Intesa Sanpaolo : FOMC super-dovish: “The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time”
Weekly Economic Monitor – Weekly Economic Monitor – 12 June 2020
Intesa Sanpaolo – Research Department
The week’s market movers
This is the main message sent by the June meeting, that outlines a difficult and extremely uncertain macroeconomic scenario, marred by “considerable downside risks”. Forward guidance on rates is unchanged, but the dot plot signals stable rates over the whole forecasting horizon, and asset purchases “at least at the current pace” in the “coming months”.
– The opening sentence of the statement sums up the message conveyed by the Fed, that guarantees its active presence in a still bleak economic picture, watering down the optimism sparked among many market participants by the turnaround of the labour market trend in May, and by indications of an incipient post-lockdown recovery. The Committee discussed changes to guidance on rates, that was ultimately left unchanged, with expectations in any case anchored by projections of stable rates until the end of 2022. For what concerns the pace of security purchases, a temporary path is laid out, with a floor at the current level, and no ceiling. Overall, the FOMC, through the statement and Powell’s press conference, has sent dovish indications, stressing the downside risks and uncertainty surrounding a macro outlook that is only modestly positive, and very fragile.
– Macroeconomic scenario exposed to considerable downside risk. The macro picture is summed up in two sentences: the virus, and the resulting containment measures put in place, have caused economic activity and employment to contract sharply, while weakening demand and lower oil prices are holding back inflation. The improvement of financial conditions is the result of the public support injected to respond to the effects of the pandemic. Macroeconomic forecasts display huge dispersion across variables (Table 1), especially from 2021 onwards. The median scenario is relatively pessimistic for 2020 (unemployment rate at the end of 2020 of 9.3%, GDP -6.5% y/y) and points to unemployment higher than the longer-term rate, and inflation below the 2% mark along the entire forecasting horizon. Therefore, macro conditions justify the stable path of interest rates. In the statement, the Fed forecasts “heavy” consequences on economic activity, employment, and inflation in the near term, with “considerable risks” to the medium-term scenario.
– Rates unchanged throughout 2022. The Committee left the fed funds rate at between 0 and 0.25%, without changing the qualitative guidance provided in the past few months, reasserting that rates will remain stable until the Committee is confident that the economy has overcome recent events and is on the course to achieve the maximum employment and price stability goals. In the dot plot (Fig. 1), the median forecast is stable, and until the end of 2021 consensus is unanimous to keep rates on the verge of zero. For 2022, forecast dispersion is very limited, with only 2 dots out of 17 above the current interval (one at 0.250.50%, the other at 1-1.25%). Concerning potential changes to forward guidance, including yield curve control, Powell said that for now the stable future path of rates is evident and shared by the market, indicating that it is not urgent to strengthen guidance. However, the Committee has discussed the matter and will make a decision in “upcoming meetings”. The minutes, that will be published in three weeks’ time, will probably provide indications on the timing and type of any changes.
– A floor set for the purchase path, but no ceiling. For what concerns asset purchases, the statement signals that Treasuries, MBS and CMBS will be purchased “at least at the current pace”, specifying a better defined path for purchases, for which a floor is now set, but remains without a ceiling, with the aim of fostering effective monetary policy transmission. With the latest decision, the Committee instructs the NY Fed to confirm purchases at current levels in the “coming months” (Treasuries: +80 billion per month, MBS: +40 billion per month), interrupting the tapering process under way since May. Emergency lending programmes crucial to sustain the recovery. During the post-meeting press conference, Powell reminded of the importance of the Fed’s lending power to extend credit to a wide range of economic players, and reasserted that the programmes are geared (and adjusted) to provide loans to help overcome the damage reaped by the shutdown phase. However, Powell said once again that in such a difficult context as the present, it could become necessary to activate the spending power of fiscal policy again.
– Dovish message on monetary policy. The statement ends signalling that “the Committee will closely monitor developments and is prepared to adjust its plans as appropriate”. The first and last sentence of the statement show that the FOMC considers the emergency phase ongoing and does not feel the need to add specific conditions to signal its readiness to act proactively, in the face of the massive uncertainty surrounding the economic and epidemiologic scenario. According to Powell, in the next few months the outline of the economic outlook could become a little less uncertain and guide potential changes to better anchor expectations. For now, however, the bias is unmistakably dovish, albeit without new forward guidance. As Powell said, the Committee is “not even thinking about thinking about raising rates”.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.