Morning Report: Rates hit fresh lows as Coronavirus infects the markets.

Vital Statistics:

Stocks are lower as the Coronavirus knocks down global equities. Bonds and MBS are up.

Washington State has reported the second US death due to Coronavirus, and one case has been reported in New York City. Globally there have been 87,000 cases and 3,000 deaths. The total number of confirmed cases in the US is 75. Most of the cases center around a nursing home in Kirkland, WA.

The 10 year is trading close to 1% as the market is anticipating a move out of the Fed, the ECB, and maybe the Bank of Japan to lower rates.  Fed Chairman Jerome Powell made a statement on Friday saying:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

This statement caused a big shift in the Fed Funds futures. The March Fed Funds futures are now calling for a 50 basis point cut. My guess is that we would have an intra-meeting cut if the sell-off continues this week, and then another 25 basis points in March. Oh, and guess what the central tendency is for December. 50 – 75 bps in the FF rate. In other words, 100 basis points in cuts this year.

Those sorts of moves seem to anticipate a recession in the US this year. Unless this turns into a major pandemic in the US, that seems unlikely. You generally don’t see recessions with 3.6% unemployment. However, supply shocks out of Asia will definitely slow things down. FWIW, the Fed Funds futures are predicting a recession, and that seems to be a stretch unless you start seeing tens of thousands of cases in the US.

The OECD is predicting that the coronavirus will lop about .5% off global growth this year, from 2.9% to 2.4%, which is a best case scenario. This scenario assumes that Coronavirus remains largely contained in Asia. If major outbreaks happen in Europe and the US, we would be looking at 1.5% global growth this year.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical View all posts by Brent Nyitray