Market movers today
Today, investors will digest two things. The first is the spreading of the coronavirus in particular in the US and Europe. The second is the Fed who yesterday evening went all in on conventional policy measures (see more below or for details see Fed Monitor: All in – only last-resort options left, 16 March).
We are heading for another week where focus is not on the economic data releases, which are already outdated. Instead, we will monitor closely the coronavirus situation and how policymakers respond. The US Senate is expected to sign off on the second US emergency spending package this week.
That said, the US Empire PMI manufacturing index for March due out in the afternoon may give us some indication on the state of the US manufacturing sector, although the situation has deteriorated since then.
Selected market news
Just three days before its scheduled meeting on 18 March the US Federal Reserve yesterday cut its target range for the policy rate with immediate effect by 100bp to 0.00-0.25%. The move was almost fully priced beforehand, as 85bp had already been discounted by the market, which is probably the reason for equity markets falling this morning.
In addition to the adjustment of the target range the primary credit rate of the discount window was lowered an additional 25bp (150bp in total), such that banks can now access federal funds at 0.5% and at the same time the term of discount window lending was increased to up to 90 days (had previously been mostly overnight provisions). A similar move was implemented in August 2007, but discount window lending remained almost unused, causing the Fed to introduce the Term Auction Facility (TAF) in December 2007. Interestingly, the Fed in its statement directly encourages banks to make use of the discount window in order to extend loans to businesses and households – it also encourages banks to make use of capital and liquidity buffers.
The Fed will also buy USD500bn of treasury securities and USD200bn of agency MBS over the coming months. The Fed cites stress and impaired liquidity in both markets, and not a direct intent to lower long-term interest rates, as the reason for implementing such purchases. The US agency MBS market has certainly been under a lot of pressure lately (OAS widening 50bp during eight sessions) and repo in US treasuries has been elevated.
Lastly, in a coordinated central bank action among the G6 central banks USD swap lines have been sweetened, by lowering the cost of USD funding to USDOIS+25bp as well as offering weekly 84d maturity liquidity operations (in addition to current 1w). The reaction comes after a sharp move wider in cross-currency bases during the past sessions indicating difficulty for foreign banks in obtaining USD funding.
Chinese economic indicators are now showing the signs of the lock-down following the outbreak of COVID-19. Thus, industrial output dropped 13.5% in January and February (y/y), while retail sales fell 20.5% (y/y).
