WHAT HAPPENED YESTERDAY
As of New York Close 10 Jun 2020,
U.S. Dollar Index, -0.30%,96.17
USDJPY, -0.68%, $107.00
EURUSD, +0.22%, $1.1367
GBPUSD, -0.15%, $1.2713
USDCAD, +0.10%, $1.3428
AUDUSD, +0.09%, $0.6967
NZDUSD, +0.20%, $0.6510
S&P500, -0.53%, 3,190.14
Dow Jones, -1.04%, 26,989.99
Nasdaq, +0.67%, 10,020.35
Nikkei 225, +0.15%, 23,124.95
Gold Spot, +1.23%,1735.66
Brent Oil Spot, +1.37%, 40.75
U.S. Consumer Price Index for May declined 0.1% m/m (consensus 0.0%) following a 0.8% decline in April. Core CPI, which excludes food and energy, also declined 0.1% (consensus 0.0%). That was the third straight monthly decline in core CPI, which is something that has never happened before. The key takeaway from the report is that it shows a trend of disinflation that will keep the Fed favouring easy monetary policy and asset purchases for a long time.
The Fed kept the target range for the fed funds rate unchanged at 0.00–0.25% (as expected), and its dot plot signalled rates will remain near zero through at least 2022. The Fed’s economic projections called for a 6.5% contraction in 2020 GDP, followed by 5.0% growth in 2021. Core PCE inflation is expected to remain below the Fed’s 2.0% target through 2020.
Dollar extended losses, dropping to a fresh three-month low against a basket of major currencies on Wednesday after the Federal Reserve made no policy changes, as expected, and pledged to continue its asset purchases aimed at stabilizing a U.S. economy that has been ravaged by the virus. The Fed also did not announce any measures to cap the rise of bond yields, as some have speculated. In a press briefing, Fed Chairman Jerome Powell said the committee did discuss controlling the yield curve but said its effectiveness remained an “open question.”
S&P 500 declined 0.5% on Wednesday in a volatile session following the June FOMC statement, while the Nasdaq Composite rose 0.7% to close at another record high. The Dow Jones Industrial Average (-1.0%) and Russell 2000 (-2.6%) continued to pull back from recent gains.
After the release of the policy directive, the S&P 500 erased prior losses and gained as much as 0.5%, but stocks quickly retraced those gains during Fed Chair Powell’s press conference. Powell didn’t say anything particularly new, reiterating the Fed’s commitment to supporting the economy, but he did subtly urge Congress to do more.
Neither the statement nor the press conference altered yesterday’s trading theme, though. Like yesterday, continued strength in the mega-cap stocks provided major support at the index level. Among the S&P 500 sectors, the information technology sector was in a league of its own, rising 1.7% while no other sector finished higher.
Notably, shares of Apple (AAPL 352.84, +8.85, +2.6%), Microsoft (MSFT 196.84, +7.04, +3.7%), Amazon (AMZN 2647.45, +46.59, +1.8%), Tesla (TSLA 1025.05, +84.38, +9.0%), and NVIDIA (NVDA 374.67, +12.83, +3.6%) rallied to new all-time highs. Several brokerage firms raised their price targets on AAPL, AMZN, and TSLA.
FRANCE LIFTS PANDEMIC RESPONSE TO 136B EUROS, WHILE ECB PREPARES FOR TOXIC DEBT
France raised its virus response measures to nearly 136 billion euros ($154.6 billion) on Wednesday, bringing the cost to 5.6% of GDP in its third budget revision so far this year. Combined with various financing guarantees the state has extended to companies and EU institutions, Finance Minister Bruno Le Maire said the government was mobilising a total 460 billion euros, or 20% of GDP. “This response is perfectly comparable with what other countries are doing, including Germany,” Le Maire told lawmakers on the lower house of parliament’s finance committee.
