Democratic Leaders See Leverage in Defeated Senate Vote, Others See Overreach

Posted on 03/23/2020 6:43 AM

Fed announces unlimited bond purchases | Some Dems balk at replenishing CCC funding as part of latest aid plan


Update: Fed announces unlimited bond purchases. The Fed announced it would go beyond its prior commitment of $700 billion in bond purchases to buy "the amounts needed" to keep markets functioning and the economy stable. It also announced significant new programs to keep credit flowing to businesses and consumers, including loans for students, auto buyers and small businesses. The announcement brought U.S. equity futures to the plus side from major losses earlier and limited European stock losses.


In Today’s Updates



* Latest Senate virus aid package hit a procedural roadblock Sunday
* Senate, House Dems believe they have 'leverage' in bid to get more of what they want
* Senate vote another sign of political discord amid a national emergency
* Pelosi says House Dems to release own rescue bill
* Some Dems reportedly balk at replenishing, boosting cap for USDA's CCC
* Food stamp funding included in Democratic-nixed Senate measure
* USTR is trying to defend imposition of tariffs on China
* WSJ: 'Senate virus bill may help the economy stave off a depression'
* Outbreak expected to have significant negative impact on U.S. economic prospects
* Goldman forecasts the S&P 500 could be in for a 41% fall from peak to trough
* 'Market for commercial real estate mortgage loans stands on brink of collapse'
* St. Louis Fed president: U.S. unemployment may surge to 30%
* China‘s economic indicators expected to have improvement in second quarter
* Foreign ministers from the G7 countries will meet Wednesday over video conference
* Abe of Japan: Summer Olympics in Tokyo might need to be postponed
* Lost or reduced sense of smell and taste emerges as a sign of Covid-19
* Researchers: Nearly 70 drugs may be effective in treating Covid-19
* Russia’s Italy aid
* Fed continues to roll out Covid-19 efforts
* Kudlow details major financial aid language in Senate Virus Aid Plan 3
* Some dairy farmers, groups want USDA to reopen dairy program after many shunned
* Tyson Foods is offering premiums to cattle feeders
* Deere shutting down some of its facilities temporarily due to coronavirus impacts


MARKET FOCUS


 

Markets: Tokyo shares ended 2% higher today, but stocks in the rest of the world were broadly and heavily lower. Equities dropped globally along with U.S. stock futures after a weekend surge in the coronavirus death toll and a failure by U.S. Congress to agree on a $2 trillion stimulus plan. Last week, the Dow and S&P 500 indexes registered their worst weeks since October 2008. Government bonds rose. Futures on the S&P 500 and Nasdaq 100 indexes dropped to their daily limits in early trading before coming off the lows. Stocks also tumbled in Australia, South Korea and Hong Kong, while India’s plunged more than 10% and the rupee sank to its weakest on record. While India has lagged much of the world in the known spread of coronavirus infections, the number of official cases has begun rising sharply in the last few days, especially in densely populated urban areas like Mumbai, the country’s financial capital. This morning, the government said there were 415 confirmed cases.

    Futures plunge

     Trading halted

Brent crude oil fell 4.6% to $25.82 a barrel. That put Brent, the global oil benchmark, close to the $24.88 level it hit on Wednesday, which was the lowest since May 2003. Crude prices have plunged on worries about reduced demand and a price war among major oil producers.

The Japanese yen regained some ground, strengthening 0.9% to ¥109.89 a dollar. Elsewhere, a flight to secure dollars continued. The South Korean won traded close to a multiyear intraday trough reached last week, while the Indonesian rupiah dropped 3.5% to around its weakest on record. Dollar indexes are not far off a multiyear high hit last week.

The yield on the 10-year U.S. Treasury note fell 0.148 percentage point to 0.788%, according to Tradeweb, as investors sought the safety of government bonds. Yields move in the opposite direction to prices.

     Tsy yields

U.S. cotton prices last week hit the lowest level since 2009 amid demand concerns.

The fallout from the coronavirus outbreak is expected to have a significant negative impact on U.S. economic prospects, with predictions emerging for losses of millions of jobs this year and a drop in economic output of as much as $1.5 trillion. A recession is now all but certain, according to a Wall Street Journal survey of 34 economists (link), which projects a downturn that would last months at least, and would in some ways rival — and possibly even surpass — the severity of the 2007-09 slump triggered by the housing collapse and subprime loan debacle.

