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The market seems disappointed. After The Fed’s 50bps rate-cut sent stocks spiking higher, all those gains have been erased…

But the market (and trump) was asking for more and Wall Street does not seem impressed… as the market’s dependence in Fed largesse is revealed for all to see…

Matt Maley, an equity strategist at Miller Tabak & Co:

“This should be very positive on a near-term basis. If the coronavirus causes the market to roll-back over in the coming weeks (which will confirm that the Fed cannot fight a health-care crisis), it’s going to mean that we’re headed for a bear market. However, this should be quite positive over the near-term.”

John Augustine, chief investment officer at Huntington Private Bank:

“The Fed responded proactively to the markets, which is very unusual and may be prelude to them also reacting at their scheduled meeting in March. Other central banks are going to respond in the interim,” he said.

“The market is not sure how to respond — the markets worry with intra-meeting Fed rate cuts, what does the Fed know that we don’t know? The stock market will remain volatile until coronavirus cases peak. So at this point in time, we’d say patience. We’re in unprecedented territory for the Fed to act like this. This is likely going to lead to further volatility in financial markets.”

Max Gokhman, the head of asset allocation for Pacific Life Fund Advisors:

“That central bank response I was talking about over the weekend is coming in quicker and hotter than anticipated. The Fed going for an emergency 50bp cut is a bit too much. It may send the message that the risk to the economy is even bigger than currently anticipated, it leaves them with less ammunition for the rest of the year (unless we go negative under Powell), and it makes them appear to be doing the Administration’s bidding since it was widely reported that Mnuchin and Kudlow were pushing for a 50bp cut immediately.”

Naufal Sanaullah, chief macro strategist at EIA All Weather Alpha Partners:

“The rates market was looking for 50bps of cuts by April. Equities first found their footing when Powell said he would act as appropriate, and then when G-7 announced an emergency conference call. Now that we’ve gotten an inter-meeting 50bps cut and the market has rebounded strongly off the lows, the upside is now relatively capped. We expect a wide, volatile range to be carved out over the next few weeks, as we consolidate the big sell-off and digest the incoming newsflow, which has the potential to deteriorate as testing proliferates further.”

Neil Dutta, head of U.S. Economics at Renaissance Macro Research:

“Markets are said to stop panicking when policy makers begin to panic. The Fed just delivered an emergency cut, which qualifies as panic. But the Fed’s tools are imperfect and not adequate to deal with a public health crisis. The market wants to know how far the virus will spread and the Fed cannot answer that question. The panic needs to come from the opposite of 17th Street in DC.”

Win Thin, global head of currency strategy at Brown Brothers Harriman:

“I’ll say it again, the optics are bad after Trump just called for a big rate cut. Call me old-fashioned but I guess I’d like a central bank that doesn’t hit the panic button every time the stock market freaks out. I know many were calling for this but I am shocked.”

We give the last word to former Dallas Fed President Richard Fisher, who warned last week…

“Does The Fed really want to have a put every time the market gets nervous? …Coming off all-time highs, does it make sense for The Fed to bail the markets out every single time… creating a trap?”

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, anbd even 2007-2009.. and have only seen a one-way street… of course they’re nervous.“

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?“

the market is dependent on Fed largesse… and we made it that way…

…but we have to consider, through a statement rather than an action, that we must wean the market off its dependency on a Fed put.”

After President  Trump’s tweet overnight:

Australia’s Central Bank cut interest rates and stated it will most likely further ease in order to make up for China’s Coronavirus situation and slowdown. They reduced to 0.5%, a record low. Other countries are doing the same thing, if not more so.

Our Federal Reserve has us paying higher rates than many others, when we should be paying less. Tough on our exporters and puts the USA at a competitive disadvantage.

Must be the other way around. Should ease and cut rate big. Jerome Powell led Federal Reserve has called it wrong from day one. Sad!

Former Alliance Bernstein chief economist Joseph Carson has a few choice words following The Fed’s decision to cut rates by 50bps…

In a surprise move the Federal Reserve announced an intra-meeting reduction of 50 basis point cut in the federal funds rate, lowering the target rate to 1 to 1.25%.

