A Coronavirus Fed Cut? Futures Say Yes; Debate Underway
A Coronavirus Fed Cut? Futures Say Yes; Debate Underway
We have consistently maintained that the coronavirus outbreak, though scary and fatal for nearly 2900 so far out of 84,000 cases according to John Hopkins Center for Systems Science and Engineering, should not create panic among investors for the long term. There have been lots of nasty headlines generated and the stock market has taken a surprising 12.8% dive from all-time highs into correction territory as a result, but history does not support what we’ve seen so far as a serious pandemic.
Nevertheless, no one can be 100% sure of this, not even your faithful scribes in these pages. And already the debate has begun, at least in the media, about what the Federal Reserve can or should do about this virus and what effect it might have on global economic activity.
The markets have spoken. While the stock market is down big, the bond market is up big, as investors fly to safety. And the CME Fed futures market has already decided—for now. I’ve noted in previous issues that the Fed futures were slowly but surely moving forward the probability of a Fed cut to the Fed Funds rate. A while back it was expected to be December. A few months back it was July. Last week it went to April early on and now strong expectations for at least one rate cut at the next meeting, March 17-18, according to CME Group data. That was up from just 9% a week ago.
Wow. I believe it is a kneejerk reaction and that it will be revised back to later in the year as it becomes clear the virus spread is being contained. Time will tell.
For its part, the Fed, through policymaker comments last week, seemed to continue the line that it is watching the virus spread closely, but that it is too early to tell about the economic fallout of the coronavirus, and in particular what effect it might have on the U.S. economy given China is a major trading partner. I’m inclined to agree.
The outbreak threatens to disrupt global supply chains that run through China and threatens to further roil travel and output as it spreads to other countries, including South Korea, Japan and Italy, which have reported more cases in recent days.
Bond action suggests that investors see a relatively high chance that the Fed could cut interest rates soon. (Bond prices rise inversely to the yield.) At about 1.17% the benchmark 10-year U.S. Treasury note traded near its all-time low as global investors lowered growth expectations and sought refuge in safe-haven assets, down from 1.47% last week and 1.58% the previous week.
The CME Fed futures market is historically a good indicator of rate trends.
Upcoming: 3/17-18 - FOMC meeting. The CME futures say something will happen. I don’t think so.
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