Fed to buy corporate debt, fund ABS, do unlimited QE – but are the measures enough to ease USD funding stress?
- USD: Overnight, the Fed significantly ramps up its measures to ease USD liquidity stress even as US Congress dithers in approving its USD1.2trn fiscal stimulus package that would enable the Fed to do much more. Key features summarized – (1) Fed effectively announces unlimited purchases of Treasuries and agency ABS (‘in the amounts as needed’); (2) Will support up to USD300bn of credit to the private sector - To buy IG corporate bonds in the secondary and primary market and provide loans to issuers and to re-establish the Term Asset-Backed Securities Loan Facility (TALF) to enable the issuance of ABS backed by student loans, auto loans, credit card loans, SME loans etc; (3) The credit support is backed by $30bn of Treasury equity with a 10 – 1 leverage and terms can be expected to be generous.
- USD: Solid measures but probably not enough to fully ease USD liquidity stress - Missing from the above announced measures is the establishment of a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses. But this is likely to be only delivered with the help of a US Treasury backstop to the Fed in the Congress’s $425bn lending facility (contained within its USD1.2trn fiscal stimulus plan) that could be levered by Fed 10-1 (to USD4trn). Following the Fed announcement of its measures overnight, USD immediately weakens but only briefly and the NY session ultimately sees USD strength prevail as investors see the Fed measures as not going far enough to more fully eradicate USD funding stress and weaken USD. Markets now await news on Congress’s USD1.2trn fiscal stimulus package where negotiations currently seem to be stalled but with key players expecting the stimulus measures to pass through this week.
Don’t forget the RBNZ
- NZD: RBNZ beings forward its QE program by announcing yesterday it will implement a NZD30bn asset purchase program (buying almost half of NZ sovereign debt available in the secondary market) across a range of maturities. This follows the RBNZ’s recent rate cut to 0.25% last week and introduction of TAF (Term Auction Facility) last Friday.
- NZD: The NZ 10yr yield at close to 1.8% last week drops below 1% following the announcement, though the influence on NZD is relatively modest. This would principally be because the RBNZ had already flagged a QE program as the next step (to commence in May).
More fiscal stimulus and promises
- EUR: Germany goes for the big bazooka - The German government approves an unprecedented fiscal package (EUR750bn) worth 4.5% of GDP that will accumulate EUR156bn in new debt this year. The measures include a rescue fund to buy stakes in companies and to fund corporate loans to issue up to EUR200bn in additional debt, if needed. The measures will be presented to the lower house of the German parliament on Wednesday and could move on to Germany’s upper house on Friday. Sources also suggest Germany is ready to grant Italy an enhanced credit line by the European Stability Mechanism (ESM) with minimal conditionality.
- EUR: ECB calls for ESM, EIB coordination - ECB’s de Guindos and Villeroy call for coronavirus Eurobond. De Guindos hopes “we have positive news this week - a joint response, using instruments we have in Europe to act in a collective way from the fiscal point of view”. He cites the European Stability Mechanism (ESM), the European Investment Bank (EIB) “and for example the possibility of launching a “Eurobond’”. Villeroy de Galhau says ECB wants to “shield the economy totally ” so activity can restart normally once the temporary crisis is behind us.
- GBP: UK fiscal Responses to COVID-19 - another step towards full fiscal absorption - On Friday, UK Chancellor Sunak announces a third round of fiscal measures that takes the UK government fiscal response to £53bn of net easing (in FY 2020/21) (2.4% GDP) and is on top of £18bn of easing elsewhere. Combining these measures with the (pre-Corona) March 2020 macroeconomic forecasts, measures to date will likely already push public sector net borrowing to over £100bn in the coming fiscal year – Citi analysts currently forecast £106.7bn (4.8% GDP). Far more to come? – Citi analysts expect the UK Treasury and BoE to continue to work in concert with the focus increasingly on ‘fiscal absorption’ over the coming years, with monetary-fiscal coordination (low rates and QE) facilitating fiscal expansion.
- AUD: Federal government announces round 2 of fiscal stimulus - On Sunday, the Australian Federal Government announces a further $AU66bn (3.3% of GDP) assistance package. This takes direct fiscal support to $AU92.7bn (4.6% of GDP) though is unlikely to prevent a still likely large hit to the economy in Q2 at least. These 2nd round of measures include a loan guarantee scheme to support small and medium enterprises (SMEs). This along with the RBA’s AUD90bn lending facility to SMEs should significantly ease local funding conditions for this sector.
Week Ahead – Data to “finally” start to show impact of Coronavirus
- This week’s headlines will continue to focus on the Coronavirus impact in Europe and the US and it is highly unlikely that we have found a bottom in risk assets yet (hence risk aversion trades are set to continue to benefit). Data wise, this week looks set to be challenging, as US jobless claims likely soar as high as 4 million (20 times or more) and euro zone PMIs plunge. Also seen will be the US Markit PMI, Richmond and KC Fed manufacturing indexes later this week to give an early look at March. In FX, the focus remains on the Fed’s tools to ease USD liquidity conditions and on US Treasury proposals (in a Congress fiscal stimulus package yet to be approved) that could assist the Fed in alleviating USD funding stress.
This is an extract from the Daily Currency Update, dated March 24, 2020. Please approach a Citigold Relationship Manager if you would like more information.