The Fed's surprise rate cut Sunday foretells "an avalanche
of horrible data in the next few weeks," an economist says.
U.S. stocks have resumed their downturn after
Friday’s rally amid extremely volatile trading. After opening limit down on
Monday, for the third time since a week ago, triggering a trading halt, then
falling further on the reopening, stocks recovered some of their early morning
losses. By late morning the S&P was down 5.7% and the Dow Jones Industrial
Average off 7.5%.
Bonds also reversed their recent trading
behavior in early morning trading, with yields falling after rising several sessions
last week. Bonds yields usually fall when stock prices decline, especially at
times of growing concerns about a possible recession, and that’s what happened
Monday morning. But by late morning, the 10-year Treasury yield was rising
again, at 0.85%, up about 10 basis points from the open.
A second surprise rate cut by the Federal
Reserve on Sunday, like the first one on March 3, failed to calm markets.
The Fed slashed the federal funds rate Sunday
evening by 1% to a range between zero and 0.25%, days before the start of the
Federal Open Market Committee’s regularly scheduled policymaking meeting. The
latest cut followed a 50 basis-point cut on March 3.
The Fed also announced a revived
quantitative easing program to purchase at least $700 billion in U.S.
Treasuries and mortgage-backed securities, which followed plans announced last
week to inject as much as $1.5 trillion into the short-term money markets.
“To move like this three days before the
meeting tells me to expect an avalanche of horrible data in the next few
weeks,” tweeted David Rosenberg, chief economist and strategist of
Rosenberg Research and Associates Inc.
Also on Sunday, Goldman Sachs forecast a 5%
decline in U.S. GDP for the second quarter and its U.S. chief equity
strategist, David Kostin, slashed his forecast for the S&P 500, noting it
could fall another 26% from Friday’s close to 2,000 if the economic fallout
from the spreading coronavirus worsens.
“The coronavirus has created unprecedented
financial and societal disruption,” he wrote in a note to clients. “The
combination of thin liquidity, high uncertainty, and positioning could cause
the S&P 500 to fall below our 2,450 base case estimate of fair value and
closer to a trough of 2,000.”
Recession fears are growing for the U.S. — a
Bloomberg survey of economists gave 45% odds for one this year — and globally.
Whole countries are under lockdown and
throughout the U.S. schools, theaters, gyms and other gathering places have
shut down; all National Basketball Association, National Hockey League and U.S.
Soccer games are canceled along with the NCAA annual tournament (March
Madness); and many businesses, including financial firms, are advising or
mandating that workers work from home.
On Sunday the Centers for Disease Control
and Prevention recommended that
events of 50 people or more not be held for about two months, excluding
schools, institutes of higher learning or businesses — although many of those
entities have taken steps of their own.
Also Sunday, after praising the Fed’s rate
cut, Vice President Mike Pence announced that the administration will have
“updated federal guidelines” Monday regarding whether restaurants, bars and
businesses should stay open, as the coronavirus crisis
pauses American life as usual.
On Monday the Senate is expected to vote on an
economic aid package that passed the U.S. House of Representatives in a
very early Saturday morning vote. The package, negotiated between House
Majority Leader Nancy Pelosi and U.S. Treasury Secretary Steven Mnuchin,
includes free testing for the virus; paid sick leave for employees at many,
though not all, businesses; and additional funding for food stamps and
Medicaid.
“The question is not whether we’re going into
a recession, it’s just how deep the recession is actually going to be,” said
Cam Harvey, partner and senior advisor of Research Affiliates, in a recent
company audio interview on The Economic Impact of COVID-19.
In the past U.S. recessions, the Federal
Reserve came to the rescue, most notably during the global financial crisis of
2007-2009. It slashed interest rates, initiated quantitative easing and took
other measures to provide liquidity to the markets.
“This time is different,” says Harvey. “What
the Fed can do is very limited,” as it is starting from a position of very low
rates, well below the 5.25% fed funds rate at the beginning of the 2007
financial crisis.
That crisis “was caused by a financial event.
What we’re seeing today is financial crisis caused by a health event.” The
current crisis requires a response to the health crisis as well as liquidity
provided by the Fed for the financial markets and provided by the Treasury to
help small business, because if those businesses fail it will be harder for the
economy to recover.
Economist Nouriel Roubini tweeted, “Without
huge fiscal bazooka stimulus the monetary one is impotent. Only a large
monetized fiscal deficit will stop the demand collapse that’s worse than in the
GFC!”
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