Head of Macroeconomic Research
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
Today’s chart is all about the Federal Reserve. The central bank has injected so much liquidity into the system to face the impact of the pandemic that in just three months its balance sheet has expanded by more than $3tr – becoming the largest in the world. At current path, we expect that the Fed’s accommodative stance and unlimited QE will result in its balance sheet reaching about $10tr by the end of the year, which represents roughly 50% of U.S. GDP. For the time being, monetary policy should be on autopilot mode with little new action from the Fed tomorrow. The central bank is basically adjusting on a day-to-day basis its nine main facilities to make it more attractive and efficient, with a strong focus on the Main Street Lending Program and the Municipal Bond Lending Facility. Yesterday, the Federal Reserve expanded its Main Street Lending Program, worth $525bn, to allow more small and medium-sized businesses to be able to receive support. Among the main changes, minimum loan amount has been lowered to $250k versus $500k previously, the length of loan has been extended from 4 years to 5 years and payments have been deferred for 2 years, up from 1 year previously.
Since the April meeting, the U.S. economic situation has sharply deteriorated. Yesterday, the NBER Committee confirmed the United States entered into recession in February 2020, putting a definitive end to the longest expansion in the history of U.S. business cycles dating back to 1854. In the past few months, economic activity has declined to an unprecedented path, unemployment has risen sharply and inflation has declined to such a level that risk of deflation is becoming real. After not publishing economic forecasts in March, the FOMC will presumably remain cautious regarding the economy’s path and will probably downplay the likelihood of a V-shaped recovery. A very moderate rebound could materialize in H2 on the back of the reopening of the economy, but downside risks are still elevated (e.g. wave of bankruptcies, second wave of the virus, increase pressure on bond yields etc.), which tends to confirm that more will be needed at monetary and fiscal policy levels in coming months. As long as the Federal Reserve does not get a better sense of the state of the economy, we think it is unlikely it will resort to new monetary policy tools, such as negative interest rates and yield curve control (YCC). At this week’s FOMC meeting, there should be no long talk about negative interest rates or any suggestion about accepting them soon. On the contrary, we think that discussions about YCC started at the previous meeting will probably continue. YCC is the next step of the Fed’s monetary policy in order to avoid that existing pressure on longer term bond yields increases further, which could put at risk the recovery.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
