I think Holman Jenkins editorial in the weekend’s WSJ said it well with everything going on. “Curtailing economic activity is how we fight the virus. Unfortunately, a recession is part of the cure for an epidemic of communicable disease.” As I’ve been saying for a few weeks, I believe the faster we shut down, the faster we get this under control, both in terms of spread, testing and treatments.
The Fed (going all in) and other central banks (New Zealand cut yesterday by 75 bps to .25%) are of course falling back on their default policy response of cut rates and QE but what we need here is a more focused approach on the flow of money rather than the rate. By flow I mean keeping the bank spigots open to business and household clients that need it. Keeping the commercial paper market open and flowing. The US Treasury market became dysfunctional last week because of legacy regulatory rules like Volcker and other capital restrictions that hindered market making abilities, especially in disruptive times. Powell said multiple times yesterday that QE was meant to add normality to the Treasury market but more Fed intervention does the opposite. Bottom line, the tools currently being expended by the Fed are like spitting in the wind.
With respect to Treasuries and its reaction to the Fed news, the 10 yr yield last night had a 6 handle but right now is settling in at .77-.78%. Its low last week was .40%. The US dollar is weak against the major currencies of the euro, yen and pound but is higher against the commodity currencies and many EM ones.
Because of the growing stress on European budgets, keep your eye on what’s going on in the bonds of the peripheral countries. They are all selling off rather sharply in Italy, Spain, Portugal and Greece. French bonds are selling off too with German bunds and gilts the only safe havens in the region.
With the weakness in gold in the face of very bullish news of falling real rates and QE, it reflects the level of liquidation everywhere that is still ongoing.
Reflecting the obvious stress in the Chinese economy, retail sales in January/February fell 20.5% y/o/y vs the estimate of -4% (which was a shot in the dark). IP was lower by 13.5% y/o/y ytd vs the forecast of down 3% and Fixed asset investment was weaker by 24.5% y/o/y ytd vs the expectation of only a modest decline. No markets were spared in Asia but Chinese stocks, both A and H shares are less bad than most everywhere else.