Coronavirus fears have driven interest rates across the developed world to historic lows. Equity markets have reacted violently to the uncertainty around how this new disease may disrupt global supply chains and affect overall economic activity.
In response to these concerns, the Federal Reserve stepped in earlier this week with an emergency 50 basis point rate cut. This cut was an attempt to promote confidence throughout the financial system and push down short-term interest rates, which will help corporations and individuals attain lower-cost financing.
There is no way of knowing what affects this virus will have on the globally interconnected economy and if it will send the world into a recession. What we do know is that it will eventually run its course and that disruption will stop once our scientific community develops remedies to combat the virus. It is important to note while the virus is very contagious, it does not appear to be extremely deadly for most healthy individuals. As a result, travel and leisure businesses will be hit hardest should the virus spread. On the other hand, the U.S. service economy (70% of the U.S. economy) is derived from service) may adjust better than currently being forecasted in the equities market given all the technology tools that permit employees to work remotely.
In other news, the February jobs report was a good one with a better than expected job creation number, while unemployment remained at 3.500%. However, even a good jobs report didn’t matter as the equity markets shrugged off the good news.
Government-guaranteed interest rates have touched levels most of us believed we would never witness unless we were in a full-on depression. The 10-year Treasury ended the week at .78%, which is remarkable, but also a bit scary. While banks lowered interest rates, it is important to note that as rates approach zero, it becomes increasingly difficult for banks to earn a net margin. The result is that mortgage rates remain higher than what some customers believe mortgages should be priced at. Should interest rates remain low, we would expect mortgage rates to continue to slide lower. However, we do expect that rates will move up once a clearer picture on the coronavirus emerges. It is our belief that rates will remain low for quite some time.