The Fed stated, “the fundamentals of the US economy remain strong”, but the “coronavirus poses evolving risks to economic activity.” 

It is hard to see how “easy money” offsets supply disruptions in supply chains and global travel.  And although many companies have alerted investors to the prospect of lower earnings in Q1 there is no hard evidence (job layoffs) of any disruption to the US economy. 

Policymakers have once again been forced by “politics” and not “economics” to make a move in official rates.  

The “BIG” test for policymakers is if and when the fear of “coronavirus” fades will policymakers take back the “emergency” rate cut. 

Last year’s rate cuts linked to global trade disputes remained in place even after “phase 1” trade deal was signed.

THE FED HAS LOST ITS INDEPENDENCE. 

Carson is echoing former Dallas Fed President Richard Fisher who warned last week…

“Does The Fed really want to have a put every time the market gets nervous? …Coming off all-time highs, does it make sense for The Fed to bail the markets out every single time… creating a trap?”

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, anbd even 2007-2009.. and have only seen a one-way street… of course they’re nervous.“

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?“

the market is dependent on Fed largesse… and we made it that way…

…but we have to consider, through a statement rather than an action, that we must wean the market off its dependency on a Fed put.”

Trump is demanding more though…

“The Federal Reserve is cutting  but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!“

Of course, as Rabobank noted, if we don’t see any major fiscal stimulus then it’s hard to imagine how one can remain too optimistic either. Notably, Mnuchin is keen on a tax cut rather than any higher state spending, and if that is any indication of what the G-7 will agree on, then we are in real trouble.

All that returned cash is going to sit there on hold until the virus has been and gone, however long that is; and then the recovery will be too aggressive the other direction. The change in baseball caps that will be required up and down and up again could be extremely challenging, especially now Chinese supply chains to the US for things like baseball caps are damaged.   

Submitted by Michael Every of Rabobank

“Tonight the super trouper lights are gonna find me
Shining like the sun (sup-p-per troup-p-per)
Smiling, having fun (sup-p-per troup-p-per)
Feeling like a number one…”

So sang markets yesterday in excitement as we enter what I am dubbing “Super Trouper Tuesday”. Indeed, the Dow Jones went up a whole baseball cap-and-a-bit to close at 26,703 even as the 10-year US remain at an unprecedented 1.12%. Not because the Fed mumbled something on Friday, but didn’t act, and not because the BOJ pumped all of USD4.6bn into markets yesterday, and not because the RBA cut rates 25bp to a new low of 0.50% earlier today, meaning that they now have one more cut left to go before it’s “Oz-QE, Oz-QE, Oz-QE” (Oi!Oi!Oi!) time. (Good timing not only due to Covid-19, as building approvals tumbled -15.3% m/m in January anyway.)

It’s also not due to more signs the virus spread is in “uncharted territory” according to the WHO (which means “pandemic” but is contractually obliged not to ever say it, it seems), with more deaths, and as UK police and army draw up lockdown plans and supermarkets plot their own contingency plans, for just one real-life example.

Rather it’s a reflection of the fact that the not-so-magnificent G-7, and G-7 central banks, have pledged that they will meet today to act jointly on the virus, and the IMF and World Bank are also prepared to help if needed; Covid-19, it seems, is a threat that requires immediate action in a way that the potential risk of the end of life on earth (if you are Green), or increasingly Victorian/Gilded Age levels of wealth inequality (if you are Piketty) are not. Then again we have to recall that stocks had just fallen by over 10% in a week, and that house prices risk following: Come on you cynical people, priorities, please!

So here we are at Super Trouper Tuesday. I am sure that a global virus-crisis meeting led by none other than world-famous virus expert US Treasury Secretary Steven Mnuchin will provide us all with the kind of comfort that deserves a whole baseball-cap in Dow movement. I am just not sure which direction.

Answer this first, key question: what level of interest rates is required to incentivize you to risk the death of yourself and your family? I am sure that there are policy wonks out there who believe they can correctly capture that precise equilibrium level on monetary policy. The point is that lower rates don’t help in this situation at all. If demand is destroyed by people bunkering down at home for weeks, and supply chains being disrupted, all lower borrowing costs can do is help tide businesses over if banks agree to extend loans and credit cards, etc. (as China is already now doing) – and all that does paint us further into the corner we are already in, because those rates won’t be able to rise again.

