Patience and a little effort. Jerome Powell at a press conference following the April FOMC meeting tried very hard not to sprinkle the basket he had created with apples. The Fed Chairman noted that the central bank will act forcefully, actively and aggressively to support the economy, and patiently keep rates close to zero until there is confidence that the States have stood the test and set out on the path to achieving maximum employment and stability goals. prices. In order to thwart the attempts of the “bears” in the S&P 500 to launch a counterattack, the head of the Federal Reserve stepped on the throat of his own apoliticality. He had not previously called on Congress to increase fiscal stimulus, making it clear that the central bank should not be the only player in the city.
Judging by the rally of stock indices, they managed to save the basket with apples even by changing their own worldview. If in March Jerome Powell spoke about the V-shaped trajectory of the US economy, then in April he sent an unmistakable message to the markets: hopes for a quick recovery of GDP in the second half of 2020 risk becoming an illusion, and the Fed is preparing for a long-term struggle against the pandemic. Uncertainty over Victoria over the coronavirus, the extent of damage to the US economy, the magnitude of global shocks, and the fearful Americans' return to consumption will continue throughout the “next year or so”. Indeed, even the practically victorious COVID-19 China gives out vouchers to the local population to encourage them to spend money.
The shocks are great: in the first quarter, US GDP dipped 4.8% qoq, consumer spending declined the fastest since 1980, and business investment saw the worst decline in 11 years. This seems unbelievable if we recall that until mid-March the economy was functioning normally, and few could have expected that the longest-running economic expansion could soon come to an end.
The dynamics of American GDP
Source: Financial Times.
In the second quarter, flowers give way to berries. Judging by business activity from Markit, US GDP will drop by 37%, which will be the most serious decline since 1947.
In my opinion, Jerome Powell managed to powder the market with brains and distract him from the topic of changing the Fed's worldview. The recovery in the US economy is likely to be U-shaped, so the 30% S&P 500 rally from March bottoms looks excessive.
From the hands of the Federal Reserve, the initiative passes to the ECB. After Fitch downgrades Italy's credit rating, investors are almost certain that the Governing Council is active. In a situation where governments of the eurozone countries cannot agree on a fiscal stimulus, someone should take responsibility. If the central bank does not expand the scale of European QE in April, is it likely that at least it will hint at such a step in the future?
The dynamics of European QE
So far, the options market is unaware of serious movements in the euro: the EUR / USD pair cannot be lured out of the range of 1.08-1.09 for any carriage. Will Christine Lagarde manage to do this?
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