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White House and Congress agree on Phase 3 fiscal stimulus that would see Fed lever $454bln to lend to medium businesses

-->White House and Congress agree on Phase 3 fiscal stimulus that would see Fed lever $454bln to lend to medium businesses                            
  • USD: Details of US phase 3 fiscal stimulus plan - Helicopter money” for individuals - direct payments of USD1200 for adults, USD500 for each child subject to a means test, unemployment benefits expanded for the unemployed. Note 1 million in the state of California alone have filed for jobless claims so far this month (this headlines seems to be the driver of equity losses into the close overnight ahead of tonight’s weekly jobless claims report - consensus at 1.5mn but estimates go up as far as 4mn). For companies - USD500bn fund for loans and assistance to large companies and USD367bn federally guaranteed loans for small businesses. Other measures include USD150bn for local and state governments, USD150bn for healthcare providers and USD300bn companions appropriations package. A Senate vote is likely to pass the package today, and it then goes to the House. This would allow for an expedited process that could get the package to President Trump’s desk for signature before the end of the week.       
  • USD: Phase 3 stimulus plan allows Fed to ramp up USD liquidity injections domestically -  summary draft text indicates $454bln in funds for the Treasury ESF that will be levered by the Fed to provide credit to US medium sized businesses, states and municipalities. Injection of more equity capital for Fed lending programs implies substantially more capacity (more than $4trn if levered 10-to-1) for existing and new facilities.  
  • USD: Implications for FX of the US phase 3 fiscal stimulus plan – significant easing of USD funding distress seen as Fed balance sheet expands sharply - expected to hit USD5trn. The broad based USD Index’s (DXY) drop over the past 2 sessions is symptomatic of easing dollar funding strains even as deleveraging and lack-of-liquidity remains an issue in other markets. The approximately $587bn in bond purchases over the last week by the Fed (2.7% of GDP) suggest that at the end of the day Wednesday the Fed balance sheet likely stood at $5.2trn and reserves at $2.5trn. Further Fed purchases and use of newly announced Fed (and US phase 3 fiscal stimulus) programs and facilities could raise the balance sheet size to $6trn in the next month or two and $7trn by June with reserves likely rising above $4trn. Bottom Line -  Fed will have a potential additional $4trn in “firepower” if it levers 10-to-1 the $425bn in Treasury capital allocated in the stimulus bill – meaning the balance sheet could grow above $10trn. This should prove effective in being able to address the tight USD liquidity conditions faced domestically and potentially spell the beginning of the end of USD strength seen until recently.        

 

ECB also flags new tools as Fed ramps up its liquidity operations; More fiscal stimulus in the pipeline in the euro zone  

  • EUR: Bloomberg reports that ECB members are open to launching Outright Monetary Transactions (OMT), briefly mentioned in last week's emergency meeting but sources suggest that there could now be broader support emerging. OMT was not used in 2012 after the then ECB President Draghi pledged to do “whatever it takes” during the Eurozone debt crisis. It is essentially a more flexible form of QE and allows the ECB to buy nearly unlimited quantities of a nation’s sovereign debt to lift inflation expectations by pushing down bond yields that risk making much-needed fiscal stimulus unaffordable (further moving towards full fiscal absorption). European governments must secure some form of assistance from the ESM before it can be launched. Bottom Line - Such a move may be more effective in lifting euro zone inflation expectations and supporting the euro.
  • EUR: In Germany, the Bundestag (Parliament lower house) passes legislation to allow additional borrowing. The supplementary budget is financed by EUR156bn in debt and there will be a EUR600bn rescue fund. Also, according to reports, nine EU leaders, including Emmanuel Macron and Giuseppe Conte, are urging the introduction of so-called Corona bonds. There also remains speculation about the European Stability Mechanism (ESM) being activated (Germany and Netherlands would prefer ESM funding rather than issuing Corona bonds).     

 

Data releases overnight       

  • USD: US core durable goods orders pull back after strong January - durable goods orders rise 1.2%MoM in February, matching Citi’s forecast but above consensus at -0.9%. Excluding transportation goods, orders decline 0.6% while orders for nondefense capital goods excluding aircraft fall 0.8%. The decline in core durable goods orders in February largely represents a pullback following a very strong increase in January. However, there is no obvious impact from the spread of the coronavirus in February though this appears imminent due to global supply chain disruptions and domestic production facility shutdowns as a result of the virus.           
  • EUR: German ifo expectations drop within a whisker of all-time low - Following last week’s record plunge in the flash release, the Ifo institute revises its headline business sentiment measures even lower in the final release. The expectations component drops further from 82.0 to 79.7 (Citi expectation 80.0), the current assessment component 93.8 to 93.0 (Citi 91.8). Expectations miss the all-time low of 79.2 (Dec-2008) by a whisker but on the current assessment, the economy is still far from the 2009 lows in the 70s.      
  • GBP: UK CPI resilient in February, but disinflation pressures continue to grow - Headline CPI inflation, targeted by the Bank of England, moderates slightly to 1.7% YY in February, broadly in line with expectations. However, Citi analysts expect UK inflation to fall significantly in Q2, with the Covid-19 outbreak adding to existing disinflationary pressures though likely to be countered by effective monetary-fiscal coordination to facilitate fiscal expansion.  

 

This is an extract from the Daily Currency Update, dated March 26, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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