2/06/2020

The Markets Don’t Know What to Make of Coronavirus Yet

"Tedeschi pins the start of major worries among market participants at Martin Luther King Jr. Day weekend; the quantity of stories on the Bloomberg terminal about the outbreak was “an order of magnitude” higher on Tuesday, January 21, than Friday, January 17, he says. And from January 17 through January 31, market expectations for short-term interest rates at year-end fell by 0.26 percent, meaning investors had shifted their views to expect the Fed to offer an additional quarter-point cut, right as they were getting more nervous about coronavirus.

It is important to note, market expectations about future interest rates are probabilistic. The shift didn’t mean market participants were sure coronavirus would hurt the U.S. economy enough to require exactly one additional rate cut; rather, it was a measure that incorporated a significant possibility of no major economic effects and no additional rate cuts, and also a possibility of significant economic effects requiring several rate cuts."