Markets have gone stark-raving mad on Friday in anticipation of either a viral apocalypse, a coordinated central bank response to recent turmoil, or both.
Although the headlines are understandably dominated by the dramatic moves in equities, rates have gone crazy attempting to price in the Fed’s reaction to recent events. That, despite officials’ increasingly belabored efforts to play down those expectations. Yields collapsed across the curve Friday, with easing bets showing up all over the place, and evident in the bull steepening bias.
STIRs are plain manic. “Markets are pricing in stunningly aggressive Fed and global central bank interventions now with imminent rate cuts”, Nomura’s Charlie McElligott writes, before exclaiming that one enormous trade/ hedge in the market yesterday playing for an absolute CRASH was 350k ‘Par Calls’ (EDM0 99.75 / 100 Call Spread) for June, meaning ZIRP for the Fed by June!”.
Read more: MOVE Spikes To Three-Year High, Markets Price Aggressive Fed Cuts Amid Global Panic
Given the snowballing expectations for Fed action, this isn’t totally surprising, but you’d be remiss not to note that three-month USD Libor fixed lower by 11.763bp on Friday.
That looks like the largest decline since December 2008.
(BBG)
Again, this is just another manifestation of just how convinced markets are that the Fed is destined to cut rates, regardless of their incessant parroting of the “good place” monetary policy line, which was still being bandied about as equities melted down this week.
“The rapid global spread of the COVID-19 coronavirus represents a major deterioration of the economic environment”, JonesTrading’s Mike O’Rourke said, in a Friday morning note, adding that “the global recession fears create an economic threat that makes it very plausible, actually likely the Federal Reserve will respond with surprise easing”.
And yet, hanging over it all is the only question that really matters right now: What, exactly, is a 25bp (or even a 50bp) emergency rate cut going to do when it comes to solving a problem that is biological, not economic or financial? O’Rourke (and plenty of other commentators) have been keen to pose that question to anyone willing to listen this week.
Spoiler alert: Nobody has any answers.
You can supply the world with dollars and generally make sure there’s ample liquidity, but this isn’t a liquidity crunch – it’s a pandemic.
“Fed Funds pricing over a full 1.13 cuts by March, 1.64 cuts by April, 2.24 cuts by June”, McElligott went on to say Friday, before underscoring the incredulity evident in many corners. “The common refrain by many is ‘what will that do to stimulate consumption when people won’t be leaving their houses and borders with be shuttered?'”
