The Market Today
Fed Cuts to Near-Zero, Restarts QE Amid Deepening Crisis
by Craig Dismuke, Dudley Carter
FED’S WEEKEND RETURN TO CRISIS POLICY SETTING
Fed Shocks with Sunday Surprise Decision to Return to Emergency-Era Policy: In a second emergency policy decision in two weeks, the Fed cut their overnight target rate range by 100 bps to 0.00%-0.25%. The rate for required and excess reserves was dropped to 0.10%. In addition, “over the coming months” they will increase their Treasury holdings by at least $500 billion and their MBS holdings by at least $200 billion. The move appears designed to both lower rates and spreads and provide additional liquidity. According to the Implementation Note, “The Committee instructs the Desk to conduct these purchases at a pace appropriate to support the smooth functioning of markets for Treasury securities and agency MBS.” In addition, the Fed is lowering its primary credit rate 150 bps to 0.25% and will allow banks to borrow from the Discount Window for terms as long as 90 days. Further, the required reserve ratio has been lowered to zero percent effective March 26. To encourage lending, the Fed advised banks to use their capital and liquidity buffers which they’ve been building to ensure the flow of credit remains uninterrupted to households and businesses.
Coronavirus Has Harmed Global Economy: The official policy statement notes that, “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.” It goes on to justify the policy decision saying, “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.” Looking forward, the Statement indicates that the rate range will remain at 0.00%-0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Nine participants voted in favor of the decision and Cleveland Bank President Loretta Mester dissented, preferring instead to only cut 50 bps.
The coronavirus continues to wreak havoc globally. Over the weekend, France and Spain joined Italy in calling for country-wide quarantines. In the U.S., the C.D.C. recommended that people cancel any gathering with more than 50 people for the next eight weeks. This will make it difficult for schools to re-open and will further erode economic activity. The expected economic impact continues to grow.
Coronavirus Chartbook: We have added a PDF version of our Coronavirus Chartbook for those working remotely. For the original PWPT slides: Coronavirus Chartbook (PWPT) For the PDF version: Coronavirus Chartbook (PDF/Mobile)
New York Fed Index Shows Sharpest Monthly Decline on Record: The economic data are irrelevant for now. In this morning’s data, the March Empire Fed Manufacturing Index saw its largest monthly decline on record, falling 34.4 points to -21.5 The index is now at its lowest point since 2009.
Foreign Markets Open to Different Trading Terrain: Foreign markets opened into an entirely different trading context Monday following the national emergency declaration in the U.S. on Friday, weekend developments that reinforced the devastating global economic effects of COVID-19, and an unscheduled Fed decision on Sunday to return to emergency-era monetary policy. U.S equities roared late Friday afternoon after President Trump declared a national emergency to release $50B in funds to support virus efforts, and announced a partnership with the private sector to significantly enhance the country’s testing capacity (more below). That optimism, however, was quickly overtaken by the continuous flow of negative headlines about how the virus is impacting the global economy.
Worrisome Weekend Developments: Cases continued to exploded across Europe, leading France and Spain to join Italy in implementing country-wide quarantines in hopes to slow the fast-spreading infection. In the U.S., pictures of airline passengers returning from Europe to long, crowded screening lines for testing went viral on social media. The U.S. expanded the European travel ban to include the U.K. and Ireland. There were wide-reported runs on groceries that cleared out shelves of stores across the country and Apple announced it was closing all of its global retail locations outside of China. President Trump tested negative for the virus after coming into contact with an infected individual and Georgia followed Louisiana in postponing upcoming presidential primary elections. After a weekend of arguing about the appropriateness of some who were still crowding bars and restaurants, despite calls for social distancing, the CDC released guidance late Sunday that called for postponing gatherings of 50 or more individuals, excluding businesses and schools, for the next eight weeks.
Fed Cuts to Zero and Calls for Bond Purchases: The obvious economic impact of the evolving virus situation and response from major world economies shutting down to slow its spread led to another surprise Fed decision late Sunday afternoon. At 4 p.m. CT, the Fed announced it was cutting its target range by 1.00% back to near 0.00% and instructing the New York Fed to buy $700B in bonds in the coming months. Those actions, as well as others announced as part of the decision, were intended to “support American families and business and the economy overall and to promote the flow of credit as we weather disruptions caused by the coronavirus,” Powell said in an evening press conference. As expected, interest rates tumbled when Asian markets opened with the 2-year yield falling as many as 23 bps to 0.26%, a low back to November 2013. The 10-year yield dropped as many as 34 bps to as low as 0.62%, holding above levels from last Monday and Tuesday.
Equities Sell Off After Fed Action Shows Recession Risk is Rising: Still, investors appeared spooked by the Fed’s action and Powell’s uncertain outlook as a signal that the prospects of a recession are growing. He admitted that the economy is likely to contract in the second quarter and said because the outlook beyond that is so unclear, the Fed is foregoing providing economic projections for now; they had been scheduled to release a refreshed outlook this week in the SEP. U.S. equity futures fell sharply at the open, limiting down with a 5% decline in the first fifteen minutes that halted trading. While many other central banks joined the Fed in a coordinated effort to ease conditions – banks in New Zealand, Australia, Japan, South Korea – most Asian markets followed suit. Most indexes in Asia fell more than 3%, led by a record 9.7% decline in Australia’s ASX 200. Europe’s Stoxx 600 plunged more than 8% and while U.S. futures remain halted for trading, a key index tracking an S&P 500 ETF was down more than 9% at 7 a.m. CT. Bonds yields were off their lows, with the 2-year yield now down 14.8 bps to 0.34% and the 10-year yield 19.0 bps lower at 0.77%.
ICYMI – March 13, 2020 Weekly Market Recap: Market worry picked up in mid-February as COVID-19 began to spread around the globe, with the volatility reaching nearly unprecedented levels last week as the uncertainty began to disrupt daily life in the U.S. While the statistical data tracking the virus has been increasingly concerning for weeks, COVID-19 finally struck a blow to real-life events that caused consumers to take notice. The NBA announced late Wednesday that it was suspending the remainder of the season after a player tested positive, the first of a long list of popular sporting leagues that cancelled, postponed, or significantly altered their seasons and events. Those headlines were surrounded by reports of school closings around the country and, hardly believable, the shuttering of rarely-disrupted destinations such as Broadway and Disney World. As the anecdotes reinforced the economic damage that the virus is causing around the globe, markets came unhinged.
The S&P 500 experienced average daily volatility that exceeded any five-day stretch during the Great Financial Crisis and was only surpassed by market crashes in 1987 and during the Great Depression. Tripping circuit breakers several times along the way, the index posted its largest fall Thursday since 1987 and its sharpest gain Friday since October 2008. Causing concerns of market dislocations and liquidity issues, Treasury yields swung wildly and actually rose. The 10-year yield traded in a 70 basis-point range, the most volatile week since 2008, ultimately rising 22 bps as the S&P 500 slumped 8.8%, the second worst weekly decline since 2008. The expected economic calamity continued to draw responses from world governments and central banks, including the White House and Federal Reserve. The Fed announced historic liquidity offerings through its repo operations and the White House declared a national emergency and announced a partnership with the private sector to ramp up and widen testing efforts across the U.S. And that summary doesn’t cover half of what happened last week, including a price war between Saudi Arabia and Russia that sparked the weekly selling and sent oil prices to their biggest weekly collapse since 2008. Click here to view the full recap and see more details from the historic week.