Market Expects Emergency Rate Cut by the Fed on Monday Morning

Mish

Jim Bianco at Bianco Research makes a case for an emergency rate cut and a recession.

Emergency Rate Cut Expected

Please consider the Market is Expecting The Fed to Cut 50 Basis Points Tomorrow Morning

Since January 2001, all inter-meeting Fed moves come between 60 to 30 minutes before the NYSE open. So the market is expecting it tomorrow morning.

Why is the market expecting a 50 bps cut tomorrow? It will be starting a rate-cutting campaign that will take the funds rate under 50 bps by the end of the year (see December 2020 futures above).

Our guess is this market is expecting thousands of positive infection cases in the US over the next month, leading to huge disruptions. Think tens of millions idled from work, school kids home for weeks, if not the rest of the school year.

So, it is penciling in a plunge in Q2 GDP to well into negative territory. It is also possible that March inflections and disruption push Q1 GDP negatively as well.

This market action says it believes a recession is about to begin.

Australia Too

2001 Flashback

Fed minutes show that Greenspan saw it way too late. His fear in 2000 was of overheating.

Important Note

Bianco's call is on what the market expects, not what he expects or would do.

I agree with Bianco's recession observation and the coronavirus disruptions.

We find out Monday morning about emergency cuts but two weeks won't make much of a difference.

A recession is baked in the cake.

Mike "Mish" Shedlock

Comments (28)
No. 1-15
Tengen
Tengen

Futures are up, Nikkei and Hang Seng are up, looks like markets may be pricing this in already.

An emergency 50 bps cut looks bad but not many would complain, especially from Trump's camp. Trump will say they should have done this sooner like he asked.

RayLopez
RayLopez

Futures in the USA for Monday and also Asian and EU market are green right now...dead cat bounce.

Here another site that's good on the prediction market for recession (about 50%): https://marginalrevolution.com/marginalrevolution/2020/03/recession-risk-is-rising.html

I'd like to know what Mish is doing or has done professionally to protect his clients but I'm sure that's against in-house and SEC rules, even though a lot of people blog after the fact on what they've done.

If the USA dodges the coronavirus bullet it's an instant win for Trump come November, if not, not.

KidHorn
KidHorn

The risk of recession within the next 6 months is 100%. There's no way to avoid it. We may get a temporary bounce from people hording, but it will be followed by a 5%+ drop in GDP.

Chinese will not go back to work. No one believes the BS numbers from the party. The containment data in China makes no logical sense. Similar to the voting pattern in the 2016 elections and Russian interference. In the US, what are two parent households going to do when the kids have to stay home? All the child care centers will be shut down. I can work from home since I'm a programmer, but most can't. How many small businesses can go 6 months with no customers?

njbr
njbr

This was the first weekend where it got in the face of many Americans. The next few weeks will be as bad as the nature of the illness and the longer-tern issues make it to the forefront of the brain.

Spring break transmission, political rally transmission, the blender of American society churns on.

If they cut rates now, today, what is there in two weeks?

njbr
njbr

In the inbox this morning from a general contractor....."We have been hearing of some potential construction material supply shortages from China, and other countries which have been greatly impacted by the Coronavirus. Please check with your material suppliers to see if there is any impact on the availability of your materials."

RonJ
RonJ

"We find out Monday morning about emergency cuts but two weeks won't make much of a difference."

It takes several months for a rate cut to filter through the economy. It was 9 months from Greenspan's emergency rate cut in January 2001, until the mild recession ended. The stock market continued to decline for another year, until October 2002.

ksdude69
ksdude69

What a joke. They better work on sending everyone a monthly deposit because if have places turning into Wuhan we're finished. Like the debt really matters now anyway lol.

CautiousObserver
CautiousObserver

Does anyone else remember that one of the things President Trump was known for in the real estate business was getting his lenders so deep into a project that, if the project did not pay out as expected, then the lenders had to negotiate a deal with Trump to keep the assets from going into liquidation? I just realized that he might be trying the same maneuver with the Fed. I can imagine him thinking years ago, "If only I was big enough to get whatever interest rate and lending terms I want from whomever I want." Today, he might be that big. Holy cow.

Tony Bennett
Tony Bennett

Do I need a calendar? Or a watch? To time duration of bounce?

Zardoz
Zardoz

Not surprising... trump has filled his cabinet with Goldman Sachs people. The trumplings have been conned so badly, most of them will never have the stones to admit it... they'll just continue raging over the cliff with the rest of the angry lemmings.

Ted R
Ted R

Yeah well use a different formula to measure inflation, like I do, and the U.S. economy has been contracting for years and as such the economy has been in a true recession for a years. Low interest rates and cheap money have only served to make the recession less severe than it really is. Piling on debt to keep the economy from collapsing only works for so long. At some point you have to pay the piper.

Carl_R
Carl_R

I thought I posted a shorter version of this last night, but it doesn't seem to be here, so I'll post it again, and make it a little longer this time. Back in the twenties and thirties, they tried lowering interest rates, but it did no good because primary demand wasn't there. That begat the saying "you can't push on a string". This situation is similar.

Coronavirus is impacting the economy in several key ways. First, right now there is a surge in demand as people stock up. Soon they will stop going out. Restaurants, entertainment, travel, etc will all get hurt, but so will other merchandise, like clothes, appliances, home improvement, etc. If people aren't in stores, they won't make any impulse purchases, and will only buy what they absolutely need (which is way less than they usually buy). Second, if businesses have no raw materials, or they have no demand (see, e.g. restaurants above) they will lay off employees, who will further reduce spending. The whole thing can easily cascade into a series of contractions.

Of course, if Cornonavirus takes the summer off, and we have a vaccine by fall, the above cascade wont happen, and we'll all get back to business. The companies that sold extra as people stocked up will sell less for awhile, but mostly things will revert to normal. In that case, there will be a minor hit, perhaps a small recession, but nothing major, and we'll grow right out of it.

But, what if cornavirus doesn't take the summer off, or, what if there is no vaccine in the fall? Can interest rate reductions stimulate the economy? This is where we come to the "push on a string" problem. Primary demand for many things would dry up. Do you really need furniture if you have no job? Do you need a new car if you are not going out? Even if you cut interest rates on car loans and furniture loans to 0%, if you boost demand 50%, 150% of 0 is still zero (and 150% of a very small number is still small). You can't push on a string. If there is no demand there to push, you can't create it with lower interest rates.

Herkie
Herkie

Well, equities closed 5.1% (over 1,295 points on the Dow) higher today so clearly they do not need a rate cut to find cash just laying around on the side looking for a home. Most of the recent downturn is just a temper tantrum at not getting a larger mountain of cash thrown at them by the Fed and so this has been little more than blackmailing the Fed for lower rates. So much for the theory that when the Dow drops three thousand or so points XYZ trillions are wiped out of existence. If that was the case then where did the $1.5 trillion cash for today's rally come from?

Zardoz
Zardoz

Biggest EVER! The hamburders and viagra will flow at the White House tonight, BAYBEE!

manish222
manish222

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