BMA Market Insights: The Big “R”


As schools, restaurants, and stores close, and travel comes to a near halt, the hit to the global economy is and will be severe leading us to a global Recession. In fact, some top economists believe the global economy has already fallen into a recession, as defined by the National Bureau of Economic Research (NBER) as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

While preliminary hard economic data is not yet available for the U.S., it is not difficult to fathom that discretionary consumer spending, making up nearly 70% of U.S. GDP, has slowed down. Precautionary agendas stemming from fears of the unknown has pushed consumers to stay at home and practice social-distancing. Not to mention global supply chains have been stunted since January as factories in China and greater Asia came to a halt.

The question will be how quickly will it take the U.S., China, and the global economy to bounce back from this pandemic.

Adding Fuel to the Fire

Last week, OPEC and Russia waged an oil war, after Russia declined to cut output, which is set to unleash the biggest flood of crude oil ever seen. The timing could not be worse as the novel coronavirus crushes demand in an already heavily oversupplied market of 3.5million barrels per day. 

  • Saudi Arabia announced it will supply more than 12 million barrels a day next month.
  • The United Arab Emirates will bolster output by about a third.
  • Russia will add 500,000 barrels a day.

OPEC’s strategy here is to max out oil supply storage, currently estimated to be at 65% capacity, and push crude prices further down in an effort to drive out competitors namely American shale drillers. The drop in crude prices will likely further push the politically fragile countries of  Venezuela and Iran to the brink of collapse. WTI crude is trading at $29.385 as of this writing, down from $46.78 less than two weeks ago.

Fiscal and Monetary Policy

With market volatility reaching all-time highs and after a tumultuous past couple of weeks, the President of the United States, last Friday, declared a national emergency under the Stafford Act to combat the pandemic. The powers invoked under the Stafford Act allows the Federal government to provide more aid to states and local governments by nearly $50 billion. 

Additionally, Congress introduced fiscal policies aimed at addressing the economic fallout from the COVID-19 coronavirus.

  • Paid sick leave for government workers and employers with 50 to 499 employees.
    • Two weeks of paid sick leave.
    • Up to three months of paid medical and sick leave.
  • Free coronavirus testing for all.
  • $1 billion for food security programs.
  • $1 billion for emergency grants to states to assist with processing and paying unemployment insurance.

It is widely expected the legislation will pass later this week.

The Federal Reserve

Nearly two weeks ago, as the financial markets were in freefall, the Fed held an emergency meeting and cut interest rates by 50bps to an upper range of 1.25%, in an effort to prop up the economy as it deals with the coronavirus. 

While the equities market appreciated the gesture and temporarily rose on the news, the bond market was skeptical and continued its marked decline in rates. Yesterday evening, in an effort to support economic activity and keep the financial system afloat and keep credit flowing to affected households and businesses the Fed held another emergency meeting, in lieu of the scheduled meeting this week, and unleashed its full crisis playbook arsenal last implemented in 2008:

  • The Fed Funds rate was slashed by 100bps to a range between 0% and 0.25%.
    • The Fed “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”. 
  • Restart large-scale quantitative easing.
    • Purchases of at least $500bn of U.S. Treasury securities.
    • Purchases of at least $200bn of Agency Mortgage-Backed Securities (MBS).
    • Reduced the penalty rate on using the discount window – cutting the discount rate by an even bigger 150bp to only 0.25% – in an attempt to encourage banks to use the window to secure funding if needed. Discount window loans will be made for up to three months. 
    • The Fed stated its support for commercial banks willing to use their capital buffers to extend credit to households and businesses and scrapped reserve requirements.
    • Support the dollar funding requirements of banks elsewhere, presumably mostly Europe, the Fed halved the cost of dollar liquidity swaps offered via other central banks.

What’s Next?

Equity futures across the Dow, S&P 500, and Nasdaq all reached their limit down before most Americans even started dinner on Sunday, wiping out most of the rally that swept Wall Street’s last hour of trading last Friday. We expect the number of COVID-19 cases in the U.S. to increase significantly over the coming days and weeks. With the Fed nearly out of ammunition and publicly opposed to negative interest rates, investors will be on the lookout for more expansive fiscal policies to curb the economic fallout from the coronavirus.