Rapid and forceful ease. Is it enough?
March 4, 2020
–Fed cut 50 bps just two weeks before the regularly scheduled FOMC to 1-1.25%. This morning EDH0 is sub-1%, at 9901.25, along with the rest of the euro$ curve out through the golds. Ten year yield hit 89 bps yesterday and is just below 1% this morning. Many businesses are likely to see large temporary drops in revenue due to the virus, and are going to need very cheap financing to plug the gap. It’s not clear that the economy was at that point, and it’s also unclear that cheap financing will be available to firms that need it. A temporary lending facility would probably be the answer, but is likely too cumbersome to put in place. I think Powell should have articulated that cuts in rates were likely to be temporary to get the economy over the hump; perhaps the Fed doesn’t think underlying fundamentals are as strong and stable as they like to say.
–Reds through golds were up 8 to 10.5. Red/green pack spread (2nd to 3rd year) rose nearly 1 bp to a new recent high of 10. The week before last it was 1.5 bps. Obviously the surprise cut affected near contracts most, with EDH0 jumping nearly 21 bps. Implied vol tanked as further Fed moves are likely to be smaller. Peak contract on the ED curve is now the first red, EDH1 at 9933. The first one-year calendar that’s positive has moved forward to EDZ0/EDZ1 which settled +1.5. With the magnitude of this move, the market perceives adjustments to the FF target to be crammed into this calendar year. April/October FF calendar rallied by a whopping 18 bps to -28.5. This period will cover 4 FOMC meetings, April 29, June 10, July 29, Sept 16. At around 1/4%, the pricing suggests just one ease at one of those four meetings. April’20/April’21 settled -33.0.
–Biden’s strong showing in Super Tuesday voting may remove some tail risk to stocks, which appear to have rejected yesterday’s post-announcement plunge and are showing strong gains as of this writing with ESM +60 at 3057.0.
