Rule By Decree

The virus continues to be
Our number one priority
The global response
Has been to ensconce
The idea of rule by decree

Thus governments, both left and right
Expand as they all try to fight
Their total demise
And what that implies
‘Bout politics as a birthright

Covid-19 has created a new lens through which we view everything these days, from financial market activity to whether or not to answer the doorbell. And in every task, we have become more circumspect as to the potential effects of our choices. As Dorothy said, “I don’t think we’re in Kansas anymore.” But despite the major upheavals we have seen, we must still seek the best possible outcomes at our appointed tasks, be they as important caring for our loved ones, or as mundane as hedging FX risk. Of course, this note talks about the latter not the former, so while I truly wish you all to stay healthy and safe, that will not be the topic du jour.

Instead, I thought it might be worthwhile to discuss just how much firepower central banks and governments have thrown at Covid-19, or more accurately at the disruptions the spread of the virus has wrought. I have gathered from central bank websites the remarkable amount of actions that they have taken so far in just March of this year. This is not meant to be exhaustive but merely illustrative of the breadth of activity we have seen:

Central Bank Rate cuts Current rate QE  Bio USD equivalent
Fed -1.50% 0.25% 5000
BOC -1.50% 0.25% 90
Norgesbank -1.25% 0.25%
RBNZ -0.75% 0.25%
Chile -0.75% 1.00%
RBI -0.75% 4.40% 12
Bank of England -0.65% 0.10% 240
RBA -0.50% 0.25% 80
BOKorea -0.50% 0.75%
Philippines -0.50% 3.75%
BCBrazil -0.50% 3.75%
Colombia -0.50% 3.75%
Banxico -0.50% 6.50%
Thailand -0.25% 0.75%
Indonesia -0.25% 4.50%
PBOC -0.20% 2.20%
SNB 0.00% -0.75%
ECB 0.00% -0.50% 1100
BOJ 0.00% -0.10% 205
Riksbank 0.00% 0.00% 30
MASingapore 0.00% 1.26%
Russia 0.00% 6.00%
Danmark Nationalbank 0.15% -0.60%

The collective amount of rate cutting has been 10.70%! And QE that was easily confirmed now totals more than $6.75 trillion equivalent. Central banks are pulling out all the stops. Meanwhile, governments, to the extent they are separate than central banks, have been adding fiscal stimulus by the truckload as they create inventive new ways to support both businesses and individuals in this most remarkable of situations. Will it be enough to stem the tide? Only time will tell, but nobody can accuse these officials of not trying, that’s for sure.

Of course, as I have discussed previously, the biggest concern ought to be just how much of the economy is controlled by governments, especially in ostensibly free market nations, when all this finally passes. And even more importantly, how quickly they reduce that control. Alas, if history is any guide, it will require a revolution for governments to cede their grip on the economy, and by extension the power it brings. There is a book, “The Fourth Turning” by Neil Howe, which discusses the cycles of history. It is a fascinating read, and one which seems quite prescient as to the current global political situation. I highly recommend taking a look.

In the end, what seems quite certain is that what we assumed was normal just two months ago may never return. This is true of businesses as well as market behaviors. Safe havens have lost much of their luster as investors find themselves in a very difficult situation. How can getting paid just 0.6% nominally for 10 years (current 10-year treasury yield) be considered a safe place to hold your funds with inflation running at 2.3%, and after a likely short-term deflationary bout due to demand destruction, set to move to heights not seen since prior to the GFC? Of course, the answer is, it can’t. But then Treasuries have a higher return than Gilts, Bunds or JGB’s, the other nations to which one would naturally gravitate for a safe haven. Equities certainly don’t create warm and fuzzy feelings given the extraordinary situation with businesses shutting down everywhere and revenues and earnings collapsing. Commodities? Even gold has had a tough time, although it is marginally higher since all this really got going in earnest, but as a safe haven? Cryptocurrencies? (LOL). In fact, despite the ongoing depreciation of the dollar through creeping inflation, Benjamins are clearly the one thing that remain accepted as a place to maintain value. They are fungible and recognized worldwide as a store of value and medium of exchange. It is with this in mind that we should recognize the near-term outlook for the dollar should remain positive.

So what has happened overnight? The dollar is king once again, rising against all its G10 counterparts with CAD the laggard, -1.1%, after oil prices once again sold off sharply (WTI briefly traded below $20/bbl and isdown about 5.2%) this morning. But the weakness is widespread with SEK -1.0% and EUR -0.8% following closely behind the Loonie. European data released this morning showed, not surprisingly, that Economic Confidence (94.5 from 103.5) had fallen at its fastest pace ever, although it has not yet plumbed the depths of the Eurozone crisis in 2012. Give it time!

Emerging markets are also under significant pressure, with MXN today’s biggest loser, down 1.8%, as the combination of tumbling oil prices, the rapid decline of US demand and AMLO’s remarkably insouciant response to Covid-19 has investors fleeing despite the highest yields available in LATAM. But RUB (-1.3%) on the back of declining oil prices and ZAR (-1.1%) on the back of declining commodity prices as well as internal credit problems, are also suffering. In fact, just two currencies, MYR and PHP were able to rally today, each by about 0.2% as each nation announced additional fiscal and monetary support.

Looking ahead this week, aside from the ongoing virus news, we do get more data as follows:

Tuesday Case Shiller Home Prices 3.29%
  Chicago PMI 40.0
  Consumer Confidence 110.0
Wednesday ADP Employment -150K
  Construction Spending 0.5%
  ISM Manufacturing 45.0
  ISM Prices Paid 41.8
Thursday Trade Balance -$40.0B
  Initial Claims 3150K
  Factory Orders 0.2%
Friday Nonfarm Payrolls -100K
  Private Payrolls -110K
  Manufacturing Payrolls -10K
  Unemployment Rate 3.8%
  Average Hourly Earnings 0.2% (3.0% Y/Y)
  Average Weekly Hours 34.2
  Participation Rate 63.3%
  ISM Non-Manufacturing 44.0

Source: Bloomberg

Obviously, much of this is still backward looking and the real question on the NFP report is just how much of the disruption took place during the survey week, which was 3 weeks ago. I think the Initial Claims number will have more power this month, as well as the ISM data. But boy, next month’s NFP report is going to be UGLY!

At any rate, there is not going to be anything positive from the economic data set this week, or probably throughout April. Rather the next piece of positive news we will hear is when the infection curve has started to flatten and there is an end to this disruption in sight. As of now, one man’s view is we will be like this for another month at least. I sincerely hope for everyone, that it is shorter than that.

Good luck and stay safe