Nonetheless, those rates cuts are coming – because they push up equities very near-term. Indeed, our Fed watcher Philip Marey, who had already been calling Fed cuts this year, has now revised his 2020 rates call. He now expects the Fed to start cutting rates in March instead of April, with a 50bp reduction this month, again in June, and in September. In other words, it is back to the zero-bound by autumn (ahead of his original call, which was December).

Arguably even more interesting are the other rumours that are flying about over the G-7 meeting. Crucially, will this be the start of an open coordination between the government and central banks? Will central banks say that states can spend whatever they want to get us through Covid-19, and they will cover the required deficits? In other words, MMT? I would like to remind regular readers that such ‘unthinkable’ policy options are something we have openly flagged as a logical inevitability, even in developed markets: we just felt that the Green New Deal, or a war somewhere, would be the better ‘sell’ to the public. There are also enormous downside risks to any such strategy, which we have covered before in detail. Not everyone can “get away with it”, meaning a huge shift in relative power. Moreover, once you have shown that you CAN get free money like this, how is that genie put back in the bottle politically? This is actually an anti-Piketty argument: his view that we are doomed to see inequality rise is based on the concept that capital is the result of accrued savings rather than being created de novo as needed by (central) banks.

Of course, if we don’t see any major fiscal stimulus then it’s hard to imagine how one can remain too optimistic either. Notably, Mnuchin is keen on a tax cut rather than any higher state spending, and if that is any indication of what the G-7 will agree on, then we are in real trouble. All that returned cash is going to sit there on hold until the virus has been and gone, however long that is; and then the recovery will be too aggressive the other direction. The change in baseball caps that will be required up and down and up again could be extremely challenging, especially now Chinese supply chains to the US for things like baseball caps are damaged.    

At the same time, it’s also Super Trouper Tuesday in US politics, where Joe “White Walker” Biden has been levelled up to become the Night King; that after Pete Buttigieg came, was from Indiana and spoke Norwegian, and went, and Amy Klobuchar, came, was from Minnesota, and went, both dropped out and backed Biden. Ahead of the slew of states voting in primaries today that means it is Game of Thrones vs. Curb Your Enthusiasm. Oh, and Mike Bloomberg is still in the race too, and very generously doing what Piketty et al., have long argued billionaires should be doing: redistributing lots of their own wealth to no particular end.

“But it’s gonna be alright; (You’ll soon be changing everything)

Everything will be so different; When I’m on the stage tonight

Tonight the super trouper lights are gonna find me

Shining like the sun (sup-p-per troup-p-per)

And I’ll go long too (sup-p-per troup-p-per)

‘Cos juicing stocks is what they do”

Trump wins? … but what is The Fed so afraid of?

Shortly after the G-7 meeting promised to do whatever it takes, and the biggest demand for Fed repo liquidity since the program began…

A desperate Fed has once again met market expectations, The Fed has just announced an emergency 50bps rate-cut.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.

In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent.

The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

This is the largest rate-cut since the fall of 2008, and just the ninth emergency rate cut in history…

So you have to wonder, just how huge a deal is the virus’ impact on the global economy – despite consensus that this dip in economic activity will almost immediately v-shaped recover back to the new normal?

Stocks are spiking…

But, we note, that stocks are losing their initial gains…

Gold is jumping…

And the dollar is dumping…

But hey, The Fed managed to un-invert the yield curve…

It seems the current Fed is ignoring the risks that former Dallas Fed head warned of last week…

“Does The Fed really want to have a put every time the market gets nervous? …Coming off all-time highs, does it make sense for The Fed to bail the markets out every single time… creating a trap?”

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, anbd even 2007-2009.. and have only seen a one-way street… of course they’re nervous.“

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?“

the market is dependent on Fed largesse… and we made it that way…

…but we have to consider, through a statement rather than an action, that we must wean the market off its dependency on a Fed put.”

The market is now pricing in no more rate-cuts in March but a high probability of at least one rate-cut in April.

At 11amET, Powell will hold a press conference.