French companies have put more than 13 million workers on state-subsidised furloughs at a cost the government put at 31 billion euros in the revised budget, shouldered two-thirds by the state and the rest by unemployment insurance.
Concurrently, European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of Euros of unpaid loans in the wake of the virus outbreak. The project, which comes as Europe mobilises trillions of euros to bolster the region’s economy, is aimed at shielding commercial banks from any second fallout from the crisis, if rising unemployment chokes off the income needed to repay loans.
IMPACT: The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit card loans, car loans and mortgages, according to official statistics. While the idea for a eurozone bad bank was discussed and shelved over two years ago, the ECB, under its new President Christine Lagarde, has consulted banks and EU officials about a scheme in recent weeks, one of the people familiar with the ECB plans said.
Germany has long opposed schemes that accept shared responsibility for debts in other countries although it recently had an unexpected change of heart, agreeing to pool EU borrowing for a virus recovery fund. Quoting from our previous commentary (5th June 2020), “Their resolve (EU) to agree on something historically unprecedented (1.35 Trillion Euro Fiscal Bill, counterintuitive to Maastricht Treaty’s fiscal rules) shows there might be some light at the end of the tunnel. Could this Franco-German led push cause a renaissance in Europe? The EU sure deserves a second assessment after this monumental feat.
Indeed the Eurozone reaffirms our suggestion that they deserved to be reconsidered. This can potentially be very bullish for the EUR and European Industrials (Safran, Thales etc), big trends tend to emerge when beaten down narratives are re-examined and found to be “not as dire”.
ADIDAS PLEDGES TO HIRE MORE BLACK AND LATINO STAFF, GOLDMAN SACHS FORMS FUND TO ADDRESS RACIAL INJUSTICE
Adidas has pledged to invest $20 million in the black community in the United States and make sure that at least 30% of all new U.S. jobs are filled with black and Latino people at its Adidas and Reebok brands. The Adidas managing board said in a statement it recognised the contribution of the black community to its success, but admitted the company must do more to fight racism and improve company culture to ensure equity, diversity and opportunity.
Goldman Sachs Group Inc said on Wednesday it had launched a $10 million fund to support the work of organizations addressing racial injustice, structural inequity and economic disparity. The bank will match employee donations to recipient organizations, it told customers of its online bank, Marcus.
IMPACT: The Black Lives Matter Movement is much more than just George Floyd, the incident was a catalyst to spark the revolution against economic and social divide caused by decades of central banking hubris and crony capitalism (revolving doors between Ivy Leagues to MNCs and MNCs to MNCs).
A large percentage of the people protesting for their rights in the U.S. and globally are the Millenial age group, big brands understand this demographic best as a lot of marketing and research dollars have been spent to comprehend their dynamics. It is important to them as this generation of people (approx 1.2 billion globally) will have the strongest purchasing power in years to come. It doesn’t matter if brands like Adidas may be virtue signalling to appease this generation, showing that they “care” and implementing policies that are aligned with their activist ideologies is the best marketing scheme. A nuanced tip-off is Goldman implementing it via Marcus (a predominantly Millennial focused bank) as opposed to Goldman Sachs.
Companies that understand this will benefit from all the fiscal induced inflationary boom this generation will stand to reap. Brands like Adidas and Apple (tied with Marcus) will cement their growth as the purchasing power of Millennials increases over the years if they keep up their “facade” of social consciousness.
OECD SEES DEEPEST PEACE-TIME SLUMP IN A CENTURY
Updating its outlook, the Organisation for Economic Cooperation and Development (OECD) forecast the global economy would contract 6.0% this year before bouncing back with 5.2% growth in 2021 — providing the outbreak is kept under control. However, the Paris-based policy forum said an equally possible scenario of a second wave of contagion this year could see the global economy contract 7.6% before growing only 2.8% next year.
“By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments,” OECD chief economist Laurence Boone wrote in an introduction to the refreshed outlook.
