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US Senate Agrees $2 Trillion Stimulus Bill, Supporting Currency Market Reversal

Karl Schamotta March 25, 2020

The dollar is falling and markets are rallying after the US Senate agreed to an unprecedentedly massive $2 trillion economic stimulus package earlier this morning.

Senate Majority Leader Mitch McConnell said “At last, we have a deal. After days of intense discussions, the Senate has reached a bipartisan agreement on a historic relief package for this pandemic”. Senate Democratic Leader Chuck Schumer called it an “outstanding agreement”.

Democrats twice blocked stimulus plans proposed by Republicans, saying they didn’t do enough to support states and hospitals, and didn’t provide enough oversight over a fund designed to bail out big businesses. Those concerns appear to have been addressed to both parties’ satisfaction, meaning that the bill is likely to garner approval in both the Republican-majority Senate and Democratic-majority House later today.

Details remain unclear, but the package reportedly includes $350 billion in aid for small businesses, $500 billion for larger corporations including airlines, and $150 billion for hospitals and other healthcare providers. Low-and-middle income citizens would receive $1,200 payments, with an additional $500 for each child, and unemployment benefits are to be extended and strengthened.

Businesses owned by President Trump and his family, members of Congress, and heads of executive departments would be barred from receiving loans from Treasury – and a new inspector general would be created to oversee the disbursement of funds.

The package comes after the coronavirus brought the global economy to a screeching halt, disrupting supply chains, putting cities, workplaces and households on lockdown, and devastating financial markets. Although there are signs of improvement in some of the worst-hit regions, the worldwide number of infections continues to accelerate. Consumer sentiment measures are plunging at a historic rate, and unemployment in most advanced economies is soaring – suggesting that consumption rates are headed for a “sudden stop” that will drive the world into recession.

Orders for big-ticket manufactured goods rose 1.2% last month following a revised 0.1% gain in January, according to data released by the Census Bureau this morning. The headline number was flattered, however, by an increase in spending on military hardware – core orders fell 0.6% – representing the 8th straight monthly decline, and the biggest drop since February 2016. This suggests that the economy was weakening before coronavirus hit – and orders are expected to fall even more in the coming months as supply chains break and uncertainty paralyzes household spending and business investment.

But official stimulus efforts are ramping up. Our estimates (note that these are changing rapidly) suggest that central banks have pumped at least $2.7 trillion in liquidity – equivalent to 3.3% of global GDP – into the financial system in the last month.

And governments from Washington to Berlin are scaling up their efforts on a daily – even hourly – basis. Among major economies, Chinese pledges now exceed 2.9% of GDP, Canada is approaching 4%, Australia 5.1%, and the United Kingdom 15%. Even the famously-spendthrift German government is proposing to spend more than 20% of GDP.

With two previously approved rescue packages and today’s agreement included, Washington’s commitments are poised to top 9% of GDP.

Taken in sum, roughly $4.3 trillion in spending – more than 5% of global GDP – is currently proposed and likely to pass into law across the major economies.

These efforts do seem to be gaining traction. Stress in the financial system appears to be easing, with a number of key benchmarks moving back toward historical norms in recent days. Bond yields have stabilized, implied volatility levels have fallen, and global equity indices have staged a spectacular rebound over the last two sessions. And currencies – notably excepting the Canadian dollar – have also begun a retracement, sending the US dollar to its sharpest losses in at least four years.

The light at the end of the tunnel may yet become a train – a buy-the-news, sell-the-reality dynamic is common during news cycles like this, and it is important to remember that history’s biggest rallies have come during bear markets. But for now, there’s reason to hope that brighter days are coming for the financial markets.

Karl Schamotta
Chief Market Strategist
@vsualst

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