FOMC day
July 29, 2020
–In front of today’s FOMC meeting the curve flattened with many spreads making new recent lows. Ten year yield fell 2.5 bps to 58 bps, within a few bps of all time lows. 2/10 is at its recent low of 43.8, while the red/gold euro$ pack spread fell 2.125 to a new low (since March) of 35.625. Red/gold has a double top at 62 from the March spike and June surge. Implied vol in rates continues to grind lower, even from these basement levels.
–Several articles suggest the Fed has to maintain extremely loose conditions. For example, Reuters notes that S&P has made 1190 downgrades so far this year, just 136 shy of the 2009 total, with plenty of time left in the year to catch up.
https://www.reuters.com/article/us-health-coronavirus-ratings-graphic/how-the-coronavirus-is-crushing-credit-ratings-idUSKCN24U18Y
| How the coronavirus is crushing credit ratings – ReutersThe crippling effects of the coronavirus crisis have crushed government and corporate finances and sent debt soaring. As the charts below show, it is also crunching their credit ratings and …www.reuters.com |
Another article notes that banks are cutting credit limits or simply closing credit card accounts. According to CompareCards, from mid-May to July, 25% of cardholders had an account involuntarily closed and 33% had limits cut. Evictions are also expected to rise as the moratorium on non-payment ends. If Congress can’t agree on a large new package to replace the $600/week, then the Fed is going to have a much bigger job on its hands that it can’t possibly win. If the curve gets any flatter it will only cause banks to draw in their horns, putting the Fed in the position of being a direct lender without an appropriate transmission architecture. No matter what the Fed says, accommodative conditions will continue with massive growth in the balance sheet. Gold has pulled back a couple of bucks to 1955, but bitcoin is still above 11k, and DXY is at a new low this morning.
–Heads of FB, AMZN, AAPL and GOOGL appear before the circus known as Congress today, right before tomorrow’s earnings reports (after the bell)
