Treasury's Mnuchin open to blanket forgiveness for smaller business relief loans

WASHINGTON (Reuters) – U.S. Treasury Secretary Steven Mnuchin said Friday policymakers should consider blanket forgiveness for all smaller businesses that received “Paycheck Protection Program” loans.

Mnuchin told lawmakers that they should consider such an approach to reduce complexity, coupled with some form of fraud protection.

He also said the Trump administration supports adding more funds to the $660 billion program, as well as allowing especially hard-hit businesses to apply for a second emergency loan.

He did not define how small a loan would have to be to qualify for automatic forgiveness, and added it should be paired with some form of fraud protection without going into detail. Several business and banking groups have pushed for blanket forgiveness for all loans under $150,000, arguing the requirements for applying for forgiveness under the program are too complex.

His comments come as Congress is preparing further economic relief legislation to support businesses and people harmed by pandemic lockdowns. Roughly $100 billion remains in the PPP, a forgivable loan program created by the initial stimulus package, is set to expire on Aug. 8.

Mnuchin added that he would also support applying some sort of “revenue test” to future PPP loans to make sure the remaining funds go to businesses that need it the most. The PPP has come under criticism after wealthy and larger companies secured loans under the program, which was billed as relief for small businesses.

“This time, we need to have a revenue test and make sure that money is going to businesses that have significant revenue declines,” he said.

He also said he would support efforts to set aside a portion of remaining PPP funds for minority-owned businesses, amid concerns from some lawmakers that those businesses were struggling to secure funding.

U.S. Consumer Sentiment Posts Surprise Drop After Surge in Virus

The University of Michigan’s preliminary sentiment index decreased 4.9 points to 73.2, according to data Friday, reversing most of the prior month’s 5.8-point gain. The median projection in a Bloomberg survey of economists called for a slight increase to 79, with estimates ranging from 75 to 85.

The gauge of current conditions dropped 3.9 points to 84.2, while a measure of expectations declined 6.1 points to 66.2.

The decline is a potentially troubling sign for the economy and underlines that confidence and consumer spending will be closely tied to whether the rapidly spreading coronavirus is brought under control. Americans’ economic health also depends on whether lawmakers extend benefits such as the extra $600 in weekly unemployment payments that are set to lapse this month.

“Unfortunately, declines are more likely in the months ahead as the coronavirus spreads and causes continued economic harm, social disruptions, and permanent scarring,” Richard Curtin, director of the survey, said in a statement. Without further action by Congress, “another plunge in confidence and a longer recession is likely.”

Stocks struggled to maintain early gains and Treasury yields were little changed after the figures.

Americans’ view of the five-year economic outlook declined to the lowest level since 2014, while expectations for personal finances as well as current buying conditions for durable goods also declined.

One bright spot in the report was a greater share of consumers reporting an improvement in their personal financial situation, though the gains were concentrated among younger and upper-income households.

The decline in sentiment spanned partisan lines, with Democrats, independents and Republicans all seeing drops, though Democrats remained far more pessimistic than Republicans.

The Michigan survey was conducted June 24 through July 15. The final consumer sentiment report for July will be issued July 31.

©2020 Bloomberg L.P.

Fed opens 'Main Street' to non-profits, eases terms from original plan

The loan terms were broadened significantly from an initial proposal floated by the Fed in mid-June, including lowering the employee threshold from 50 workers and easing some revenue and operating margin requirements developed as a way to rate the financial health of non-profit organizations.

“Nonprofits provide vital services across the country and employ millions of Americans,” Federal Reserve Chair Jerome Powell said in a statement. “We have listened carefully and adapted our approach so that we can best support them in carrying out their vital mission during this extraordinary time.”

U.S. Bank CEOs Warn of Tougher Economic Road After Recent Gains

In the wake of brighter data on employment, retail sales and housing over the last two months, most financial-institution executives curbed their enthusiasm about the economy during the kickoff to the latest earnings season — even as some of their own profits rose.

“There is no question as reopening has occurred, we’ve seen a pickup in that activity,” David Solomon, chief executive officer at Goldman Sachs Group Inc (NYSE:GS)., said on the firm’s July 15 earnings call. But with a recent uptick in Covid-19 cases in several states “and this uncertainty persisting, I think you’ll see a flattening in that economic pickup and that will slow the progress we make.”

