Published: March 2nd, 2020
– Despite the narrative the Federal Reserve has been serving the American public in the recent past, there is a possibility the central bank may just cut the Federal funds rate after all. This new position is precipitated by the momentary collapse of Wall Street last week as well as the poor performance of the Treasury yields. On the backdrop of all this gloom, the greenback shed much of the gains it racked up in February.
The U.S. dollar is not in a comfortable place. March begins with the greenback facing pressure from the collapse of Wall Street and the sub-par performance of the Treasury yields. Besides, the interest rates are sliding further and further down and every expert is pointing at coronavirus, rather, too conveniently.
The sliding dollar is not the worst part; the very low interest rates the market is seeing indicate that there is not much room for wiggling should the markets drop further down. According to Neil Irwin, a senior economics correspondent for the New York Times, the steep drop that the stock markets experienced last week is not the best indicator of how gloomy the global economy is getting, rather, the current happenings in the bond markets tell the story more eloquently.
The dive the global interest rates have taken could be reflecting the markets’ migration towards safe investments. Such a phenomenon is always witnessed every time the world’s economy takes a beating. However, it could also be a reflection that the markets anticipate the Federal Reserve and other global central banks to lower the base lending rates or implement some actions that will contain the effect of the coronavirus.
The poor performance of the dollar, the nose-diving stock markets, and the low-interest rates are powerful and pessimistic harbingers of the degeneration expected in the world economy a few years from now. It is sad, Neil adds, the warning is valid even if the damages that result from the coronavirus epidemic, both economic and social, are short-lived or mild.
The benchmark 10-year U.S. Treasury bonds lost traction. Its yield shed substantial gains to stand at 1.16%, a record low. Compared to the 1.9% posted when the year began and 2.7% a year ago, these returns are considerably dismal. Besides, the poor show is not only limited to the U.S.; European superpower Germany, as well as the Australasian giants Japan and Australia, are also reeling under the pressure.
The poor performance by the Treasury bonds and the fall manifesting among longer-term interest rates are only normal when the markets panic or during a recession. None of these situations describe the current conditions; the economy is in somewhat good shape and what investors report is not the reality, rather, threats from an economy that is being disrupted.
The Treasury bonds may have had it rough but the stocks were bruised more. At the close of Friday morning trading session, the S&P 500 and the Dow Jones Industrial Average were down 13% and 14%, respectively.
And while these figures seem devastating, there are segments of the market that were hit harder. Stocks of many banks, for instance, are heaving. JPMorgan Chase shed some 15% during the past week and 5% on Friday alone.
Bank of America lost 17%, a position shared by many banks in America.
Aside from the dollar, whose losses are compounded by many global factors, the banks are the biggest losers this far. You may be asking yourself why that is so.
Well, banks are traditional; while most have migrated to multiple revenue streams, the vast majority still make money by charging interest on the money they lend out. That is, they borrow money from their customer base and lend this out at a higher rate.
The last week, the interest rates, and more so, the Treasury yields have descended to record lows. The low-interest rates, as such, mean that banks get lower margins for the cash they have lent out.
The dollar is the most indicative signal of a struggling economy. The greenback sliding consistently for three consecutive days was a sign that the effects of coronavirus have been harsh on the U.S. economy. This fact is a little disturbing considering that the epicenter of the epidemic is half a globe away. It goes to show just how intertwined the economies of China and the U.S. are.
Joseph Gagnon who is a senior fellow at the Washington D.C.’s Peterson Institute for International Economics says there is more than meets the eye about the current market downturn. According to him, seeing oil tank, gold dive, and all major assets assuming a downward trajectory simply is the markets’ way of instructing the Federal Reserve and other central banks to keep the base lending rates exceptionally low, and indefinitely.
The position of the dollar, in particular, according to Joseph, means that the era of cheap money is only beginning. The unfortunate bit about this whole situation, he adds, is that the world economy is very vulnerable and would probably degenerate into a full-blown recession if the situation does not change soon enough.
Joseph concludes that the Federal Reserve does not have adequate capacity to help when things get out of hand. He likens the current economic environment to a severe shock, warning that the entire market ecosystem needs to worry.
If the threat of coronavirus can push rates below the levels seen during the great depression or the global financial crisis of the last decade, then the problem is starker than it seems. Joseph says that the time to act was yesterday and that central banks will soon realize, rather sadly, they are not able to help the global economy recover.
The U.S. dollar tanked last week, and so did other assets such as gold and oil. This is an indication that not all is good in the global economic scene. As the Federal Reserve and global central banks struggle to remedy the situation, one is left wondering just how big the effect of coronavirus is going to be when the dust finally settles.