G-7 finance chiefs and central bankers promised to “do whatever it takes” (sort of) to support the global economy at a time when a pandemic threatens to further undermine global growth and trade, but that promise isn’t likely to be enough for markets.
Global equities gained on Tuesday ahead of the hotly-anticipated teleconference, but reports that the communique wouldn’t contain any specific language calling for looser monetary policy or for coordinated fiscal stimulus turned out to be true.
Here is the statement in all its (non)glory:
U.S. Treasury Secretary Steven T. Mnuchin and Federal Reserve Chair Jerome H. Powell led a call with the G7 Finance Ministers and Central Bank Governors to discuss the coronavirus disease 2019. At the conclusion of their meeting, they issued the following joint statement:
Washington — “We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.
Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks. Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase. G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.
We welcome that the International Monetary Fund, the World Bank, and other international financial institutions stand ready to help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible.
G7 Finance Ministers and Central Bank Governors stand ready to cooperate further on timely and effective measures.”
Obviously, that isn’t going to be enough to pacify markets which had aggressively priced an emergency monetary policy response in the course of bidding US equities 5% higher on Monday.
“They need to announce something, just a motherhood statement would definitely disappoint the market”, an economist at UOB Singapore said Tuesday, prior to the release of the official statement.
“I’m not sure it’s really going to deliver a big dollop of fiscal stimulus, which is probably what the market would like to see but which I think it realistically doesn’t anticipate seeing”, ING’s AsiaPac chief economist remarked.
That turned out to be correct. In fact, it didn’t deliver much of anything. To say it was “long on rhetoric and short on specifics” would only be half right. It was short on both.
Ahead of the call, Mark Carney said policymakers were working on a “powerful and timely” defense of the global economy, but, as we’ve seen time and again, the market’s definition of “powerful and timely” can differ from policymakers’ conception of what’s adequate.
“Across jurisdictions there will be some differences in exact form of those measures and the exact timing, but the response will share a common goal which will be to achieve this bridging to support the economy through a potentially challenging period”, Carney declared, speaking to lawmakers in the UK.
But the market always – always – wants more. Targeted fiscal measures are likely, as are incremental rate cuts, but a piecemeal response will probably be seen as inadequate – especially as the genie is already out of the proverbial bottle when it comes to the virus.
One person who certainly won’t be satisfied with whatever policymakers manage to cobble together is Donald Trump, who donned his rates strategist cap to weigh in on the overnight RBA cut (if you can believe it).
“Australia’s Central Bank cut interest rates and stated it will most likely further ease in order to make up for China’s coronavirus situation and slowdown”, Trump tweeted, at 1:34 in the morning on the east coast stateside. “Our Federal Reserve… should ease and cut rate big”, he went on to chide, in his standard grade school cadence. “Jerome Powell has called it wrong from day one. Sad!”
The BIS (the “central bank for central banks”, as it were) is said to be setting up a chat next week between a dozen or more important central banks in response to the COVID-19 outbreak.
Speaking of the outbreak, virus cases continued to climb on Tuesday, with South Korea, Italy and Iran all reporting increases. There are more than 92,000 infections worldwide, and more than 3,100 deaths.
“I’m having to fight hard to keep my inner cynic at bay”, SocGen’s Kit Juckes wrote. “In my mind’s eye, images of the Fed heading off to fight the Covid-19 dragon look rather like Don Quixote astride Rocinate. The Ingenious Knight of Quitman, Georgia?”
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Global central banks just took collective action – they waved the “yellow flag” on the global economic race.
All participants just agreed to a place holding “pause”. We are in a holding position until we get the “all clear”.
It really is up to government leaders to determine adequate fiscal and health related issues.
Policies, not issues.
The fascinating point for me is how in just a few short years central banks have morphed into the fulcrum upon which our lives, and not just our economy, revolves. I wonder if it’s a temporary phenomenon.
Yes, this is an important point, although i think it’s crucial that market participants step back and realize that for the vast, vast, vast majority of humanity, what happens to stocks and bonds is totally irrelevant, let alone what happens in short-end rates (i.e., daily pricing of rate cut expectations). For example, to a lower-income family in public housing, literally all of this is irrelevant. They don’t own any stocks, have no access to credit and may not even have a checking account. And that’s to say nothing of, for example, people fleeing Idlib or trying to figure out how to make it through the day alive in Yemen.
H- your comment is true but the problem is at least for the lower income family in public housing, what if the breadwinner’s job goes away due to economic contraction? What if crime goes up in the public housing project because times get nastier and tougher? What if a program to help the family is cut back because times are tough and the municpal or state government has to cut its budget as a result of the downturn from the virus? There are many other second and third order effects too. Idlib of course is another story.