Rates Spark: Walking The Talk

Even the Fed has capability limits - we just have not hit them yet. It is "one down, one to go" as today the ECB meets, with no pressure to ease per se. Lack of new easing measures could see long rates catch up with the optimism displayed in other markets. But deflation fears and soaring debt should still keep overall rates low.

A sombre Federal Reserve - All in, and can do more

No doubt the Federal Reserve is bracing itself for macro angst. Chair Powel struck a sombre tone during both his address and Q&A. Our assessment is here. The implication for risk assets is mixed. The clear worry shown by the Fed elevates the default risk that credit markets have in their sights. But at the same time, an implication is that official rates will be kept low for the foreseeable future. That's a positive for risk assets, and for now helps to keep core rates under wraps.

One item that warrants concern is extra Treasury issuance. It will be some three to four times typical size, to help fill a nearly USD4trn hole. At the same time, the Fed is still a buyer, and could ramp that up if needed. So far the market mindset is that the Fed has this and other systemic shortages covered. At the same time, it is clear from the Fed that there is a limit to what they can achieve. That extreme has not needed to be tested as of yet.

If things really did take a turn for the worst, the capacity of the Fed to be a solver of all things could be tested. That is a world where the notion of negative rates would at least be entertained - think of the states, cities, counties and indeed governments with massive holes in budgets that need filling. That scenario, even if low probability, helps to explain why market rates are remaining more anchored than many expected. Zero for the 2yr remains a central call for us.

ECB: less pressure to ease

Hot on the heels of last night’s FOMC meeting, the ECB meets this afternoon. As was the case for the Fed, the tendency to take inter-meeting monetary policy decisions, and the fact that the arsenal already unveiled is bearing fruits, diminish the need for drastic action today. We would also forgive the ECB for keeping their economic assessment vague. It is a cliché to note that economic uncertainty is high but, for once, it rings true.

This should not prevent the ECB from sounding dovish and keeping all its options on the table. For one thing, the extent of the economic damage brought by the epidemic is far from known. Another consideration should also skew the ECB’s tone: growing piles of debt can only be kept affordable with rock-bottom rates and ample liquidity. This state of play is likely to persist as long as deflation fears linger.

This should not in theory prevent temporary rises in rates. Despite heavy central bank interventions, the lack of new measures taken today could help rates catch up with the optimism displayed in other markets. Given the timing of the meeting, coinciding with month-end, it is possible that selling flow only materialises on Friday 1 May however.

A bad start to 2020: French and US GDP

INSEE, BEA, ING

Watch for EZ GDP, CPI and unemployment. Also Dutch issuance plans

The day has a lot to offer besides the ECB. We get Eurozone inflation data, the first Q1 GDP reading and unemployment. All of these will have relevant “post-coronavirus” data. For GDP, the question will be how bad the Q1 data is – our economists are looking for -4% QoQ. This would be better than both the US and French figures released yesterday and this morning, respectively.

Eurozone unemployment will show whether March layoffs have already pushed the unemployment rate up. Short-time work schemes and a more rigid labour market than the US will mitigate some of the impact. For the US, the hope is that after three consecutive declines in jobless claims we will see a much sharper fall this week, as some states start to re-open.

Primary Eurozone government bond markets are quiet today. But it is worth mentioning the funding plan update provided by the Netherlands yesterday. The overall funding need was raised to €135.8bn in 2020, up from the €42.7bn envisaged at the start of the year. A minimum of €35bn will be funded via bonds, up from an initial issuance target of €21-26bn.