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Institutional Research: May 18, 2020

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What you need to know for the week ahead

  • Eyes will again be on Fed Chair Powell’s testimony before the Senate Banking Committee on Tuesday
    • With Mnuchin, will provide the first quarterly report on the CARES Act
    • Powell already said that more policy support will likely be needed (expect a reiteration)
    • People want to hear details around Main Street Lending, corporate credit facilities, and support for municipal govt’s
    • Continue to anticipate the FOMC to adopt average inflation targeting using forward guidance and front-end yield curve control
  • Thursday will bring a second Powell appearance at the “Fed Listens” event about the impact of COVID on US communities
  • The main focus on economic data will again be on jobless claims, which are forecasted at 2.5 million. Last weeks should be revised down by at least 200k since Connecticut overstated its numbers by 10x
  • It appears unlikely that continuing jobless claims will fall back to 18m registered, and a 7m decline in May non-farm payrolls is expected
    • This would raise the unemployment rate to >19%!
  • April housing starts will likely be affected by shutdowns last month. But MBA mortgage applications for purchase has risen 33% from April 10th lows!
  • While risk assets have been strong lately, expect policymakers to take a cautious tone and that there is still some hardship ahead. Consensus forecast of 8% GDP decline this year Q4 vs Q4.

US Consumer Credit Trends from Large Credit Card Companies

  • Net charge offs (“bad debt”) and delinquencies continue to increase
  • Charge-offs are higher than or equal to medium levels (“higher than average”)
  • JP Morgan Chase will offer payment assistance programs to defer credit card payments for 3 months

Negative rates pricing couple persist for now

  • The Fed and other central banks have been reluctant to go negative
  • The Fed views the evidence of benefits from negative rates in other economies as mixed
  • IBank Research estimates there is ~25% chance that we achieve 4% unemployment by end of 2021.
    • JO: Generally, the Fed will only likely increase rates again if we see sub 4% unemployment and core inflation at 2%+ sustainably
  • Even pricing in a ~20% chance of a negative rates policy by end of 2021 could make slightly negative rates pricing make sense on a probability-weighted basis

How much corporate credit will the Fed purchase??

  • Expectation is that the Fed’s purchases will be much less than the size of the facilities ($750 billion)
  • The credit markets have remained strong off of the Fed’s signal that it will backstop corporate credit; if the markets remain relatively healthy, then the expectation is that the Fed will purchase much less than half of the capacity
  • If there is another period of stress in the credit markets, we might expect much higher purchases with issuers needing to use these facilities to borrow

United Kingdom economic notes

  • Rising unemployment is inevitable after lockdown
  • The Government’s furlough scheme has helped stave off a spike in unemployment, but job losses are likely
  • Leisure and hospitality represents ~2m employees
  • Retail represents ~2.8m employees
  • ~25% of the UK workforce was furloughed as of May, likely to see wage cuts
  • Higher unemployment and low wage growth are likely to cause a weak labo(u)r market for months
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