Dysfunction.  Stocks sold off yesterday as more and more businesses mothball operations to fight the spread of COVID-19. The Fed showed up in a big way and the Senate failed to reach agreement on a multi-trillion dollar bailout, sending shares to their lows of the session.




Operating on all fronts:  The US Federal Reserve has been front and center in the economic battle against COVID-19 while politicians continue to be… well politicians.  It takes monetary and fiscal policy to control the economy.  Monetary policy is, for the most part, the job of the Federal Reserve and its global central bank counterparts.  The Fed was quick to react to the growing financial peril as it slashed key interest rates to near 0% in two successive emergency rate cuts.  Additionally it has aggressively stepped up its open market operations (mainly Repo’s) in order to provide short term liquidity to banks.  The Fed then started to become creative.  It extended the time in which banks may take loans from its discount window which was rarely used by banks to borrow funds overnight in order to meet reserve requirements.  Banks can now borrow for longer periods and reserve requirements have been scrapped.  Next, the Fed announced a series of new facilities, all with fancy titles.  Here is a list: Commercial Paper Funding Facility – This facility enables the Fed to buy corporate commercial paper which is how corporations borrow short-term money for liquidity.  Money Market Mutual Fund Liquidity Facility – This facility enables the Fed to buy debt from banks which has been purchased from prime and municipal money market funds, thus shoring up money market funds.  Primary Dealer Credit Facility – This instrument enables primary broker dealers to borrow overnight and up to 90 days directly from the Fed, similar to the bank discount window, but for dealers.  Primary Market Corporate Credit Facility – This program buys newly issued investment grade corporate debt directly from issuers.  Secondary Market Corporate Credit Facility – This package buys investment grade corporate bonds in the secondary market.  Term Asset-Backed Securities Loan Facility – This program is aimed at lending funds to issuers of student loans, auto loans, and credit card loans. And finally… All of these forms of quantitative easing, or QE, are unlimited, unlike in the past in which they are announced with caps.  In short order, the Fed has done an extraordinary job at shoring up many areas of the financial system that failed during the financial crisis, and they are not done yet.  Yesterday, the Fed hinted that they were working on a program to support loans directly to businesses.


Now, on to fiscal policy, which is up to the Federal Government. Congress has approved  phase 1 and phase 2 stimulus packages which advanced funds to fight the Coronavirus, provided free virus screening, and extended paid time off.  These were stopgap measures to address the immediate needs of the initial response.  Phase 3 is THE stimulus package which would include backstopping struggling companies in the hardest hit sectors, relief to renters/mortgage holders, and direct checks to individuals (so called Helicopter money).  The package has been estimated to be worth between $1.7 and $2.5 trillion. Unfortunately Congress has been unable to agree on a few of the key details of the package and has twice failed to bring the proposal to a vote.  These failures were behind yesterday’s -2.93% drop in the S&P500 to levels not seen since December of 2016. While there is some politics in play in the Senate, motivation to pass a meaningful package is bipartisan, so we can expect some progress soon… hopefully. As more and more businesses temporarily shutter their operations sending workers home it is increasingly clear that there will be a large toll on economic growth.  The massive and quick slide in stock prices is an attempt to factor in those hits to revenue and it has, for the most part, been draconian and widespread.  The bright side is that stocks are becoming more fairly valued (another way of saying cheap), we know that the self-imposed economic pause will be temporary, and that the pause will be followed by lots of pent-up demand.  The big question is how long will the pause last.  For now it is too early to tell but the massive mobilization by the Fed and Government should provide some comfort, if at least a bit of encouragement.




– Preliminary Markit Manufacturing PMI for March is expected to come in at 43.5 versus 50.7 in February.  Services PMI for the same period is expected to be 42.0 down from its prior reading of 49.4.  Don’t be surprised if these numbers disappoint on the downside as these are the first of a series of numbers that is more current.

– New Home Sales for February may have fallen by -1.8% compared to a rise of +7.9% in January.

– Richmond Fed Manufacturing Index for March is expected to have fallen to -15 from last month’s -2 level.

– Stock futures traded up overnight as investors find encouragement in the massive effort to fight the virus.  Early this morning they were limit up but have since resumed trade.  With the VIX index easing back to 55.5 (which is still high), we can expect daily price fluctuations to be around +/- 3.4%.




daily chartbook 2020-03-24


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