In a surprise announcement on Tuesday, the Federal Reserve slashed its benchmark interest rate by 50 basis points in response to deteriorating global economic conditions driven by the coronavirus outbreak. While the move was largely anticipated by the markets, this was the first time since 2008 the federal reserve cut interest rates outside of a regularly scheduled meeting. In a statement issued by the Federal Open Market Committee (FOMC), they reiterated “the fundamentals of the U.S. economy remain strong”, although cautioned that “the coronavirus poses evolving risk to economic activity”. The rate cut may help to improve investor sentiment and calm the markets, but there is very little monetary policy can do to restore global supply chains and counteract the real negative impacts of the coronavirus.
Outside of the coronavirus, markets reacted positively to Joe Biden’s strong performance on Super Tuesday, and global stocks traded higher mid-week following dismal returns in the week prior. Interest rates continued to fall this week as investors sought the safety of U.S. treasuries at virtually any cost, causing the 10-year Treasury yield to dip below 1% for the first time in history. Bond prices have an inverse relationship with interest rates, and as interest rates fall, bond prices rise (and vice versa). The impacts of the recent rally in interest rates has spilled over to the housing market, with mortgage refinance applications spiking more than 30 percent in the last week. Looking forward, we can expect markets to continue to trade on headline news related to the coronavirus as well as the upcoming presidential election.
Source: Morningstar Direct, CNBC, WSJ Market Data, GSAM, Bloomberg