- Fed’s rate cut fails to offset stock market concerns about the coronavirus
- Fed kicks off what is likely to be a string of global interest rate cuts
- 10-year T-note yield falls below 1.00% to record low while global negative-yielding debt rises to $14.3 trillion
- Oil prices rally as OPEC+ committee recommends larger cut for this week’s meeting
- U.S. economic data will not yet fully display virus effects
Fed’s rate cut fails to offset stock market concerns about the coronavirus — The Fed on Tuesday announced a surprise -50 bp cut in its federal funds target range to 1.00%/1.50%. The markets had expected that -50 bp rate cut but not until the regular FOMC meeting in two weeks on March 17-18.
Yesterday’s rate cut by the Fed initially gave the stock market a boost. However, the stock market sold off sharply as the day wore on as the markets faced up to what could be a long siege in battling the virus. The markets noted Fed Chair Powell’s comment Tuesday morning that the outbreak of the coronavirus and measures to contain it will weigh on economic activity “for some time.” In addition, Cleveland Fed President Mester (voter) said, “the underlying fundamentals of the U.S. economy remain strong, but the coronavirus will weigh on U.S. growth at least during the first half of the year, with a pullback in spending by households and businesses.”
The markets were also rattled by the news in recent days about the low number of Americans who have been tested for the virus because of a defect in the CDC’s first test kit for the coronavirus. As of Monday, the CDC said that it had tested fewer than 500 Americans for the coronavirus, according to an article Tuesday in the New York Times.
That raised market concerns that U.S. health authorities actually have very little data on the extent to which the virus might have already spread within the U.S. population. The U.S. government has plans to massively ramp up testing this week, which might give the markets a better idea of the size of the problem the country is facing.
In the meantime, the 8th and 9th American deaths from the virus were announced on Tuesday. An increasing number of public events and conferences are being canceled. Ford Motor Co on Tuesday banned all business travel, illustrating how businesses are starting to react to the virus.
Fed kicks off what is likely to be a string of global interest rate cuts — While the Fed cut rates by 50 bp on Tuesday, the markets reacted by boosting expectations for Fed easing by year-end by an additional 15 bp (or 0.6 rate cut). Specifically, the Dec 2020 federal funds futures contract on Tuesday fell by -15 bp to a yield of 0.445%, indicating expectations for another 68 bp of easing (or 2.7 more rate cuts) by year-end, in addition to yesterday’s -50 bp rate cut.
The markets are now expecting a string of rate cuts by G-7 central banks during March. The market is discounting a very strong chance of a 50 bp of easing by the Bank of Canada at its meeting today from its current policy rate of 1.75%. The markets are expecting the ECB at its meeting next Thursday (March 12) to cut its deposit rate by another -10 bp to -0.60% from its current level of -0.50%.
The Bank of England at its meeting on March 26 is expected to cut its base rate by at least 25 bp from the current level of 0.75%. The Bank of Japan already has its policy rate at -0.10% and it remains unclear whether the BOJ at its March 19 meeting will cut that rate further into negative territory and/or reduce the target rate for the 10-year JGB yield from the current level of zero.
Rate cuts are likely across most of the rest of the world. Australia and Malaysia, for example. cut rates yesterday.
10-year T-note yield falls below 1.00% to record low while global negative-yielding debt rises to $14.3 trillion — The 10-year T-note yield on Tuesday plunged below the psychological level of 1.00% to a new record low of -0.904%. The 10-year yield then recovered by about 10 bp from the daily low but still closed the day sharply lower by -16.4 bp at 0.999%. The 2-year T-note yield on Tuesday fell to a 3-3/4 year low of 0.66% and closed the day sharply lower by -20 bp at 0.70%.
The sharp drop in U.S. interest rates is part of the overall global trend towards lower interest rates due to the economic damage being caused by the coronavirus. The amount of negative-yielding global debt on Tuesday rose to $14.3 trillion, just below last Friday’s 5-month high of $14.6 trillion, according to Bloomberg data. The massive amount of negative-yielding foreign debt illustrates that there is a strong incentive for foreign investors to buy U.S. Treasury securities, which at least still carry a positive yield.
The S&P 500 index on Tuesday fell sharply by -2.81% but remained above last Friday’s 6-month low, where the index corrected lower by a total of -15.8% from the mid-February record high. The VIX on Tuesday closed +3.40 at 36.82, but remained well below last Friday’s 2-year high of 49.48.
Oil prices rally as OPEC+ committee recommends larger cut for this week’s meeting — April crude oil prices on Tuesday closed up +0.92%, adding to Monday’s gain of +4.45%. The OPEC+ Technical Committee on Tuesday announced a recommendation for OPEC+ members at their meeting on Thursday-Friday to cut production by between 600,000 bpd and 1.0 million bpd. That was more aggressive than their recommendation last month for just a 600,000 bpd cut. The markets are expecting Russia to go along with a production cut of some size since oil prices are likely to plunge otherwise as the global oil surplus swells on the plunge in demand caused by the coronavirus.
U.S. economic data will not yet fully display virus effects – The consensus is for today’s Feb ADP employment report to show a gain of +170,000, down from Jan’s +291,000. Today’s Feb ISM non-manufacturing index is expected to show a mild decline of -0.6 to 54.9, reversing Jan’s +0.6 point rise to 55.5. Today’s Beige Book will give a snapshot of the U.S. economy as the coronavirus began to hit.
