S&P Futures (INDEXSP: .INX) are up 27 points this morning. This is because of 2 reasons: First, the economy is opening and starting to recover from the coronavirus; and Second, the riots are the slowing down. Investors are awaiting today’s release of employment data for May to determine the state of the domestic economy. If the number is more than expected, we could see a dip in the markets, but it will only be temporarily.
After April’s 20.5 million contraction in nonfarm payrolls, contraction of another 7.725 million is consensus for May. Manufacturing is expected to lose 530,000 payroll jobs. US unemployment is expected to rise to 19.8 percent versus 14.7 percent in April.
Critical Market Point – Many indicators suggest that the economy has bottomed out, and the reopening of the economy in May coincides with the start of the second half of this year’s fiscal year, which will be the first since the 2008-09 financial crisis. (BULLISH TREND)
The data also pointed to a rapid recovery in the third quarter, and economists at the central bank expect euro area gross domestic product to fall by 8.7% in 2020. It also expects growth to accelerate from 6.7% last year to 7.5% in 2020 and to be at its highest level in more than a decade. We expect the trend to be similar in the US.
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However, the threat of civil unrest will likely continue through the summer and will cause drops in the market. The biggest threat to the markets would be a win by the Democrats in November which would trigger a BEAR market due to the rollback of tax cuts and uncertainty in markets.
President Donald Trump signed legislation to speed up legislation on energy and infrastructure projects to boost economic growth. He said the government is determined to spend $1 trillion on the next round of stimulus programs, compared with the $3 trillion provided by House Democrats’ plan. Broadcom’s chief executive spoke out against Apple, hinting at a delay in Apple’s next iPhone cycle.
Yesterday, as part of their latest policy update, the Federal Reserve Bank of New York and the US Treasury decided to expand the Pandemic Emergency Purchase Program (PEPP) to about $675 billion. That brings the Fed’s latest monetary stimulus total to $1.52 trillion.
While the ECB’s total may seem small relative to the Fed’s actions, it is still a considerable sum, and money managers everywhere should be encouraged to build up their holdings of US government bonds. Too quickly, they have become the biggest buyer of domestic bonds, and are likely to become a bigger buyer than what we see domestically at the Federal Reserve.
European Commission President Christine Lagarde noted that recent economic data indicated a strong recovery in the second quarter of this year, but not quite as fast as expected. The central bank expects the gross domestic product to have fallen sharply in the second quarter. It expects monetary and fiscal stimulus to be a key driver of the recovery. It also expects a rapid recovery in the third and fourth quarters.
The expansion of bond purchases is likely to ease the ECB’s monetary policy stance further. After assessing the recent damage, the Council decided that the economy needed more help. It is concerned that financial conditions are tightening, and less credit is available, and it wants to ensure that growth recovers and prices remain stable.
By buying bonds, it is putting pressure on interest rates and keeping borrowing costs down. This should make it easier for individuals and businesses to obtain credit, and it should also reduce borrowing costs.
She said the ECB wanted to make sure there was enough credit available to the economy, and Lagarde said she wanted to support the real economy.
We want to make sure that small and medium-sized businesses can borrow easily, “she said. SMEs employ the most people and account for more than half of the eurozone economy.
Lagarde said the purchases would continue to cover a range of assets, including corporate and government bonds. The central bank expects loose lending to have the biggest impact on the economy in the first half of the year, initially with about 2.5 percent. The program will also run until at least the end of June 2021, and the proceeds from the bonds will be reinvested in the bank’s balance sheet as well as other assets such as shares. She said she would use all the tools available to achieve the most significant economic impact. The aim is to bring inflation and growth back to pre-coronavirus levels as quickly as possible. We will do everything to support the citizens of the euro area during this difficult time. If the situation requires it, we will be ready to do more, “said the Governing Council of the ECB.
Lagarde also called on the European Union to support the central bank’s stimulus programs with its measures. The ECB welcomes support for the economies most affected by the coronavirus, such as Greece and Spain, “said Christine Lagarde, President of the International Monetary Fund (IMF).
Reflecting on the importance of expanding the bond program, Lagarde said it was not the only measure that would help, but the first step in a long-term plan. She also stressed the need for targeted long-term debt refinancing and reminded everyone of the extended collateral that the central bank was willing to accept.
The idea is that financial institutions with a lot of money are more willing to lend, and the ECB can get more money by increasing the amount of collateral it is willing to accept. This is similar to what our central bank, the Federal Reserve, is doing and has done. It is also a way to encourage banks to lend to individuals and businesses, not just banks.
The ECB has learned from the financial crisis, and there are lessons to be learned to respond to the current crisis and avert a long-term struggle. Frequent direct communication takes place between the ECB and the European Central Bank (ECB) and other central banks.
When the crisis erupted, central banks did not want to be opaque, especially when the economy seemed to be growing. Now the European Central Bank (ECB), the US Federal Reserve (Fed), and the International Monetary Fund (IMF) want their central bank to become transparent again.
In doing so, they encourage individuals and institutions to put themselves first, according to a new report from the Federal Reserve Bank of New York. As Fed Chairman Jerome Powell recently noted, this communication has encouraged markets to solve their liquidity problems. According to the report, central banks have intervened in the market for the first time since the 2008 financial crisis.
When lenders of last resort finally enter the market, they will have maximum impact in the short term. If markets solve the underlying problems alone, it will remain a rally for the rest of the year and beyond.
We now have an enormous backstop from the Fed and the ECB, but there will certainly be unforeseen things and issues that will come. So, as during the financial crisis, every move by the Fed and ECB will fuel a sustained rally.
Central banks have taken mainly steps to ensure that the economy recovers, and the stock market recovers. When economies everywhere regain momentum and return to normal, the backstop will prop up the markets. The US economy and its central bank support will continue to support the S & P 500 and other major stock markets around the world.