Macro Digest: Next policy change... when panic goes to angst! Macro Digest: Next policy change... when panic goes to angst! Macro Digest: Next policy change... when panic goes to angst!

Macro Digest: Next policy change... when panic goes to angst!

Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

Summary:  We think the Fed will cut rates before the scheduled 18 March FOMC meeting and most likely by a FULL 75 bps - to get some effect and get ahead of the market before they hit the zero bound for policy rates.

Conditions:  The market volatility (VIX spot) is 45%, 30Y US Fixed Income is up 4 points today alone & WTI Crude is down 30% since the beginning of the year.

What’s next:

  • We fully expect G7+ (most of G20, even) meetings this weekend
  • China could announce a massive fiscal expansion over the weekend
  • Maybe a surprise Friday cut in policy rates
  • Easing on regulation for banks next week…
  • The ECB will meet next Thursday – I doubt the market can wait
  • A move by the ECB and the Fed to buy equities could be the ultimate panic reaction from policy makers

My personal take:

  • It’s going to be an extremely volatile Friday session with plenty of rumors and noise.
  • Watch 9.00-10.30 CET time for Fed announcements or from US Treasury
  • I’m watching closely: Credit, WTI Crude (gauge for real market risk  – WTI is now down 30%), and US 10-year yields and gold
  • Positioning – reduced long volatility trades to 50% of total relative to my Monday note, still Long Gold, long EURUSD (this is major break @ 1.1240)
  • Remaining alert and totally flexible with plenty of cash to use as opportunities arise over the next week
  • Buying some SPX calls on open today 9.30 CET  - 3200 March (14 days left of tenor)

Policy makers are now beyond panic – they are in angst mode (and for good reason as their own ignorance has made the present crisis worse) and that’s when you really need to take notice.

We have reduced long volatility and will starting hedging/trading upside policy action over the next week

We suggest buying March – S&P Future calls (one example below)


The most difficult thing as a trader is to have the flexibility to change your view – there are hundreds of reasons to be bearish here and fear the next two weeks, but central banks and politicians are thinking the same thing. Being short the market, you want the market to collapse, while they want to stabilize it and will shred the rule book to try to do so. 

Historically policymakers have had very big policy “bazookas” to counter all negative moves in excess of 10% :

1987, 1992, 2000, 2008/9, 2011 – the present situation to this seasoned veteran is a total repeat of 2008 – even the projection of policy rates is following the same play book:

The time line of Federal Reserve moves in 2008 below (Source: St. Lois Fred with my edit)

12/16/08| 0-.25%|0.25-0.50%|SURPRISE |Easing |-.75% | 0.50%|10-0
10/29/08| 1.00%| 1.00%|Expected |Easing |-0.50%| 1.25%|10-0
10/08/08| 1.50% |n/a |Unscheduled|Easing |-0.50%| 1.75%|10-0

10/07/08 conference call to review recent developments
09/29/08 conference call to review recent developments
07/24/08 conference call to discuss liquidity facilities

04/30/08| 2.00%| 2.00%|Expected |Easing |-0.25%| 2.25%| 8-2
03/18/08| 2.25%| 2.25%|Expected |Easing |-0.75%| 2.50%| 8-2

03/10/08 conference call to review financial market development

01/30/08| 3.00%| 3.00%|Expected |Easing |-0.50%| 3.50%| 9-1
01/22/08| 3.50%|n/a      |Unscheduled|Easing |-0.75%| 4.00%| 8-1

  • 2008: January 22nd Fed cuts – unscheduled – 75 bps and then on regular meeting another 50%
  • 2020: March 3th – Fed cuts – unscheduled  -50 bps – and now market expects another 50 bps by March 18th!

But… but...

We think the present markets will force the Fed to cut by 75 bps pre-meeting – Why?

  • Fed is now nearing the zero-bound, or limits to how much they can cut rates – going 50 or 25 bps makes no difference, but going 75 bps would have some “shock and awe” with it
  • Fed is now close to restarting QE or yield-curve-control
  • Fed meets March 18th – that’s a long time away in conditions like this!
  • The US yield curve is now bottoming one-year out @34 bps – Thirty-FOUR basis points!  1 Y rates will fallen 112 bps in ONE MONTH and 10 yrs fallen 87 bps! This is an unprecedented yield curve shift relative to the world pretending everything is fine!
  • Credit is blowing up! Airlines collapsing – next bankruptcy is a few weeks away
  • High yield is tanking
  • Energy is tanking
  • The coronavirus spread will accelerate in the US over the next two weeks (minimum) as testing expands, and will do the same in Europe
  • We are now in a global recession – set to lose a full quarter of production –  Companies, in particular SME’s and non-listed companies, have on average 1-3 months of cash reserves and we are deep into the second month now.

US Yield Curve today vs. One month ago

Source: Bloomberg

VIX spot – now higher than 2015

Source: Bloomberg

SPX with retracements levels for reference

Source: Saxo Bank

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