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US Slash Rates To Near Zero

Ahead of the open of Asian markets late last night, the US Federal Reserve slashed interest rates by 100bp, taking the target range for the benchmark rate to 0-0.25%. Alongside, the Fed also announced that it would restart QE asset purchases by buying $500bn of Treasuries and $200bn of mortgage-backed securities.

The move followed a 75bp cut by the RBNZ and a number of central banks lowering the price of US dollar swap lines to improve liquidity in the market. Despite these actions, equity markets in Asia have sold off heavily this morning, with futures pointing to further losses in European and US bourses today.

Data from China meanwhile – covering the January and February period – provided some indication of the impact that measures aimed at restricting the spread of the virus have had on the economy. On a year-to-date basis, China retail sales (-20.5%), industrial production (-13.5%) and fixed asset investment (-24.5%) were down sharply and by much more than consensus expectations.

The coming week’s focus will remain on what further monetary policy stimulus will be forthcoming, but more importantly what the fiscal response will be to the deepening coronavirus crisis. Reports suggest that US and European authorities are preparing for more fiscal stimulus. In the US, it remains to be seen how quickly the Trump administration and Congress can agree measures, with both the timing and the size of the package being important.

In Europe, meanwhile, there are reports that the German government may be prepared to ditch its longstanding balanced budget strategy to combat coronavirus. At the European level, officials have said the EU will do “whatever is necessary” and allow maximum flexibility in fiscal rules to enable governments to provide support for the economy.

Later today, G7 leaders will hold a video conference to discuss the spread of the virus, while finance ministers from Eurozone countries will meet to discuss plans to support their respective economies.

Markets have not paid a huge amount of attention to economic data releases of late, partly because they have been mostly backward-looking, predating the escalation of coronavirus concerns. However, the Empire Fed manufacturing survey is for March and should provide a timely update.

We expect the headline balance to sharply reverse February’s strong rise to 12.9 and move down to 3.0. Disruptions to supply chains are expected to show through in higher supplier delivery times, while the rise in confirmed cases across the region is likely to have weighed on demand.

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