Canada is looking to its neighbor to the south for direction on monetary policy – and that is a good thing for indebted provinces across the country that are hemorrhaging red ink to stave off an economic collapse.
Canada Goes Fed
The Bank of Canada (BoC) recently held its April policy meeting and left interest rates unchanged at 0.25%. Considering it had already slashed rates by 150 basis points in about a month, the decision to stay put was not surprising. The real newsworthy development, however, was Ottawa's move to mirror the Federal Reserve and intervene in the muni-bond and corporate debt markets.
Governor Stephen Poloz announced an expansion to the BoC's quantitative easing program by scooping up $50 billion in provincial debt and another $10 billion in corporate bonds over the next 12 months. This is in addition to the $150 billion of liquidity the central bank has already injected into markets. Poloz noted that he wanted to ensure governments and companies can eliminate the debt from their balance sheets so they can allocate their resources to shoring up the economy.
Provincial Money Market Purchase Program is set to launch in May, and details regarding who gets what and how much should be outlined soon.
The Great White North is not the only jurisdiction to aim a fire hose at the muni-bond and corporate debt markets. The Federal Reserve, the Reserve Bank of New Zealand (RBNZ), the Reserve Bank of Australia (RBA), the Central Bank of Brazil, and several others have added local debt to their QE endeavors. These powerful institutions are executing a "do whatever it takes" approach to rescuing their respective economies from ruin due to the economic fallout from COVID-19. Whether this is short-term relief or a perpetual policy remains to be seen, but now there is precedent and it is likely this is the go-to position central banks will take any time there is a downturn.
China Falls – For Now
If there is one country on this planet that wants to forget about the first three months of 2020, it is China. Not only has Beijing's reputation taken a beating over its handling of the Coronavirus pandemic, but the economy has also been battered and broken. The country's fundamentals were already deteriorating, and a virus outbreak exacerbated its demise – at least for the short-term.
On April 17, a flurry of data came out – and it was not pretty. The most glaring statistic was its first-quarter gross domestic product growth rate: -6.8%. This was worse than the median estimate of -6.5%. Plus, industrial production fell at an annualized rate of 1.1% in March, industrial capacity utilization slumped to 67.3%, and retail sales plummeted 15.8% last month.
Beijing was prepared for this. The day before, the People's Bank of China (PBoC) executed a series of monetary actions to offset the bearish news, including an interest rate cut to its one-year medium-term lending facility and a 50-basis-point reduction to the reserve requirement ratio (RRR0). Both moves will unleash a total of $400 billion into the financial system.
With a combination of fiscal and monetary stimulus tools, President Xi Jinping and his communists will use every tool in the toolbox to fix the economy. The government will not settle for anything less than 5% GDP in the second quarter. Is it achievable? It depends on global economic demand, which is minimal at the moment due to lockdowns among China's largest trading partners. Also, Chinese markets are still short of running at full capacity.
The Wall Street Journal ran this headline that summarized its situation: "Coronavirus Ravages China's Economy—and It's Just Getting Started." If a second wave starts seeping into regions that were mostly unaffected by COVID-19, President Xi can say goodbye to the 5% dream.
Will Powell Save the Day?
The U.S. central bank is pumping approximately $750 billion into the corporate bond market to limit the blows from the virus's widespread damage. The component of the Powell Putsch triggered a boost in various exchange-traded funds (ETFs) that hold investments in speculative-grade firms, and Wall Street juggernauts are trying to front-run the Fed in this financial arena. But is Powell's save-the-day moment enough to stop the tidal wave of corporate defaults? Not quite, says Bank of America Global analysts.
According to a recent research note to clients, Frontier Communications, LSC Communications, and Quorum Health defaulted on a combined $14.3 billion in junk-rated bonds. The analysts warn that the attempted bailouts of the corporate debt market will not prevent a 21% increase in non-payments over the next two years.
The financial institution put together a comprehensive list of 2020 defaults, a watchlist, and distressed names. Unsurprisingly, energy and retail businesses dominated the list, including Chesapeake Energy, JC Penney, Neiman Marcus, and American Energy Permian.
And it is not just BofA that is sounding the alarm. Goldman Sachs analysts anticipate junk-bond defaults to reach 13% by year-end, while JPMorgan Chase experts forecast an 8% default rate by the end of 2020.
While you should never bet against the Eccles Building, not even the forces of the printing presses are enough to defy basic accounting and economic laws. At the same time, Powell is ready to deploy the Fed's QE infinity at a moment's notice to plug holes in the sinking ship. He is prepared to purchase any asset without a ceiling in place, a move that will surely become the de facto policy in any market hiccup, downturn, recession, or depression.
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Read more from Andrew Moran.
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