JPMorgan Chase (NYSE:JPM) & Co. CEO Jamie Dimon was just, if not more, skeptical that the recent pace of improvement in the economy will endure.

“You’re going to have a much murkier economic environment going forward than you had in May and June,” Dimon said on JPMorgan’s July 14 call. “You are going to have a lot of ins and out. You are going to have people scared about Covid. They’re going to be scared about the economy, small businesses, big companies, bankruptcies, emerging markets. So it just could be murky.”

While employers have added 7.5 million workers to their payrolls in the past two months, the number of Americans on state jobless benefit rolls remains stubbornly high at more than 17 million. Meantime, the virus continues to inject a steady stream of uncertainty into recovery efforts. Some 22 states have either reversed or paused reopenings, according to Bank of America Corp (NYSE:BAC). economists.

Bank of America CEO Brian Moynihan told analysts Thursday that “baseline projections now extend the length of the recessionary environment into 2022, deep into 2022.”

Michael Corbat, Citigroup Inc (NYSE:C).’s CEO, is viewing the virus-economic relationship through four stages — containment, stabilization, normalization and ultimately a return to growth.

“I would describe right now that, broadly in the world, we are somewhere between containment and stabilization,” Corbat said on the firm’s July 14 call. The stabilization phase would include removal of some actions put in place to contain the virus, such as social distancing.

“Normalization to me is: Am I willing to get on the airliner, am I willing to get in a subway, am I willing to go into a crowded venue to watch a sporting event or a concert or what it may be?” Corbat said, adding that that won’t occur until “a vaccine that’s available for the mass population.”

For its part, the Federal Reserve has effectively ensured the proper function of capital markets, according to Charles Scharf, Wells Fargo (NYSE:WFC) & Co.’s CEO.

“However, the economic recovery will not be smooth,” Scharf said on the bank’s July 14 call. “Much of the economy is still essentially closed. We’re just beginning to open, and additional restrictions are being implemented as the spread of the virus continues to increase in many areas of the world.”

©2020 Bloomberg L.P.

The EU recovery fund's feast for the East

LONDON (Reuters) – The European Commission’s proposed 750 billion euro ($853.35 billion) coronavirus recovery fund for EU member states implies an unexpectedly generous package for countries in central and eastern Europe that could significantly benefit their economies.

The CEE region accounts for around 11% of the 27-member European Union's gross domestic product but has been provisionally allocated 187 billion euros, or 25%, of the ‘Next Generation EU' plan's money.

In gross terms, Poland and Romania would receive the largest sums in CEE at 65 billion euros 33 billion euros respectively. Scaled as share of GDP, Croatia and Bulgaria would get the biggest boost.

“The extent to which CEE countries, many outside of the Euro area, are supported by the EC’s recovery package came as a positive surprise to the market,” analysts at JP Morgan said.

(Graphic: Potential allocation of EU recovery fund as share of GDP, https://fingfx.thomsonreuters.com/gfx/mkt/xegpbmrxkvq/Pasted%20image%201594924346874.png)

The recovery fund proposal is currently split between 500 billion euros of loans and 250 billion of ‘grants'. The money is intended for projects spanning 2021-2024, though absorption could be allowed to leak into 2025-2026 as well.

It comes alongside the proposed 1.1 trillion euros EU’s regular seven-year budget for 2021-2027, meaning the CEE bloc could draw in a lot of money over that period.

The recovery fund will likely come with substantial strings attached. The ‘grants' portion will be distributed to finance specific projects in line with the Commission’s agenda and subject to its authorisation.

That has rankled with Hungary's Prime Minister Viktor Orban, whose criticisms of Brussels and clampdowns on academics, media freedom and civil society have long been a thorn in the EU's side.

What Poland gets will be also be closely watched. The EU has been voicing concerns about an erosion of democracy there too https://www.europarl.europa.eu/news/en/press-room/20200109IPR69907/rule-of-law-in-poland-and-hungary-has-worsened and Poland's freshly re-elected President Andrzej Duda ran an acrimonious campaign laced with homophobic language and attacks on private and foreign-owned media.

(Graphic: Coronavirus has caused huge slump in CEE economies, https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrrgagve/Pasted%20image%201594920899785.png)

Central and eastern European economies outperformed after the global financial crisis a decade ago. Taking into account the increased funding, they should be able to consistently outgrow their Western European neighbours.

However, given the lags in absorbing EU money, the degree to which this can materialise is unclear.

