16 March, 2020
Frances Donald, Chief Economist
The Fed sent a jolt through the financial markets on Sunday, 15 March, by cutting interest rates by a full percentage point three days before its scheduled rate-setting meeting. While an imminent rate cut had been expected, the timing of the announcement was a surprise. The decision brings the US interest rate back to the level it was during much of the 2008 global financial crisis (0%–0.25%). Our Global Chief Economist and Global Head of Macroeconomic Strategy Frances Donald takes a closer look.
We’ve written previously that we believe the US Federal Reserve (Fed) would have to move aggressively before its scheduled March 18 meeting; however, even we hadn’t expected this level of action. In our view, the US central bank has thrown just about every tool available at its disposal at the markets and the US economy.
It’s important to note that the package Fed Chair Jerome Powell announced on 15 March isn’t just about the interest-rate cut, it also includes:
In our view, there’s absolutely a growth component here. It’s becoming increasingly clear that we’re staring down the barrel of an extremely pronounced growth shock—one that may be short in duration, but painful in terms of depth. There are many market commentators who say that rate cuts at this point won’t help growth. I respectfully disagree: They absolutely do, just not to the same degree they have in the past. Mortgage applications during the week ended 6 March rose 55% from the previous week, led by refinancing. This is evidence of lower rates at work. At the margin, it should also help the consumer by lowering some bills, which could translate into slightly higher disposable income.
The more important point here, however, is that what we’re dealing with could be bigger than a coronavirus-created recession—policymakers are acting to steer us away from a potential credit crunch. In our mind, the Fed is clearly trying to prevent a repeat of 2008 and keep us in a 2001 type of recession from which we can bounce back much more quickly. The US Treasury market has seen sizable funding issues in the past week and has been displaying signs of stress. As Chair Powell noted during the Fed’s press conference, the Treasury market is typically the most liquid, and any sign of stress is therefore concerning and could translate into broader market dysfunction. He also noted that he felt it was important that the Fed “support market functioning.”2
Of course not. The Fed may be out of rate cuts, but it’s not out of tools. We’re expecting more action from the Fed in the weeks ahead.
Ultimately, we believe that the Fed’s package won’t be able to prevent a recession if that’s where the US economy is headed—and it probably is. However, this package will likely support credit channels and enable the healthy functioning of the US Treasury market, thereby preventing severe financial contagion from taking place. That said, overall visibility remains limited. Hopefully, the fog will clear soon.
1 Federal Reserve issues FOMC statement, federalreserve.gov, 15 March 2020.
2 “FOMC Press Conference Call,” 15 March 2020
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income – Aim for higher, not the highest
If we focus too much on chasing the highest yield and upfront yield generation, we could suffer from early capital depletion and miss the total return opportunity towards the later stages of the investment journey.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.