Will Powell have any more Luck Pushing against Negative Rate Expectations in the US?

Overview: Another late sell-off in US shares, this
one perhaps related to the sobering assessment by the leading medical adviser
for the Trump Administration about the risks of opening too early, failed to
deter investors in the Asia Pacific region. Although Japanese shares
slipped, most other markets rose. India led the way (~2%) after a fiscal
stimulus program was announced. European shares, though, are heavier, led
by consumer discretionary and financial sectors. US shares are steady to
firmer. After a slow start, European bonds have rallied and yields are
2-3 bp lower, with Italy’s benchmark off about 6 bp to 1.82%. Bond
markets are mostly quiet, but the Reserve Bank of New Zealand’s increase in
bond purchases and indication that negative rates are possible saw the
benchmark yield fall around 12 bp and took the currency about 1% lower. The 10-year US Treasury is a little softer at 66 bp. Outside of the Kiwi,
most of the major currencies are mostly firmer, led by the Norwegian krone and Canadian dollar. Emerging market currencies are mixed, with eastern and central
European currencies a little heavier. Gold continues to hover are $1700
and July crude continues its broadly sideways drift.  

Asia Pacific

India announced a package of INR20
trillion or 10% of GDP. 
The details are not yet clear, but it does appear that officials
have combined several previous commitments and central bank measures. The
fresh initiatives, though, still appear substantial and are estimated around
INR8-INR12 trillion (~4%-6% of GDP).  

The Reserve Bank of New Zealand doubled
its bond-buying efforts to NZD60 bln. 
 It left its cash rate target at 25 bp but suggested
that negative rates are possible. Thus far, no country with a current
account deficit has adopted negative interest rates. New Zealand’s
current account deficit was about 3.3% of GDP in 2019.  

The US dollar jumped to a little more than
JPY107.75 to start the week after testing the JPY106 area while Japanese
markets were closed in the first half of last week for the Golden Week
and today, the dollar has pared Monday’s gains and now is testing JPY107.00
where a nearly $900 mln option is set to expire. The dollar is third of a
yen range today, and the upside looks to be blocked with the help of a $1.1 bln
expiring option at JPY107.40. The Australian dollar fell nearly
1% over the past two sessions, but it found support near the 20-day moving
average (~$0.6425), which it has not closed below in over a month. 
is an option for A$1 bln at $0.6500 that expires today. The
greenback is firm against the Chinese yuan as it holds in the upper end of the
CNY7.05-CNY7.10 range that has largely contained it in recent


The two main economic reports from Europe
were not as dismal as expected. 
The eurozone reported industrial output in March fell
11.3%. The median forecast in the Bloomberg survey was more than a 12%
slump. The UK economy contracted 2% in Q1 with the median estimates
looking for a 2.6% decline in output. The monthly GDP estimate showed a
5.8% decline in March alone. The Bank of England is expected to increase its
bond purchases as early as next month. The ECB is also likely to
increase is Pandemic Emergency Purchase Program (PEPP) as well, but the timing
is less clear.  

On the fiscal front, the UK has extended
its furlough program until the end of October and will not taper it until at
least July. Italy’s

cabinet approved the 55 bln euro stimulus package. Nearly 30% is for its
employee furlough program. More than 10% is earmarked for what appears to
be grants to small businesses. And nearly another 10% is for
self-employed and seasonal workers.  

The euro traded in a cent-range yesterday
(~$1.0785-$1.0885) and today is in a little more than a quarter-cent range above
consolidation looks set to continue. Sterling fell to around
$1.2255 yesterday, its lowest level in over a month. A marginal new low was
made in Asia, before sterling was bid in Europe to toy with the $1.2300
area. There is potential toward back toward $$1.2340-$1.2350.  


There are three events in the US today to
the US reports April producer prices. The deflationary shock is well
recognized, and the collapse of oil price will send the headline PPI into
negative territory. However, the core rate, which excludes food and
energy, is likely to fare considerable better. The median forecast in the
Bloomberg survey is for a 0.1% decline on the month for a 0.8% year-over-year
gain. In yesterday’s April CPI, gasoline prices fell by over 20% while
food prices rose 1.5%. Second, the EIA will make its weekly energy
inventory report. API estimated that oil stocks increased by about 7.6
mln barrels, but at Cushing, they might have fallen by more than two million
barrels. This would be the first decline in 10 weeks. Third,
Federal Reserve Chairman Powell speaks at the Peterson Institute (9:00 am
ET). He is expected to push back against ideas a negative funds
rate. Despite the efforts of several regional presidents to play down
this scenario, the fed funds futures strip starting next March imply slightly
negative rates. Another common theme of Fed speakers have been that
more support may be needed for the economy. This is seen as a balance sheet
issue and fiscal policy.    

After raising $100 bln in
cash management bill sales, the Treasury sold $32 bln 10-year notes at a lower
yield than the previous auction (70 bp vs 78 bp), with a higher bid-to-cover
(2.69 vs 2.63), and more taken up by indirect bidders that include asset
managers, hedge funds, and foreign central banks (66.1% vs 59.2%). 
is coming. It is not just today’s $20 bln 30-year bond sale to round out
the quarterly refunding and another $75 bln of cash management bills, but
another large spending bill has begun its circuitous route to become law. The initial estimate of the House bill is about $3 trillion and that is on the
day that the US reported a record $737.9 bln deficit for the month of
April.  Around a third of the bill is for states and local governments. There are also funds for another $1200 payment adults, which is means-tested,
and money for elections and the postal service. The deduction for state
and local taxes is also brought back. Of course, as the Senate Majority
Leader noted it is aspirational. It must be negotiated with the Senate,
and especially Trump Administration. However, the House took first-mover
advantage and forces the GOP to be less “Rooseveltian” with the
election now less than six months away. 

The US dollar settled last week near
recovered 0.5% on Monday and again on Tuesday but has run out of steam near
CAD1.4085. Support is seen in the CAD1.3980-CAD1.4000 area
today. Similarly, the greenback finished last week around
MXN23.65 and gained 1% on Monday and 2% yesterday to reach MXN24.40.
 It is trading softer now around MXN24.10. Dollar losses may be limited in
North America today ahead of the Banxico rate decision tomorrow. Although
a 50 bp cut is widely expected, there is scope for 75 bp move. More
political problems for Brazil’s President Bolsonaro weigh on the real, which
fell to new record lows yesterday (the US dollar rose above
Today, Brazil reports March retail sales and its
economic activity index. The only question is how fast of a contraction
is being experienced.  

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