Looking only at investment-related disbursements, analysts calculate annual investment funding for CEE countries could range from 2.4% of GDP in the Czech Republic to 8.5% in Croatia. In some countries, such as Bulgaria and Croatia, available funds could exceed public sector investment.

Disbursements of EU funds could also significantly reduce borrowing needs for many countries, though the loan portion would have to be repaid.

Due to the Czech Republic's high income and low debt levels, it could find itself a net contributor to the pot for the first time under NGEU, even if only by a symbolic net 0.3% of GDP.

(Graphic: EU investment funds per year to 2024 as share of GDP, https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwwqabvw/Pasted%20image%201594982884732.png)

(Graphic: Net allocation of EU recovery fund money as share of GDP, https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdldbmpo/Pasted%20image%201594918074652.png)

In the short term, German stimulus could prove even more important, Societe Generale (OTC:SCGLY)'s Marek Drimal added, given how much CEE firms sell to Germany and its manufacturers.

(Graphic: CEE exposure to large European economies, https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzwxljvw/CEE%20exposure%20to%20large%20European%20economies.PNG)

Take Five: Hoping for that V-shape in earnings

We knew Q2 earnings would be dire but the hope was a) they might turn out to be better than feared and b) companies could offer guidance on the outlook. So while expectations are for European Q2 earnings to slump 50%-plus, there's margin for error.

Scandinavian banks, first out of the blocks, have surprised positively, with DNB, SEB, Swedbank and Handelsbanken beating forecasts. Trading revenues were a bright spot for them, and for many U.S. lenders so that segment should perform well in the rest of Europe too. Investors will also watch for banks' loan-loss provisions, after large amounts were set aside in Q1.

There are hopes, too, that sectors such as industrials might have benefited from recovering June activity. Those due to report include Unilever (NYSE:UL), , chipmaker STMicro and pharma Roche

(Graphic: US versus Europe earnings, https://fingfx.thomsonreuters.com/gfx/buzz/yzdpxrlnxpx/Pasted%20image%201594975539796.png)

2/SHOW US THE MONEY, TESLA

This year's 260% surge in Tesla (NASDAQ:TSLA) Inc shares has widened the divide between the electric carmaker's sceptics and believers. All eyes therefore will be on its Q2 earnings report, due July 22. Higher-than-expected Q2 vehicle deliveries, announced earlier this month, have raised hopes the company will defy Wall Street estimates to show a profit. It would mark Tesla's first cumulative four-quarter profit, a key hurdle it needs to vault to join the S&P 500.

Tesla doesn't have a great track record of delivering positive surprises – only in six of the last 17 quarters did it top Wall Street analysts' mean estimate for GAAP net income. And this time too, a GAAP net loss of $275.2 million is expected, Refinitiv IBES data shows.

(Graphic: Tesla – earnings surprise history, https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwwmdrpw/Pasted%20image%201594932415092.png)

3/PUNCH-DRUNK

China's national drink ‘baijiu' doesn't froth like beer, but there was froth a-plenty in the shares of premium baijiu maker Kweichow Moutai Co., China's most valuable company. So much so that authorities felt the need to temper their rise.

The stock tumbled and Chinese equities had their worst week in five months, after the influential People's Daily thundered: “alcohol is meant for drinking, not for speculation or corruption”.

But warnings about the $285 billion Moutai stock were likely aimed at calming tipsy markets, rather than reversing the rally. China has made clear that deeper capital markets are central to its growth strategy; part of that is the upcoming revamp of the Shanghai benchmark and the launch of a Nasdaq-style startup index called the STAR Market.

(Graphic: China stocks surge, https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkalgbvm/Pasted%20image%201593752727405.png)

4/DRUM ROLL FOR PMIS

PMI data took a bit of a backseat lately — essentially Q2 figures were dismissed as reflecting, first, the activity collapse sparked by lockdowns and then, a rebound as restrictions lifted. But upcoming July releases will draw attention as investors seek clues on the outlook.

China's manufacturing PMI is already back above 50 — the line dividing contraction from expansion — and the euro zone is not far behind. Any signs of recovery taking hold will boost investor sentiment.

Then again, unease could follow as investors fret that the fiscal and monetary life support of the past few months could start to be unwound.

(Graphic: Time for the PMIs, https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkaodrvm/theme1707.PNG)

5/FEELING LOW

Emerging-market policymakers have been busily slashing interest rates to heal economies devastated by the coronavirus. With central bank meetings due in some developing economies, expect more cutting. First — Hungary. It's expected to trim rates by 0.15 basis points on Tuesday after a surprise June cut.

