Food Fight
Is paying more at the supermarket the new normal in the post-Coronavirus economy? With inflation concerns on the other side of the lockdown, the prices consumers pay at the grocery store could be a glimpse into the future for the broader market. While the general consumer price index (CPI) tumbled 0.8% in April due to crashing energy prices, food was far more expensive last month – and it could be the same trend in May.
Overall, the prices U.S. consumers paid for groceries increased by 2.6%, the biggest one-month boost since February 1974. Meat, fish, and eggs topped the list with a 4.3% gain. This was followed by a 2.9% jump for cereals and baked goods, a 1.5% pop in fruits and vegetables, and a 1.5% surge in dairy products.
Suffering From COVIDepression
After watching Federal Reserve Chair Jerome Powell’s speech, you might be wondering if the printing press in the basement of the Eccles Building is manufacturing razor blades and Prozac. It has been a long time since a leader of the U.S. central bank delivered such a bearish tone about the economy. Powell talked about an extended slowdown, a sluggish recovery, and the need for additional fiscal tools from Congress to support growth. Everyone was also waiting for Powell’s remarks on negative interest rates, something President Donald Trump had been demanding on Twitter leading up to his news conference.
So, is the U.S. in store for a NIRP? Powell confirmed that this is not something the Federal Open Market Committee (FOMC) is looking into right now. That said, it appears Powell has left the door open for additional monetary stimulus. But considering unlimited quantitative easing, 0% interest rates, corporate bond-buying, and Main Street lending, what else could the Powell Putsch entail?
Speaking of the Fed ...
Feeding the Federal Reserve
The central bank announced that its balance sheet swelled to an all-time high of $6.98 trillion in the week ending May 13, up from $6.72 trillion in the previous week. The balance sheet boost was led by an increase in holdings of mortgage-backed securities ($178 billion), Treasurys ($37 billion), and Paycheck Protection Program assets ($11.4 billion). It did report a decline in a couple of its emergency lending programs, including its dollar swap lines to other central banks (-$3.95 billion). Still, the Fed remains on track to grow its balance sheet to $10 trillion by the end of the year.
Let’s Be Franc
In recent years, central banks have become major shareholders in their respective stock markets. The Bank of Japan (BoJ), for instance, is a top shareholder on the Nikkei Index. The Federal Reserve has recently started acquiring billions of dollars in corporate debt ETFs. The Swiss National Bank (SNB) has taken a different approach: Invest in foreign equities. According to its latest filing statement, the SNB owns about $94 billion in American equities, including Amazon, Google, and Netflix. Its top holding is Apple, with roughly $4 billion in shares in the tech titan. Could this give central banks other ideas?
The SNB has been participating in an ultra-aggressive expansionist approach to monetary policy. The SNB is attempting to support the Swiss economy, but it is also trying to limit the franc’s appreciation. SNB Chair Thomas Jordan has justified the massive interventions into foreign exchange markets, including the $80 billion in sight deposits, by pointing out that Switzerland is an export-oriented economy. If the franc strengthens, it makes its products more expensive for foreign importers. The franc has been one of the top-performing currencies during the financial crisis as investors pour into the traditional safe-haven asset, like the U.S. dollar and the Japanese yen.
Made In [Insert Here]
The world will inevitably reduce its dependence on China, according to a new report by a group of economists. The Economist Intelligence Unit (EIU) says that the Coronavirus pandemic will reverse globalization and produce regional supply chains. Even before the Coronacrisis, corporations had already started to relocate their supply chains due to rising wages in China and the trade war. But in the fallout of the virus outbreak, it could accelerate.
“COVID-19 will push more companies in other sectors to relocate parts of their supply chains. The outcome of this will be an Asian supply chain network that is both less China-focused and more diverse,” the report forecast.
In the aftermath of the COVID-19 public health crisis, a significant shift could happen in the global economy: the end to the Made in China trend. In the next few years, you may begin to see more Made in Taiwan tags on the back of more products. This will inevitably be a market-driven event, but politicians are trying to steer the ship away from Beijing, including potentially President Trump and his administration.
The president told the Fox Business Network that he is considering a tax on American companies that produce their products outside America. He said that taxation is an "incentive" for firms to return their manufacturing and industrial operations to the U.S. This would be part of the White House's "turbocharging" initiative to transition production away from China. He ostensibly dismissed giving companies tax breaks if they re-shore operations or already create items in the world's largest economy. One could only imagine the right’s reaction if former President Barack Obama proposed this idea.
They All Flow Over Here
Global investors are heeding Warren Buffett's advice: Buy America because "nothing can basically stop" the United States. In recent months, investors have been exiting European and emerging market funds and are pouring into U.S.-based exchange-traded funds (ETFs). Over the last three months, non-U.S. ETFs saw approximately $19 billion in outflows, but U.S. ETFs have experienced about $57 billion in inflows. This highlights the rest of the world's bullishness on the U.S. economy during bear and bull markets. Be it the best of times or the worst of times – foreign investors view U.S. investments as havens and opportunities.
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Read more from Andrew Moran.
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