The plan on Tuesday was for G-7 finance ministers and central bankers to issue a joint statement to reassure investors who, hopefully, would be feeling pretty good about things after Monday’s “best-in-a-decade” rally on Wall Street and an overnight RBA rate cut.
Then, once the the communique had a couple of hours to resonate, the Fed would cut rates by 50bps just a half-hour into the US cash session. After that, Powell would hold a press conference an hour later.
Policymakers probably assumed all of that together would surely bolster sentiment and propel US equities to another gain. At the least, frayed nerves would be calmed, even as the world stares down a black swan (or, if you’re in the camp that contends we always knew it was just a matter of time before a pandemic posed a grave threat to the global economy, call COVID-19 a “gray rhino”).
It didn’t work out that way.
Instead, US equities careened sharply lower with bond yields, as frazzled markets reacted in deer-in-headlights fashion. 10-year US yields actually sank to 0.90% at one juncture, after breaching 1% for the first time ever, possibly bringing in convexity flows, which may have amplified the move. At the lows, 10-year yields were down nearly 26bps on the day.
2-year yields, meanwhile, fell as much as 28.1bps – the two-week move is on the order of 65bps now. It is, in a word, astonishing. As Bloomberg’s Edward Bolingbroke notes, index swaps priced in “30bp of additional rate cuts into the March meeting, with 50bp priced into the June FOMC [while] other global bank OIS followed suit starting with almost 50bp of cuts priced into Wednesday’s Bank of Canada policy meeting”.
You might very well argue that, very much contrary to what the Fed intended to accomplish, Jerome Powell scared everyone to death. That, despite delivering precisely what the market had spent the last week effectively begging for.
It’s the old “what do they know that we don’t?”, worry. And it has to be especially maddening for the Fed, because officials were likely wondering the same thing about money markets last week.
In any event, the news flow around the virus didn’t help. The prospects of the US avoiding a serious outbreak of COVID-19 have dimmed considerably.
All S&P sectors were lower on Tuesday. The benchmark is back below its 200-DMA. After going more than 70 sessions without a 1% move, almost every, single day is “interesting” now.
Futures tracked almost tick for tick with USTs.
At one point, Tuesday was the best day for the ETF that tracks the Bloomberg Barclays Aggregate Bond index in years, although by the end of the day, it came up shy. Still, this makes two out of three sessions that AGG has logged gains on par with its best days in a decade.
“The coronavirus will weigh on US growth at least during the first half of the year, with a pullback in spending by households and businesses”, Cleveland Fed President Loretta Mester said, during remarks in London. She added that she’s “skeptical that the benefits of negative interest rates would outweigh the costs in the US”.
We may be about to find out, Loretta. Because it certainly seems possible that, just as the market forced the Fed into a 50bps emergency cut, traders might well compel the Fed to choose between returning to the lower bound as soon as this summer or else wrong-footing traders (heaven forbid).
Trump wasn’t satisfied. He called for further easing in an irritated tweet after the Fed made its move. And that wasn’t all he said.
I just asked President Trump about todayâ€™s market sell off and the Fed rate cut. He said the Fed made a mistake by not signaling they would continue to cut rates. pic.twitter.com/Fw2gCxXKv1
— Eamon Javers (@EamonJavers) March 3, 2020
The US president, apparently, knows a thing or two about how important forward guidance is when it comes to underwriting gains for risk assets.
Of course, if that’s the case, it leads one to question the relative wisdom of Trump’s decision to effectively fire Janet Yellen. After all, Janet was pretty adept with deploying forward guidance in the service of perpetuating low (indeed, non-existent) equity volatility.
A hard act to follow.
Big shoes to fill.
A heavy collar to pop.
To honor Janet Yellen's extraordinary tenure & accomplishments at the Federal Reserve, her distinction as the first woman Chair, & her inimitable style, we're sharing photos of our colleagues "popping" their collarsâ€“just like she does. #PopYourCollar #WomenInSTEM pic.twitter.com/Ya0H3RwRnI
— New York Fed (@NewYorkFed) January 31, 2018