A Doomed Cavalry Charge? Rates Rage On Wild Central Bank Easing Speculation

The Bank of England joined the BoJ in seeking to calm markets with soothing rhetoric, but risk assets remain on edge as growth warnings proliferate alongside cases of the coronavirus.

The BOE said it’s coordinating with UK and international authorities to “ensure all necessary steps are taken to protect financial and monetary stability”.

“The coronavirus added a new layer of uncertainty to global and euro-area growth prospects”, ECB Vice President Luis de Guindos said in London, adding that “the outbreak has the potential to affect the euro area economy through both demand- and supply-side channels”. He went on to say that the bank “remains vigilant and will closely monitor all incoming data”. Then, he delivered the pledge: “The Governing Council stands ready to adjust all its instruments, as appropriate, to ensure that inflation moves toward its aim in a sustained manner”.

In another example of the measures being deployed Monday, Indonesia slashed lenders’ foreign exchange reserve requirement ratio to 4% from 8%. That move should free up some $3.2 billion in liquidity.

Traders are now all but sure that a coordinated response is coming. “We suspect that [central banks] view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move”, Goldman said over the weekend, in the course of upgrading (if that’s the right word) their call for Fed easing for the second time in three days. They also see the BOE and the ECB cutting rates by 50bps and 10bps, respectively.

Markets, meanwhile, are now pricing in 20bps worth of ECB cuts, compared to expectations for 14bps as of Friday. A 10bps cut at next week’s meeting is almost fully priced.

That seems entirely aggressive (it would push the policy rate in Europe to minus 0.15%), but that’s where we are. And speaking of aggressive expectations for policy easing, the US 2s30s has steepened more than 30bps in a week.

That “straight-line” steepening comes courtesy of the 2-year, where yields plunged as much as 19bps on Monday, on top of last week’s “largest since the crisis” drop.

“Ultimately, the nature of this shock, which we believe will have a significant adverse impact on first half growth with high probability and at the very least represents a substantial downside risk to the outlook… are likely to bring about Fed rate cuts before the evidence of the disruption is clear in the data”, Deutsche Bank said, updating their Fed call.

Deutsche sees the Fed cutting by 25bps at the next two meetings, taking the fed funds rate down to 1.1% by the April meeting. “However, we view the risks as being tilted towards the Fed needing to provide more accommodation, and given the rapidly evolving nature of this risk, we will continually reassess this expectation”, the bank says. At one point Monday, money markets were pricing in 63bps of Fed rate cuts this month and a cumulative 100bps of easing by July.

10-year yields in the US fell to just 1.05%.

3-month dollar Libor plunged -20.9bp at 1.25375%, the second straight day it’s posted a “biggest since 2008” drop.


Analysts are cautious about the assumption that rate cuts can help. Indonesia reported its first case on Monday, as did Portugal and India said it has two new infections. Germany’s case total jumped to 150. Iran’s cases jumped a harrowing 50% to 1,501. The death toll in the country is now 66. There are 7,280 suspected cases.

Goldman banned all non-essential business travel.

In addition to central banks, G-7 finance ministers are set to hold a group phone call this week. “[There will] be concerted action”, French Finance Minister Bruno Le Maire said.

“It’s the start of a new month and there are hopes of Fed easing, and fiscal easing all over the place”, SocGen’s Kit Juckes Monday. “All is for the best in this best of all possible worlds. Or is this just an exhilarating but doomed cavalry charge into a dead end?”


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

7 thoughts on “A Doomed Cavalry Charge? Rates Rage On Wild Central Bank Easing Speculation

  1. Keeping with the pseudo-Western theme, I think the Fed (and other central banks) have led us like cattle into a blind canyon with their artificial interest rates. Where would the Dow be if interest rates were at those of the past several hundred years (about 2.5-3% + inflation)? I wouldn’t loan the government money at 1.1% when their inflation target is 2%. We keep borrowing our walking around money even in what advertised as “the best economy ever”. I have low confidence in the current administrations ability to handle either crisis.

    Covefefe-45 looks at Covid-19 as a “marketing problem”. Hammer/Nail, I guess… I’m a believer in the stock market, I’ve been 100% stocks forever, but my own mortality is shaking my confidence. I hope I’m wrong on everything, but after 1987, 1999, 2008, I don’t want to get clipped again. I just hope we don’t start another world war to get out of it.

    Right now the S&P 500 is about where it was October of 2019. It’s still not that bad a time to sell if you’re unsure. At my age I may not live long enough to recover a 30-40% drop. The market’s had a great run and no one ever sells at the top or buys at the bottom. So you give back 10% on paper. The virus is still spreading and layoffs haven’t even started. I think this could be like a worldwide rolling 9/11. About 10% of world GDP is directly or indirectly related to travel and tourism. Clip a lot of that off world output and all I see is cascading layoffs. Plus the lockup of the Chinese supply chain? The election is the least of our problems.

    2-year, now .73%, Good Christ

    1. Exactly, I think a whole bunch of people looking to retire in the next few years are looking really hard at the gains since 2008 and the loss from the peak and thinking… yeah I may as well lock this up if I want to retire on my current schedule. The first ones out the door will get to do just that.

      1. OK, so Devil’s Advocate-ing here, what do the 10,000 people turning 65 daily do for yield? Spend the principal down, but save just enough for a bullet? Or just keep working as long as they can (or will be allowed to)?

        1. The dollar and bonds have been rallying for the entirety of 2020. Anyone close to retirement age should have been able to offset a significant portion of their equity losses with gain in their fixed investments.

          As far as going forward, for the time being capital preservation is a great deal more important than chasing yield.

  2. All is for the best in this best of all possible worlds. Or is this just an exhilarating but doomed cavalry charge into a dead end?”

    References to Voltaire and “Charge of the light Brigade” in one quote. I’ve found bears tend to be well rounded literate people.

    Alas the bulls remind me of Ogre from “Revenge of the Nerds”, always shouting for “MORE BEER!”

NEWSROOM crewneck & prints