With crisis responses set to shape economic and social prospects for the coming decade, she urged governments not to shy away from debt-financed spending to support low-paid workers and investment.
IMPACT: It couldn’t have been more blatant, in a nutshell, “print the money, or trigger the revolution”. At risk of quoting the same commentary repeatedly, we believe we have to because it has been prescient and now it is taking root, hence the effects of it should be expected. “Societal reforms are going to be a constant in the next decade. As the world marches towards deglobalization and nationalism, we believe this equilibrium will be found via infrastructure and supply-chain programmes where millions of jobs can be produced on a global scale. (benefits hard commodities — Copper, Silver, Gold and its related currencies -AUD)”.
FED VOWS TO SUPPORT U.S. ECONOMY’S ‘LONG ROAD’ TO RECOVERY AFTER 2020
Powell, acknowledging the nationwide demonstrations in his opening remarks at a news briefing, said it was now the Fed’s single-minded mission to bring the job market back to where it was at the end of last year, with the unemployment rate at a record low 3.5% and wage gains accumulating for some of the very same lower-paid workers in the service sector that have suffered most during the recent collapse.
“22, 24 million people — somehow as a country we have to get them back to work,” Powell said via video link after the end of the Fed’s latest two-day policy meeting. “They did not do anything wrong. This was a natural disaster.” “It is a long road. It is going to take some time,” he said. “We can use our tools to support the labour market and the economy and we can use them until we fully recover.”
The response has been an unparalleled level of unanimity in the outlook for monetary policy. All 17 current Fed policymakers see the key overnight interest rate, or federal funds rate, remaining near zero through next year, and 15 of 17 see no change through 2022.
At this point “we are not even thinking about thinking about raising rates,” Powell said.
This excerpt from Lords of Finance (The Bankers Who Broke The World) puts it best. The U.S. will do “whatever it takes” to preserve the vestiges of the American Empire. In our opinion, the U.S. can only get away with this in the long run and not suffer the fate of Weimar Germany if they 1. Manage to successfully defend their Hegemony (threatened by RMB backed Commods) or 2. Achieve asymmetric technological innovation and edge (sputnik moment — i.e. Kennedy’s Space Race) — These developments are Positive for both Gold and Silver.
U.S. Jobless Claims
The surprise rebound in U.S. employment in May would be more encouraging if the number of people applying each week for jobless benefits also showed a similarly welcome trend. Economists polled predict another 1.6 million people likely applied for benefits in the first week of June through traditional state-run unemployment programs. Several hundred thousand more may have applied via a temporary federal relief program. A good Initial Claims number today will reaffirm the market belief that the worst has been seen in the jobs market while a weaker than expected print may dent sentiment, but the effects are unlikely to be long lasting.
Fed Chair Powell pretty much said he doesn’t care if a bubble is brewing because the Fed’s mandate is to target employment and inflation. With no sign of inflation, easy monetary policies can go on for as long as required to create employment. Though it was an extremely dovish message, risk assets retraced from the highs towards the end of the New York trading session.
Gold and Silver powered higher even when stocks were testing the highs of the day because with weak longs cleared out on the retracement after the US jobs number last Friday, positions are now much lighter and the thesis that hard assets will outperform in an environment of incessant money-printing is yet again reasserting itself.
The Relentless Rally
Fiscal Policy (driven by Modern Monetary Theory — unlimited spending) is the name of the game for this crisis. With the Fed backstopping U.S. Deficits by aggressively expanding their balance sheet in a manner not seen since World War 2, discussion of Yield Curve Control and the U.S. publicly putting it out that they will spend Russia and China into oblivion (with respect to winning the nuclear arms race), inflation will be a risk in the future.
The tsunami of liquidity, unleashed by global central banks using Monetary Policy to suppress rates and governments putting money directly into the hands of Main Street via Fiscal Policy, is stimulus on steroids. This will coerce the market to grind higher regardless of fundamentals as long as inflation is kept at bay.