What a ‘Super Tuesday’ it turned out to be. After the G-7 gathering’s ‘act as appropriate’ statement broadly disappointed, the Fed surprised markets with a unanimous 50bps rate cut, to 1-1.25%. Although this was largely priced in for the 18-19 March meeting, the unscheduled slice did catch most market makers off guard. The last three occasions the central bank has carried out intra-meeting cuts were: following the 2000 dot-com bubble, in January 2001, the next came after the September 11 attacks, with the penultimate move in 2008, during the GFC.
The emergency cut, which came only 10 trading days ahead of the official Fed meeting, did appear to do quite the opposite as was intended, and panic struck markets. Flight to safe assets saw USTs rally to new lows, with the 10-year benchmark falling below 1% for the first time ever. Importantly, the yield on the 30-year UST inflation-protected securities, AKA the real yield, tumbled below 0% for the first time in history. Meanwhile, equity markets and the dollar tumbled, so pretty much what 2/3rds of Trumps’ dreams are made of: lower rates, weaker dollar, but weak equity markets.
Historically, the Fed has never made such a cut without subsequently reducing rates at the next meeting. This is scheduled to take place from 18-19 March, and as such, futures markets are pricing in a further cut in two weeks. We look to the Bank of Canada to follow suit later today, and expect to hear from the ECB and BoE which have sufficiently less monetary shock absorbers available.
We will continue to actively manage the Funds through the market moves as we receive further clarity on the coronavirus’ global economic impact and remain comfortable with our high-grade positioning.