Market movers today
Market focus remains on COVID-19 news flow and the potential for a coordinated policy response. Yesterday both the Reserve Bank of Australia and more notably the FOMC cut policy rates by 25bp and 50bp, respectively. Today Bank of Canada will take the stage with markets pricing the likelihood of a 50bp cut. Markets will also continue to digest the results from yesterday’s US Super Tuesday .
This morning we published an update on our view of the global economic repercussions of the coronavirus, see The coronavirus crisis – A U- rather than L-shaped global recovery . We will also host a conference call at 9:00 CET discussing the global monetary and fiscal policy response to the outbreak.
Today’s data highlight will be the US ISM Non-manufacturing index . After the weak flash PMI figures, with the services index surprisingly dipping into contraction territory, markets will watch whether that picture is confirmed by the ISM survey today. EU Commission President Ursula von der Leyen will today unveil the centrepiece of her Green Deal : a proposal to make the EU climate neutral by 2050. In Norway , February housing prices will be published, see page 2.
Selected market news
It has been a rollercoaster ride for risk appetite since Monday’s historical upbeat session. Yesterday’s G7 communique failed to trigger any noteworthy market moves, but that changed when the FOMC delivered an emergency 50bp rate cut early in the US session (see next section). Initially markets reacted positively but things quickly changed with US equities heavily lower and 10Y US Treasury yields moving below 1.00% amid longer-dated US market based inflation expectations hitting the lowest level since 2016. This morning equities and yields have rebounded somewhat on Joe Biden’s comeback in the US Democratic Primaries . According to prediction markets Biden has now overtaken Bernie Sanders as the most likely presidential candidate for the Democratic Party.
As we think the situation will deteriorate before it turns better, it is difficult for us to see why the Fed should not cut rates further. By cutting the Fed funds target range, the Federal Reserve has ensured that monetary policy is now neutral instead of tight. Given that the economic situation is likely to become worse before it gets better, we think the Fed needs to cut interest rates down to expansionary territory. Powell also repeated that the Fed is still ready to ‘act as appropriate ‘, i.e. still with an easing bias. We expect the Federal Reserve to cut the target range by a further 50bp during the spring, see Fed Monitor , 3 March.
FX reserve data from Danmarks Nationalbank revealed FX intervention during February of DKK0.9bn. This marked the fifth straight month that DN has drawn on the FX reserve to cap EUR/DKK topside, albeit the pace of FX intervention has slowed. We think DN has room to draw a further DKK20bn on the FX reserve before it is forced to hike its policy rate. We forecast a 10bp hike to minus 0.65% in H1 this year. There is also a possibility that the ECB cut its policy rate near term in response to the negative economic consequences from COVID-19 (not our base case). In that case, we would expect DN to refrain from following, e.g. a 10bp ECB cut.
