Markets Reel on Coronavirus (COVID19), Crying Out for Fiscal Policy

Stocks, bonds, and credit markets are at peak volatility as the pandemic spreads worldwide.  Massive daily fluctuations have become the norm.  The economy may be in recession now according to many analysts.  The global economy may come to a near halt with increased unemployment, slowdowns in consumer spending and business investment.  Predictions are out the window as the spread of Coronavirus has surpassed precedents such as Ebola, SARS, MERS, etc.  The uncertainty is contributing to the volatility.  The classic “Fed put” whereby the Fed cuts rates and soothes markets is not going to cut it this time.  With treatments or vaccines most likely months or years away, markets are clamoring for the full arsenal of government tools: strong crisis level fiscal and monetary policy from the U.S., a coordinated maximum response.  England did their part yesterday, as the Bank of England cut rates and Parliament committed to fiscal stimulus. This was apparent with markets plummeting after a rare Fed non-meeting emergency rate cut.  Various stimulus plans are being discussed in Washington: President Trump speaks tonight, the House of Representatives is expected to pass a bill tomorrow and the Senate seems to be waiting for guidance.  The Fed is pulling out all the stops.  Meanwhile, next week’s meeting will almost certainly include a 0.50% to 0.75% rate cut (which will bring the Fed Funds rate back to near zero, where it sat from 2008 to 2015). They have increased overnight repo line assistance to a staggering $175 billion (note that a mere $50 billion was enough during last September’s volatility). Other tools could be deployed: a full on return to QE with the Fed buying Treasuries and Mortgage backed securities.  Treasuries: the 10 year hit an all time low of about 0.38% a few days ago.  Today it closed at 0.84%.  The yield increase usually means things are settling down, but in this case it’s “bad”.  Banks are selling Treasuries in order to hoard cash.  Lending: We are hearing the gamut of reactions.  Some lenders are shutting down originations temporarily, some fixed rate lenders are increasingly indicating an all in rate rather than a index and spread. Underwriting standards are being scaled back.  Anticipated slowdowns in consumer spending and business investment will have consequences for real estate. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners