SUB-ZERO

Love them or loathe them, negative interest rates are back in the spotlight as ammunition-depleted central banks debate the pros and cons of going down the unorthodox route already trodden by the BOJ and ECB.

The Federal Reserve has so far brushed aside President Donald Trump’s calls to adopt negative rates. Bank of England governor Andrew Bailey too said he isn’t considering taking rates sub-zero. But markets reckon otherwise. Fed funds futures, for the first time ever, reflect a small chance that a negative rate policy will find its way to U.S. shores. Short-dated British gilt yields are back below 0%.

The truth is the coronavirus crisis is heaping pressure on policymakers to do more to support growth. New Zealand has flagged a possible shift to negative rates, just days after Norway cut rates to 0%. Even BoE boss Bailey declined to rule it out altogether.

Powell and other Fed officials will talking in coming days, the former testifying before a Senate committee on Tuesday. Bailey will take questions from UK lawmakers on Wednesday. Their comments will be scanned closely for any shift in stance.

TARGET PRACTICE

Months late, and in a city emerging from lockdown’s grip, China’s National People’s Congress convenes in Beijing on May 22.

At issue for markets are the annual growth target and fiscal policy details. Sources told Reuters last year a growth target around 6% was eyed. By March, something like 5% was on the table. Both seem fanciful now. The magnitude of the targeted deficit and the size of debt-raising needed to pay for it are also in focus.

The long-standing deficit ceiling of 3% of GDP will likely be breached. To plug that, something like 5 trillion yuan ($700 billion) in special bonds could be raised. That may also offer a guide to what kind of monetary effort the People’s Bank of China is crafting.

The PBoC’s failure to cut a key bank lending rate on Friday caused some to wonder if it will opt instead to slice its loan prime rate on Wednesday. But possibly, it’s the fiscal bazooka that’s being polished.

RETAIL HIT EARNINGS SPOTLIGHT

The U.S. first-quarter earnings season is mostly winding down, but the retail sector is just revving up.

Coming days bring results from big U.S. retailers including Walmart, Home Depot, Lowe’s, Target, Kohl’s and Best Buy. Their figures will show whether Americans, locked down by coronavirus, are still spending money.

With more than 35 million U.S. jobs lost since mid-March, the outlook isn’t rosy for the consumer discretionary sector — it is expected to post a 45% drop in Q1 earnings. Consumer staples on the other hand should see a 5.2% increase, according to IBES data from Refinitiv.

The retailers are reporting in the shadow of online shopping giant Amazon, which is among the “stay-at-home” stocks benefiting from the lockdown. Its shares have soared some 28% this year.

OIL TO EXPIRE AGAIN?

Tuesday brings the monthly expiration of U.S. West Texas Intermediate crude futures contract. Normally uneventful, the expiry turned into a nightmare last month when crude slumped to negative-$40 a barrel and brimming storage tanks discouraged traders from taking delivery of oil.

Many are worried about a repeat performance. Already, the U.S. Commodities Futures Trading Commission has warned market participants they should be prepared for volatility and negative pricing again. After all, oil storage remains tight and U.S. demand is still 23% below last year’s average.

But oil prices have rallied of late on hopes energy demand will get a boost from an easing of lockdown restrictions. In another hopeful sign, U.S. crude inventories fell in the most recent week for the first time since January.

Yet some traders seem to be heeding the CFTC’s warning. Volumes in the July futures contract, which expires in a month’s time, are outpacing the June contract by nearly 50%.

THE BIG CUT

Aside from China, there’s a pack of other emerging markets chomping at the bit to chop interest rates. After Indonesia on Tuesday and Thailand on Wednesday, Turkey and South Africa follow on Thursday and both are expected to cut rates again despite heavy beatings their currencies’ have endured of late.

Analyst polls predict South Africa will cut its 4.25% main rate by another 50 basis points. Economists stress any policy easing must be sizeable if it is to offer any help to the suffering economy.

Turkey’s meeting will be even more interesting. The lira has plunged to record lows, hard currency reserves are dwindling and inflation is in the double digits, yet all that probably won’t deter the central bank from lopping another 50-100 basis points off its 8.75% repo rate.

Comments