The Fed cuts 50bps causing gyrations in equity markets which ultimately have given back a chunk of yesterday’s gains. US bond yields move markedly lower, adding to downward pressure on the US dollar.
After setting up the market last Friday, the US Fed delivered an emergency 50bps cut to its fed funds rate overnight (taking the upper bound to 1.25% from 1.75%). Chairman Powell said the coronavirus outbreak had increased risks to the US economic outlook although the fundamentals of the US economy remain strong. He said the Fed was ‘closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate’. So further easing is possible. Asked about the scope for further moves, Powell said ‘we do like our current policy stance’ before repeating the Fed will take action if needed.
The Fed is in ‘active discussion with other central banks’ and said other central banks are doing what makes sense in their contexts. This follows a conference call overnight between the G7 finance ministers who also invited their respective central banks, with markets baying for a coordinated policy response to the impacts of COVID-19.
The joint statement said they’ll ‘use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks’. But no specific measures were announced. It went on to say G7 finance ministers are ready to take actions, including fiscal measures where appropriate, while G7 central banks will continue to fulfil their mandates. This, of course, followed a recent string of comments from central bankers including from the ECB’s Lagarde yesterday saying ‘we stand ready’ to take appropriate steps and similar from the BoJ’s Kuroda earlier this week and from the BoE’s Carney overnight. The market looks for the Bank of Canada to cut 50bps tonight.
US equities have been volatile, surging immediately after the Fed cut to be up more than 1% at one stage, before retreating nearly as quick and then grinding lower thereafter as the market reassesses the extent that interest rate cuts can offset the economic shock taking place. The S&P500 is currently down more than 2%, so still holding a significant portion of yesterday’s near 5% gain.
US bond yields fell across the curve following the Fed cut, with a steepening bias as short dated yields fell by more than longer dated equivalents. US 2-year Treasury yields are down around 21bps, while US 10-year yields have fallen to new all-time low around 1.01% and eyeing a sub 1% level. The US 10-year yield is down around 16bps on the day. Bond yields were mixed in Europe, with 10-year government yields in Italy down around 15bps, while Spain and Portugal were down around 10bps, but UK and German yields were only down a point or two.
The narrowing interest rate differential has seen the US dollar extend its recent declines overnight. The broad US dollar index is down around 0.4% on the day.
From around 1.1130, EUR broke through 1.1200 shortly after the Fed cut but has since given back some of the gains to currently sit around 1.1170. The GBP is up 0.5% to sit just above 1.2800, perhaps helped a little by a better than expected construction PMI. USD/JPY extended losses after the Fed cut to be down around 1% on the day, opening this morning around 107.10.
AUD and NZD have been beneficiaries of a weaker USD, with the currencies currently sitting around 0.6600 and just under 0.6300 respectively. The NZD showed little response to dairy auction overnight. The GDT Price Index fell 1.2%, against expectations of a bigger fall, while wholemilk powder prices only eased 0.5% to a still-reasonable US$2,952/T. COVID-19 fears there may be, but NZ’s primary product prices remain at reasonable levels.
The AUD sits at the top of the G10 currency leaderboard, up 1.1% despite yesterday’s move by the RBA. The RBA cut its cash rate 25bps, to 0.50% from 0.75%, and signalled it is prepared to ease monetary policy further. The AUD rose a little on that given the market had priced some chance of more easing, but the bigger move came after the Fed announcement.
The RBA cut was in response to COVID-19 that the Bank sees delaying progress to full employment and delaying progress to reaching its inflation target. It’s worth noting that neither of those latter two points applies to the RNBZ, given that NZ inflation is close to target and employment is at or above its maximum sustainable level. Of course, this doesn’t rule out a domestic rate cut given the coordination occurring offshore and the risks involved but the starting point of the economy will have some bearing of the RBNZ’s course of action.
NZ swap yields found some stability yesterday after some large moves, edging around 1 to 2 bps higher across the curve. The market is pricing nearly half a chance of a 50bp cut by the RBNZ in March.
Looking ahead today there is nothing on the domestic calendar while AU has Q4 GDP data due. PMIs for February from various areas may shed some light on the initial economic hit from the virus. But most focus will remain on virus news and potential policy response to it.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.