Last week saw two key developments by global policymakers to manage the economic fallout from the global pandemic. With deflation becoming a growing problem, as evidenced by last month’s -0.4% consumer price index, a historic deal to reduce global oil production has been reached. Global production will be cut by 10%, as demand for oil has plunged due to the slowdown in economic activity. Although the size of this cutback is historic, it’s unfortunately still not enough to equal the reduction in daily demand. Over the next several months, it will be interesting to see if demand improves before the amount of crude that has been pumped exceeds current storage levels.
The second major policy action was the announcement by the Federal Reserve (Fed) to utilize new policy tools to bolster the markets by supporting municipalities, mid-sized businesses, high yield bonds and structured credit. These programs total $2.3 trillion, bringing the Fed’s total support to $10 trillion. The Fed is not wasting any time in implementing these programs and its balance sheet has grown rapidly in the last month. By this time next year, I expect that balance sheet to exceed $15 trillion.
Risk markets continue to improve as a result of the dramatic liquidity and backstop buying by central banks. This strategy is effective in the short term, but a plan to build back economic activity needs to be put in place in the coming weeks. If no solid plan exists, markets will likely revert to the fundamentals, which I expect to be very poor as earning and economic data will likely be worse than expected.
We hope that you and those close to you are staying healthy and safe.
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