Slowing inflation may also leave room for South Africa to trim its benchmark rate on Thursday. The same day, Turkey must square its rising inflation with industrial production and retail sales data that show some recovery, but not to pre-COVID-19 levels. Odds are it will keep rates unchanged.

Russia rounds off the grand slam on Friday with central bank chief Elvira Nabullina expected to follow though on her signal for more rate cuts.

(Graphic: EM central banks keep cutting rates, https://fingfx.thomsonreuters.com/gfx/editorcharts/yzdpxrkxypx/eikon.png)

Bank of England's Bailey sees UK economy beginning to recover

“We are seeing activity return. We are beginning to see this recovery,” Bailey said during a webinar organised by the central bank.

There were signs of activity returning “quite strongly” in the housing market and in new car sales, but not in hospitality and entertainment, which employ large numbers of people, many of them on low pay, he said.

There was a “very big question” about how cautious people would be about returning to life as before the crisis and there were also risks of a second wave of COVID-19, or localised outbreaks, Bailey said.

Furthermore, the BoE did not know how much long-term damage the economy would suffer as a result of companies failing.

“We don't yet know the full story of this,” he said, in response to a question about whether he shared the view of BoE Chief Economist Andy Haldane that the economy looked like it would have a swift V-shaped recovery.

Earlier this week, Britain's budget forecasters said the economy could shrink by more than 14% this year if there is lasting damage from the coronavirus.

Lebanon's advisers to work on compromise on financial plan, sources say

The plan, which anticipates vast losses in the financial system, has been undermined by objections from Lebanon's ruling elite, obstructing IMF talks aimed at rescuing the country from a financial meltdown.

Prime Minister Hassan Diab's government had approved the plan, which would lead to losses of 241 trillion Lebanese pounds in the financial system, or $68.9 billion at the exchange rate applied by the plan, as the basis for talks with the IMF.

The IMF said the losses appeared to be about the right order of magnitude.

But a parliamentary fact-finding committee, backed by all Lebanon's main parties, objected to the approach taken in the plan. Applying different assumptions, it came up with losses between a quarter and half that amount.

“Lazard will come possibly next week to see if they can adjust the government plan and work on a compromise acceptable to the IMF. They will do any adjustment based on the government plan,” one of the sources said.

The second source said the aim of the Lazard visit is “how we can try to adjust the government plan to see if we can come up with something workable for the IMF and for the Lebanese counterparts”.

Lazard declined to comment.

Lebanon's legal adviser, Cleary Gottlieb Steen & Hamilton LLP, is also visiting the country, the sources said.

The IMF warned Lebanon on Monday that attempts to lower losses from the financial crisis could only delay recovery.

Alain Bifani, a senior member of Lebanon's negotiating team with the IMF, resigned as finance ministry director general last month, saying vested interests were undermining the government plan.

Boris Johnson Relaxes U.K. Work-From-Home Rules After Lockdown

Anyone will now be able to use public transport, Johnson said in a televised press conference on Friday, marking a change from guidance to avoid it where possible. And from August 1, he said employers will have “more discretion” on bringing staff working from home back into offices.

With the economy shrinking a fifth in the three months through April, Johnson and Chancellor of the Exchequer Rishi Sunak are trying to revive economic activity and stave off an expected wave of job cuts as the government tapers support for businesses and continues to ease a lockdown that began on March 23.

But the prime minister’s advice on Friday puts him at odds with Patrick Vallance, his chief scientific adviser, who told Parliament’s Science and Technology Committee on Thursday that he could see “absolutely no reason” to change guidance for people to work from home if they can.

“We’re still at a time when distancing measures are important, and of the various distancing measures, working from home, for many companies, remains a perfectly good option because it’s easy to do,” said Vallance, who heads up the government’s Scientific Advisory Group for Emergencies. “A number of companies think actually it’s not detrimental to productivity.”

Ministers are responding to concerns that shops and restaurants in city centers will struggle to survive if people who work in the offices around them continue to work from home. Vallance himself acknowledged that the government also has economic considerations to bear in mind as he sought to distance himself and his committee from policy decisions.

“What we’re doing is laying out scientific reasons behind options from which people can choose,” Vallance said. “Overlaying that with economic and other considerations is the job of government.”