     Morgan Stanley

     Goldman forecasts the S&P 500 could be in for a 41% fall from peak to trough, Bank of America believes the selloff might not ease until the index tumbles 47%, while Credit Suisse estimates the benchmark could be in for a 35% drop overall.

Wall Street Journal editorial concludes “the Senate virus bill may help the economy stave off a depression.” Link to the editorial which says “the foremost goal should be to provide liquidity to prevent defaults and business failures that will cascade into mass layoffs and another depression.” And it concludes: “This liquidity panic isn’t the result of bad business decisions. It’s the result of government orders to save lives. The loans are designed to keep employers alive during this forced shutdown so employees will still have jobs when it’s over. The Trump Administration still needs a Phase Two strategy soon to move past the shutdown, and Democrats need to end their partisan obstruction lest they send the economy into a far deeper recession.”

Dire warning. "The market for commercial real estate mortgage loans in the U.S. stands on the brink of collapse," according to Colony Capital Chairman Tom Barrack, with banks, mortgage REITs and other non-bank lenders now "at a precarious juncture." A meltdown of this magnitude "would have catastrophic follow-on effects across the American economy" if lenders and the government don't take prompt action.

St. Louis Fed president: U.S. unemployment may surge to 30%. As the U.S. grapples with the coronavirus pandemic, St. Louis Fed President James Bullard expects an unprecedented 50% plunge in GDP and sees the unemployment rate hitting 30% in the coming months. If the projection proves to be true, unemployment would be worse than it was during the Great Depression and three times worse than the global financial crisis. "Everything is on the table," he said, referring to additional lending programs from the Fed. "There is probably much more in the months ahead depending on where Congress wants to go."

China‘s economic indicators are expected to have an improvement in the second quarter and the economy will quickly recover to its potential output, central bank vice governor Chen Yulu said Sunday. Some data out of China suggest the country's economy is recovering. "Our baseline forecast suggests a meaningful rebound in Q2 and a decent recovery in H2, where we see demand as a bigger challenge than capacity in light of the worsening global outbreak and its cascading effects on asset prices and economic activity," Barclays economist Jian Chang wrote. Even so, the virus has taken a toll: The bank lowered its 2020 full-year growth forecast to a positive 1.3%, versus 5.8% before the outbreak.

     China economic forecast

Foreign ministers from the G7 countries will meet Wednesday over video conference ahead of the June G7 summit. The decision has already been made to cancel an in-person summit because of coronavirus fears.


POLICY FOCUS



Coronavirus update:

  • Summary: The number of confirmed global novel coronavirus cases more than doubled in a week and now have reached 341,722 with the death count at 14,765, according to figures compiled by Johns Hopkins University. U.S. cases surged to 35,224, which is the second largest global total, with U.S. deaths at 471. Nearly half the U.S. cases are in New York state at 16,916. New York State now accounts for roughly 5% of the world’s total tally.
     
  • States that have put in play stay-at-home orders include Pennsylvania, New Jersey, Oregon, Connecticut, Illinois, New York, California and Louisiana, with Ohio and Delaware to join that list early this week. Kentucky has ordered all non-essential businesses to close. The orders do exempt those involved in critical industries such as agriculture and transportation along with 14 other sectors of the U.S. economy. President Donald Trump has activated the National Guard in three states hit hardest by the Covid-19 situation — New York, California and Washington state.
     
  • Democrats blocked package of virus aid package 3 after dispute with GOP over corporate bailout provisions and aid to workers. The motion to advance the legislation failed on a 47-47 vote, short of the 60 votes needed. Lawmakers and administration officials still hope to reach an agreement on a deal worth as much at least $1.3 trillion to allow both chambers of Congress to approve it as the week opened. Negotiations stretched late into the night. Senate Majority Leader Mitch McConnell (R-Ky.) said Sunday that a second procedural vote would be held at 9:45 a.m. ET today, but Senate Minority Leader Chuck Schumer (D-N.Y.) objected, effectively blocking it until noon.
     
  • House Speaker Nancy Pelosi (D-Calif.) said House Democrats planned to introduce their own legislation, saying there were big differences between what her caucus wanted and what Republican were proposing.
     
