The Day at a Glance | May 12 2020

FED will begin buying corporate debt ETFs today.

The Federal Reserve announced yesterday afternoon it will start operating its Secondary Market Corporate Credit Facility today, May 12th, with the purchase of ETFs – mainly ones exposed to corporate debt with investment grade and some with speculative grade. The resources used to buy these ETFs come from the stimulus law approved by Congress a few weeks ago, in which up to $454 billion dollars (of a total of $2 trillion) were designated to the FED`s programs, given the fact that the central bank can`t be highly exposed to credit risk. Additionally, the Treasury Department has provided 37.5 billion of the 75 billion total to this program and others that seek to back private debt markets. The other program announced by the FED, the Primary Market Corporate Credit Facility, will launch “in the near future”, according to the central bank`s announcement. The creation of both facilities was announced on March 23rd, date on which American equity markets reached their lowest levels; a clear sign of how important the FEDs support has been in backing investor confidence after massive selling of shares took place in March. On Wednesday, President of the Federal Reserve Jerome Powell will hold a press conference. It`s expected he will speak about these programs, but also answer questions concerning the probability of seeing negative interest rates in the US – this after derivatives markets included negative rates for the Fed Funds before the end of the year since last week.

Record fall in underlying inflation in the US

Inflationary figures published by the US this morning confirm a strong slowdown in the economy`s prices during April. The fall in the general index accelerated with respect to March and reached -0.8% monthly (0.3% annual vs 1.5% Mar), driven by lower prices in energy (-10.1% monthly). However, the drop in prices goes beyond volatile components and an important deceleration in underlying inflation was confirmed, which contracted a monthly (-) 0.4% (a record contraction; 1.4% annual) affected by apparel (-4.7%) and transportation services (-4.7%). In fact, within the underlying component, deflation was recorded in almost all categories except for medical services (0.5%), new vehicles (0%) and accommodation (0%). These figures reflect the virus`s impacts on prices and the proportions of the challenges that the FED will have to face in order to ensure stability.

China eliminates tariffs on 79 US products

Being under heavy pressure from Washington to meet the stipulated terms in the “phase one” of the trade agreement, and the need to stimulate its domestic market, the Chinese government has announced the temporary elimination of tariffs on 79 products imported from the US. The suspension will take effect between May 19th 2020 and May 18th of 2021, and will include gold, silver and rare earths. Pekin and Washington held conversations last week and discussed the implementation of the trade agreement in midst of growing tensions between both countries due to the handling of the pandemic. President Donald Trump assured yesterday that he is not willing to renegotiate the agreement because of the health emergency and expects China to deliver on their commitments; otherwise, he would end the agreement.