Fed Surprises Markets with an Emergency 50bps Rate Cut


The spread of the coronavirus outside appears to be continuing unabated with Tuesday figures highlighting the grimmest picture yet. Tuesday saw a 2,101 increase in the number of confirmed cases with China accounting for a meagre 125 of the cases. Cases in South Korea and Iran continued to surge topping 5,300 and 2,300 respectively.


US stocks closed sharply lower following a volatile trading session on Tuesday as the Fed delivered a surprise 50bps rate cut. The surprise cut came two weeks before the next FOMC meeting on March 17-18 with the Fed saying this was a response to the risk the coronavirus posed to the economy even as fundamentals remain strong. Stocks whipsawed following the announcement of the cut eventually closing lower with the NASDAQ down 2.99% while the DOW and the S&P shed 2.94% and 2.81% respectively. Treasury yield also closed lower with 2Y and 10Y USTs down some 20bps to close at 0.6991% and 0.9990% respectively.


A rebound in home constructions spurred the fastest growth in more than a year for UK construction activity in February. The IHS Markit/Cips UK construction PMI rose to 52.6 from 48.4 in January, some way above the expected 48.8 according to a Reuters poll. Residential activity reported the strongest expansion since July 2018 with the PMI rising to 54.3 from 48.4. The construction PMI data came following a Bank of England report that showed the highest number of mortgage approvals for three years in January. The pound closed firmer at $1.2811 while yield on 30Y UKTs was about flat at 0.915%.


European periphery sovereign bonds rallied on Tuesday following the Fed’s emergency 50bps cut as traders anticipated more quantitative easing by the ECB in response to economic risks posed by the coronavirus. ECB President Christine Lagarde had on Monday signalled readiness on the part of the eurozone’s central bank to provide stimulus and with the Fed’s emergency cut it appears to be a matter of ‘when’ not ‘if’. Italy, which would be a major beneficiary on additional QE, saw a rally in its bonds with yield on 10Y BTPs sliding 15bps to 0.984%, breaking below 1% for the first time since October. SPGB 30s and PGB 30s also made similar moves with yields on both down some 10bps. The euro closed slightly firmer at $1.1173 while yield on 10Y and 30Y DBRs made comparatively modest moves lower closing at -0.625% and -0.161% respectively.


Asian stocks were mostly higher on Wednesday following the Fed move to cut 50bps off the benchmark rate. The NIKKEI rose 0.08% while the CSI was up 0.63% despite data showing service sector activity had declined in February. The Caixin China services PMI plunged to a record low 26.5 in February from 51.8 in January as government travel restrictions amid the COVID-19 outbreak prompted the sharp cooldown. The HANG SENG whipsawed between losses and gains before closing lower at -0.24% while the ASX closed 1.71% lower, held down by losses in banks following Tuesday’s cut by the Reserve Bank of Australia.


Turkish inflation continued its ascent in February with consumer prices rising 12.37% YoY from January’s 12.15%. While this was lower than the median 12.7% forecast in a Bloomberg survey, it pushes real interest rates further into negative territory with rates worse than for the UK, Switzerland and Japan. A broader recovery in the economy coupled with recovery in consumer demand has spurred the recent surge in inflation. The central bank is however maintaining its end-2020 forecast of 8.2% and is putting more effort into battling a depreciating lira which has shed 3.5% against the dollar this year. The lira closed firmer at 6.1080 to the dollar while TURKEY 47s surged over two points to trade in the high 90s.


Analyst are betting on a cut by Banxico following the Fed’s move on Tuesday. While most analysts are expecting a quarter-point cut at the March 26 monetary policy meeting, some are going as far as expecting a 50bps cut this week as well. Policymakers seem hesitant to make deep cuts however given that inflation is trending above the target 3% with another eye on the peso which has benefited from carry trades this year. The peso closed weaker at 19.4519 to the dollar while MEX 50s rose over two points, trading in the mid 116s.


Russia’s Finance Ministry cancelled its weekly Wednesday OFZ bond auction for the first time since September 2018 amid market turbulence in the wake of the increasing spread of the coronavirus ex-China. Another seeming concern for the Ministry was that investors would demand higher yields following the previous week’s rather unsuccessful auction. Analysts suggest that Russia is close to meeting its Q1 borrowing plan and with a current account surplus, it can afford to cancel auctions if investors seek yields deemed too high. The ruble closed firmer at 66.0546 to the dollar while RUSSIA 47s surged over 3 points, trading in the mid 133s.


South Africa’s economy contracted in annualised 1.4% in Q4 2019 to send the economy into a second recession in consecutive years. The contraction was steeper than the 0.2% decline predicted in a Bloomberg survey as power cuts weighed on output. Growth for the full year came at 0.2%, the worst since the financial crisis and half the central bank estimate in January. With global central banks hinting more easing in the wake of the coronavirus, the monetary policy committee may be forced into another cut soon; the MPC projection model had priced in a 25bps cut in Q4. The rand closed slightly weaker at 15.4065 to the dollar while SOAF 49s were higher, trading in the high 97s.