  • A $20 billion boost in USDA's CCC borrowing authority, to $50 billion, is at risk with the defeated Senate measure but also because some Democrats in both the Senate and House are balking at the move by Sen. John Hoeven (R-S.D.).

    Bottom line: Veteran sources see the bolstered CCC funding being eventually approved by Congress, in time to start working on the biggest one-time CCC disbursement of money in the history of USDA.

    Food stamp funding also included in Democratic-nixed measure. The draft Senate legislation also includes $15.6 billion for the Supplemental Nutrition Assistance Program/food stamps.

     
  • Some provisions in the Senate bill affecting small businesses would represent direct aid to businesses, like loans that would be forgiven if businesses meet requirements for keeping workers on the payroll. White House staff have referred to such aid as “groans,” or grants that the administration is calling loans.
     
  • Office of the U.S. Trade Representative (USTR) is defending the imposition of tariffs on China under Section 301 of U.S. trade law, noting they have exempted several “critical products” like ventilators, oxygen masks, and nubilators and issued tariffs exemptions on large numbers of health-related products. U.S. imports of all critical medical and pharmaceutical products were up over 20 percent since 2017, before Section 301 tariffs were imposed, USTR said. However, they announced they have now opened a new docket for the public, businesses and government agencies to submit comments “if they believe further modifications to the 301 tariffs may be necessary. This comment process does not replace the current exclusion process and supplements that process. Submissions are limited to comments on products subject to the tariff actions and relevant to the medical response to the coronavirus.”
     
  • Drive-through testing sites were opened Sunday in Walmart parking lots in the Chicago area, part of the retailer’s collaboration with federal health officials, for health care workers and emergency personnel.
     
  • Chief executives of the major airlines, UPS and FedEx said that they would postpone mass layoffs and stock buybacks and dividends if a bailout large enough is passed. The pledge was made in a letter to congressional leadership on Saturday.
     
  • Prime Minister Shinzo Abe of Japan suggested today that the Summer Olympics in Tokyo might need to be postponed, hours after Canada and Australia threatened to boycott the Games. The International Olympic Committee has said it will decide within four weeks whether to delay or scale down the event.
     
  • A lost or reduced sense of smell and taste has emerged as a sign of Covid-19, the disease caused by the virus.
     
  • Nearly 70 drugs may be effective in treating Covid-19, researchers reported. Some medications are already used to treat other diseases and repurposing them may be faster than trying to invent a new drug, the scientists said. Link to NYT article.
     
  • Russia’s Italy aid. Russia’s defense ministry said it would send eight mobile medic brigades, special disinfection vehicles, and other medical equipment to Italy under a direct order from President Vladimir Putin. Russia has reported only 306 cases of the coronavirus so far, with one death. Meanwhile, Italy is set to close all nonessential businesses until April 3 as a further measure to combat its coronavirus epidemic. In a live address, Prime Minister Giuseppe Conte said “only production activities deemed vital for national production will be allowed,” although grocery stores, banks, post offices and pharmacies will remain open. Italy’s coronavirus death toll now stands at 5,476 after 651 people died on Sunday.
     
  • Fed continues to roll out Covid-19 efforts. Expectations are the Fed will take its bond-buying efforts beyond the minimum levels it previously announced — at least $500 billion in Treasury-backed securities and at least $200 billion in mortgage-backed securities. As indicated in an update above, the Fed announced it would go beyond its prior commitment of $700 billion in bond purchases to buy "the amounts needed" to keep markets functioning and the economy stable. It also announced significant new programs to keep credit flowing to businesses and consumers, including loans for students, auto buyers and small businesses. The announcement brought U.S. equity futures to the plus side from major losses earlier and limited European stock losses.Some expect the types of securities to be purchased could also be expanded. The Fed Friday announced it will launch the Money Market Mutual Fund Liquidity Facility (MMLF) to make loans to financial institutions that are secured by certain assets purchased from single state and other tax-exempt municipal money market mutual funds. The Fed also announced it had expanded its U.S. dollar swaps with other major global central banks to provide even more liquidity backstop to ease strains in global funding markets. The Fed along with several federal financial institution regulatory agencies and state regulators are encouraging financial institutions to “work constructively with borrowers affected by Covid-19” and urged them to do so in a safe and sound manner and will not categorize such actions as troubled debt restructuring. The steps include short-term modifications like payment deferrals, fee waivers, extensions of repayment terms or other delays in payments. The guidance listed six months as an example of a short-term modification. It is clear the Fed will continue to deploy efforts on the financial front as the Covid-19 situation unfolds.

