There is an old saying that goes
"Don't fight the Fed."
Maybe now, this one holds true as well. Consider the following:
*Thread* 1/n
#USA #Economy #Liquidity #MonetaryPolicy #DontFightTheFed #Covid_19
"Don't fight the Fed."
Maybe now, this one holds true as well. Consider the following:
*Thread* 1/n
#USA #Economy #Liquidity #MonetaryPolicy #DontFightTheFed #Covid_19
2/ Data-wise, we all know that March & April 2020 have turned out to be a catastrophe so far. Just think of initial claims, regional manufacturing PMIs, Flash PMIs etc. etc. Nonetheless, there seems to be light at the end of the tunnel. A data point which has clearly surprised...
3/ to the upside were ZEW Expectations in April 2020. Expectations have increased strongly in all regions including the US, Europe & Japan. At the same time, the assessment of the current situation has collapsed to 2008 lows. A typical pattern at the beginning of new cycles. 
4/ An economic cycle is like the phoenix: the old one has to die, for the new one to be born. This can already be seen in the ZEW Survey in the diff. between the catastrophic situation versus the sanguine future expectations. This spread usually correlates w/ the Yield curve.
5/ This spread is one of the earliest leading indicators I am aware of. An increase in this spread historically coincides w/ an increase in the unemployment rate. The very moment the last cycle 'dies' the new one emerges. A reset of the old cycle builds the basis for the new one.
6/ What does this have to do with the Fed? The expectations-situation spread in the US historically also correlates w/ Excess Liquidity which is a basically a function of monetary policy & historically even leads other leading indicators such as the ISM Manufacturing PMI.
7/ There are other Long leading Indicators that imply they same as the ZEW Survey eg the Sentix Survey where the expectation-situation spread increased as well in April. Another one is the University of Michigan Home Buying Conditions minus Selling Conditions (not shown).
8/ What is more is that the US ZEW Expectations usually lead S&P 500 EPS revisions as well, implying that we might have already seen maximum pessimism & bearishness among equity analysts in April.
9/ Bottom Line: Despite the catastrophic data in April, there appears to be some light at the end of the tunnel. We are already experiencing the reset of the old cycle & the emergence of the new one. This is most-likely due to Fed easing & an increase in excess liquidity.
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