All In. Limit Down.

“We’re going in strong, starting tomorrow, across the curve”, Jerome Powell said, during a somewhat surreal Sunday evening teleconference following the Fed’s extraordinary “whatever it takes” moment.

He was referring to the newly-announced QE program under which the Fed will buy $700 billion in Treasurys and MBS over an unspecified period. The Fed is not, Powell remarked, “seeking permission to buy other securities” and the committee continues to view negative rates as not appropriate for the US economy.

US equity futures cratered, trading limit-down in a continuation of the rollercoaster ride investors have been subjected to recently.

“We [may] see some Treasurys trade at negative yields in the front-end when markets reopen”, BMO’s Jon Hill said Sunday evening, adding that “pretty quickly the conversation will turn to what more the Fed can do”.

“All in… they certainly are!”, exclaimed ING, in an e-mailed note. “This action in itself is not going to rescue the US economy from recession, but it will help to mitigate the risks from financial tensions that could make the growth and jobs outlook far, far worse”, the bank’s James Knightley remarked.

Bear in mind that what’s being asked of monetary policy is unrealistic. Policymakers in the Eccles building are donning their firefighter costumes while simultaneously playing at epidemiology and masquerading as virologists, all in a fruitless effort to extinguish cross-asset volatility and somehow impress upon an unthinking pathogen the ridiculous notion that monetary policy is a cure-all for biological threats.

There are now 3,365 coronavirus cases in the US with 64 deaths. Those figures will be out of date by the time you read these lines. Some of the numbers in the following chart are up markedly over the past 48 hours.

Ohio is set to shutter all bars and restaurants indefinitely, American Airlines said it will cut long-haul international flights by 75%, night clubs were ordered to close in the nation’s capital and New York City will shut its public schools, affecting more than 1 million students. “I’m very, very concerned that we see a rapid spread of this disease, and it’s time to take more dramatic measures”, Mayor Bill de Blasio said Sunday. “This is a decision I have taken with no joy and a lot of pain”.

There isn’t anything the Fed can do to mitigate these type of sweeping disruptions to everyday life and/or prevent the knock-on effects to the US economy. The S&P is now pricing in an ISM near 35.

(Deutsche Bank)

But the actions the Fed took Sunday evening will ensure that everything which can be done on the monetary policy side has been done, even if that won’t do anything to allay market fears of a recession.

“This is a crisis [and] it’s good they did it before the market open. Why wait to Wednesday?”, TD’s Priya Misra remarked, adding that while “cutting to zero was a necessary condition, with QE, they’ve gone more than what the market was pricing in”. She did note that there’s a stigma associated with the discount window, but was upbeat on the size and composition of QE.

Whatever equities do, the Fed’s action was bullish for bonds and bearish for the greenback. “The USD should absolutely be sold”, CIBC said. NatWest sees the Fed eventually expanding swap lines to other central banks. Had cross-currency basis continued to widen, the world could have become an even more precarious place than it already is.

The Fed’s actions should “dampen the recent liquidity and funding strains, implying some tightening in FX bias, FRA-OIS, swap spreads, etc”, Citi said, in a quick reaction note, on the way to cautioning that even as Sunday’s measures are “very significant”, they simply can’t do anything to mitigate health concerns.

In addition to obvious worries about the likely worsening of the epidemic in the US, stocks may also have reacted poorly in typical “what does the Fed know that we don’t?” fashion.

In any case, the Fed has done what’s possible on their end. The problem at the current juncture is that while there’s obviously no transmission channel between rate cuts and liquidity provision to the spread of COVID-19, there is a transmission channel between the economic fallout from the containment measures associated with the virus and funding markets. That’s what needed to be addressed, and the Fed has at least tried to do that.

“It will also offer breathing room before an anticipated fiscal stimulus and a potential lending scheme provided by the Treasury materialize”, ING noted, with the obligatory caveat that “only better news on the prognosis for COVID-19 will return us to ‘normality'”.

And so, the armory is bare. Or at least nearly so. “The Fed has now fired the vast majority of their bullets”, BMO’s Hill went on to say.

“The Fed has likely fired off its last bazooka. Still, after last week’s risk parity unwind, it isn’t easy to predict which express elevator, up or down, investors will be taken for a ride to the next circuit breaker”, Axicorp’s Stephen Innes warned Sunday. “Although arguably the path of least resistance may eventually be lower as investors watch in horror as a good chunk of global GDP goes up in flames”.


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