Kudlow details major financial aid language in Senate Virus Aid Plan 3. National Economic Council Director Larry Kudlow, on a Fox News program on Sunday, provided details of the latest and pending Senate virus aid package. “Programmatically it's $1.8 trillion plus another $4 trillion or so in lending programs, from the Federal Reserve and the Treasury Department, and perhaps some private lenders. That's a staggering total of almost $6 trillion, which comes to roughly 30% of GDP. That's the kind of big and bold program we are pushing forward to get us through with families, working families. People at home, people who have been damaged by the virus, small businesses, income tax deferral, business payroll tax deferrals, unemployment insurance increases, get you back to your wage level. Oil purchases and student loans — there's a whole variety of things that we're throwing to keep the economy as strong as it was before. If we can weather this storm in the next four eight or so weeks maybe 12 weeks, whatever it's going to take, then we can come back on the other side with a very strong economy.”

     Kudlow said the Small Business Administration is involved with the IRS. “Basically, the business payroll tax holiday will immediately reduce their liabilities. We are going to use the IRS as much as possible to get money cash into the hands of the small business owners, as you can't have employees for long unless you have a strong employer. If you're working with a bank locally, that should happen within 48 or 72 hours because those loans are going to be guaranteed. As long as the small business pledges to retain the workers, the loans will be guaranteed. Presumably these firms have relationships with their local banks that will happen very, very fast. So there's a lot of avenues to help small business, but basically, it's going to be guaranteed loans from your local lender backed and guaranteed by the U.S. government, and it should get there pretty fast if you have a relationship with your local bank as almost every small business does. And by the way, those loans will be forgiven, those loans will be forgiven after a period of time.”

     Kudlow stressed that “the weeks ahead are gonna be rough, very, very rough, and challenging, no question about it. Going in we had a strong January and February, which is one of the reasons we're so keen on this package. They are good investment incentives in this package, there's some good work incentives in this package. We want people to get through so we're pouring cash and liquidity. Again, there's a $4 trillion liquidity line open to the Fed, to the Treasury Department, that's what I would call a big money... $4 trillion coming out the other side. If we can keep things on an even keel best we can, we should be in good shape. I think the chances are, a V shaped recovery is possible. Obviously, everybody's crystal ball during cloudy, I get that. Nobody saw the magnitude of this or the speed.”

Other items of note:

  • Some dairy farmers, groups now want USDA to reopen dairy program after many shunned program when prices were higher. The National Milk Producers Federation and other groups are asking USDA to reopen enrollment for the Dairy Margin Coverage (DMC) program. Enrollment in DMC plunged this year because the program wasn’t expected at the time to trigger payments in 2020. But USDA projects that a farmer with 5 million pounds of production enrolled in DMC would likely get a payment of more than $26,000 this year on a premium of about $7,000 at the $9.50 coverage level. Some analysts say it would be a mistake for USDA to reopen the program based on price factors because that could set a precedent for other programs, many of which frequently have their initial signups extended, sometimes several times. At the time it was announced, House Ag Chairman Collin Peterson (D-Minn.) said dairy producers should go into the program because it was a no brainer and that if they don't they should not complain to him.
     
  • Tyson Foods is offering premiums to cattle feeders as the beef industry tries to refill meat cases. “This is an unprecedented time and the intent of our response is to show our support in an effort to help our supply partners weather this extraordinary situation,” the company said in a statement. But some observers wonder if this sudden gesture is to blunt some of the talk to investigate packer margins.
     
  • Deere & Company will be shutting down some of its facilities temporarily due to coronavirus impacts while others are reducing operations. But the company announced it would continue domestic operations and plans continue in other parts of the world to operate to the extent possible. The company also warned they are withdrawing their financial outlook for 2020, warning there could be a “material” impact to the company from the Covid-19 situation. Deere had been keeping workers reporting to their jobs relative to those involved in the manufacture of ag equipment as that has been identified as one of the 16 critical sectors of the U.S. economy.


 

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