVID-19 outbreak. On the economic data front, updated figures on the Empire State Manufacturing Index, retail sales, industrial production, housing starts, building permits, and existing home sales, among others, dot the economic calendar.
Market implied policy path (Overnight indexed swap rates)
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