Episode 18: Market Chaos and Oil Crisis

This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week we'll be looking at the expected global central bank policies to maintain stability, and the impact that Coronavirus and oil will have on U.S. CPI. In the After section, we'll be reporting on the stellar U.S. jobs numbers results. 

The Fed has cut. The Bank of Canada has cut. Other central banks are poised to cut as well. But will cuts be enough? The answer is out, and the answer is emphatically 'No'. Does this mean that QE is therefore about to return? Or can Legarde get Europe's fiscal pumps primed? Last week, the Fed did a not so surprising 50 BP cut outside their schedule meeting. After the worst week in the markets since the Great Financial Crisis, chatter was building that we would see some co-ordinated easing from the world's major central banks. It looks like they may have missed the boat, though. Last Monday, March 2nd, with equities battered the world over, three of the world's leading central bankers issued statements. BOJ Governor Haruhiko Kuroda, ECB President Christine Lagarde, and the Fed Chair Jerome Powell pledged to take action and the words 'appropriate measures' were used more than once. So what exactly are the 'appropriate measures' for a global pandemic, the likes of which the world hasn't seen for decades? Well, it didn't take long after those statements for the Fed to cut rates. Perhaps they could have held off as the market was already rising on a word. And an additional 50 BP cut by the Fed is expected by the April and June meetings. What action will they take and how soon, remains an open question, especially given that all three are already operating with precious little ammunition in their policy arsenals, and the collapse in the oil price has thrown a spanner in the works. But with few options left in terms of rate cuts, what else can or would the central banks do to maintain stability or prevent markets from total collapse? As the Fed had the most room to cut, that was their first step. The ECB, which has a negative 50 basis key rate, has 10 more basis of cuts priced into their March 12 meeting. It's hardly going to move the dial. Eurozone banks have dropped through their all time lows. But Lagarde already hinted at alternative methods, such as 'targeted measures', this suggests that they could offer tools that more directly impact the ailing economy, such as ultra cheap loans tailored for firms, or more liquidity operations to bolster their economy. They could also include a further corporate debt purchases, or an increase in the exemption from the ECB punitive charge on commercial banks' excessive reserves. Whatever they choose, it needs to be dramatic and it needs to be now. 

We were going to take a look at Wednesday's U.S. February CPI data, but Monday's price action has now made much of the macro data obsolete. There had been concerns that Coronavirus led supply shocks would become inflationary. And in some items, that may be the case. But the bond market is emphatically outlining the reality of a full blown demand shock. And that was even before we experienced Monday's stunning decline in oil prices with its knock on effect across the commodity complex. In a recent episode of Before and After we looked at 'Before U.S., 10 year yields reach zero' well within a few days, yields have already touched the low thirties. That's a 0.3 percent, another all-time low. The drop has come much faster than anticipated and reflects the combination of lower oil, plus the expectation that capex across the oil patch, which was already on the backfoot, will now collapse. This is what happened in 2014 and 2015. Lower oil prices might be a boost to consumer discretionary spending, but when the fall takes place at this sort of speed, it has huge implications across industrial capex complex, which will more than offset any boost that consumers may experience. 

We may be able to say that we're getting closer to the low from which inflation can rebound. It may be that we are physically getting close to the low in bond yields, but that's clutching at straws. The repercussions will linger for a long time. It will need to be a co-ordinated fiscal response to boost a monetary response of central banks who had already stripped bare their policy toolbox. Fiscal responses, however, take far longer than monetary accommodations to work their way into the system. So Wednesday's CPI figures are now only a passing interest. The Coronavirus scare has re-opened the fault lines that remain from the Great Financial Crisis of over 10 years ago - and these can not be fixed by a few rate cuts alone. 

The change in Non-Farm Payrolls for the last month came in huge. Two hundred and seventy three thousand jobs were added versus an expectation of one hundred and seventy five. Of course, the world changed towards the end of February, as Covid-19 spread to the rest of the world and markets were roiled. Nonetheless, the one factor of the economy which hadn't already begun to to celebrate was the jobs. One would expect, with almost cardiac arrest reaction of corporate America to Coronavirus, that would change on a dime. But one interesting question to ask is - 'will companies be swift to cut staff in such a tight labor market?' The reaction of futures in the market was almost nil. Friday's pre-market had the S&P futures down close to 3% and the monster jobs number did little to reverse it. One would hate to think how the markets would have reacted had the jobs number come in poorly. 

So there it is. Central banks and inflation and the Before and the U.S. jobs number in the After Refinitiv data throughout. 

This has been the Tuesday episode of Before and After. Please subscribe and hit the notification bell to ensure you're alerted to all of Refinitiv's future market updates. Have a great week and we look forward to seeing you again on Friday.