New York Fed shrinks more liquidity than expected


This marks the second straight month the institution is reducing liquidity injections
Chief Investment Office14 Feb 2020
Photo credit: AFP Photo


US

US equities had a turbulent Thursday (13 February), fluctuating between gains and losses on mixed news about the coronavirus outbreak, only to fade after the Federal Reserve Bank of New York said it will further shrink repurchase agreement operations.

The Fed news late in the trading day erased what had been a small gain for S&P 500 Index, which closed lower for the first time this week (ending 14 February) – falling 0.16% to 3,373.94. The benchmark had bounced back from session lows after the World Health Organization (WHO) said a surge in coronavirus diagnoses did not necessarily indicate a spike in infections. Traders are still trying to gauge the outbreak’s effect on the economy.

The New York Fed said it would shrink repo operations starting with Friday’s overnight offering. The Fed has been conducting repo offerings and Treasury bill purchases in a bid to keep control of short-term interest rates and bolster bank reserves. The efforts had calmed markets since a September spike. Treasuries trimmed their gains for the day.

This marks the second straight month the Fed is reducing liquidity injections. It said in mid-January that it would reduce term operations by USD5b starting in February. These operations have been oversubscribed this month, but analysts say the demand from dealers has not indicated renewed stress in funding markets, or concern about bank reserves. Instead, the strong bidding is seen as simply underscoring that the rates dealers can get in these operations are lower than prevailing market rates. – Bloomberg News.

 

EUROPE

Italy is in danger of missing its already unambitious growth targets for 2020 because of the coronavirus outbreak, according to a senior government official.

“The impact of the coronavirus risks being significantly negative on the global economy and also on Italy,” Deputy Finance Minister Antonio Misiani said in an interview in Rome on Wednesday (12 February). “It’s become more complicated now to reach the government target of 0.6% growth in the budget.”

The outbreak has come at a difficult time for Italy’s economy. Output unexpectedly shrank 0.3 %pt in the final quarter of 2019, ramping up pressure on the fragile coalition government of Prime Minister Giuseppe Conte. Bank of Italy Governor Ignazio Visco warned of “significant” downside risks to the country’s outlook. In fact, the country could be heading for its fourth recession in little more than a decade.

According to the European Commission’s economic forecast published on Thursday, Italy’s gross domestic product will grow only by 0.3% this year, down from a previous prediction of 0.4%, partly because of a negative carry over effect. “Downside risks to the growth outlook remain pronounced,” it said.

“China is Italy’s third-largest supplier, many Chinese tourists come to Italy” and purchase significant quantities of its luxury goods, Misiani said. He vowed that the government would “redouble efforts to relaunch growth with income tax reform, carrying out the government’s public investments plan, and quickly helping the companies most exposed to the Chinese market”. – Bloomberg News.

The Stoxx Europe 600 Index was little changed at 431.08 on Thursday.

 

JAPAN

Japan’s economy likely suffered its biggest contraction since 2014 at the end of last year leaving it in a vulnerable state, as fallout from China’s viral outbreak threatens to turn a one-quarter-slump into a recession.

A sharp drop in consumer spending after a sales tax hike is seen as the main culprit behind an annualised 3.8% contraction estimated by economists. The slide would be the worst for Japan since the second quarter of 2014, when a previous tax increase prompted the economy to shrink by 7.4%.

Economists previously viewed the expected fourth-quarter contraction as a tax-triggered blip compounded by typhoons that battered manufacturers struggling with weak export demand. But economists are now concerned the coronavirus could delay or even derail a weak recovery forecast for early this year, an outcome that policymakers would find difficult to ignore.

Analysts’ forecasts have become progressively gloomier as it became clearer that shopping rebates and other government measures meant to maintain households’ spending after the tax hike had not worked as well as hoped. Economists estimate that consumer expenditure fell 7.8% in the fourth quarter, alongside declines in business investment and exports.

The full extent of the economy’s weakness may also be masked if higher inventories give the headline growth figure a temporary boost. That is because higher stockpiles now will be a drag on growth later when they are sold down.

Prime Minister Shinzo Abe already acted in December to support the economy with a stimulus package that should lift growth as the year progresses. He also announced Thursday (13 February) a limited raft of measures to help combat the impact from the viral outbreak, including loan guarantees for small businesses. He will likely want to see more evidence of economic damage before taking more extensive action.

The Bank of Japan is likely to hold off on using any more of its depleted policy ammunition to prop up growth, arguing that the special factors weighing on the economy are transitory. – Bloomberg News.

The Nikkei 225 Index fell 0.52% to 23,698.11 on Friday morning. The benchmark closed 0.14% lower at 23,827.73 the previous session.

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