COVID-19, Monetary and Fiscal Actions, Credit Markets and Future Tailwinds

On Friday, March 13, Loomis Sayles’ Global Fixed Income team held a conference call to discuss the current market environment, policy responses and potential opportunities. Here, each speaker summarized a few key points.

The big picture

It doesn't happen often that a single event or shock could so quickly alter our view of the global economy and impact markets such as we've seen over the last couple of months with the global spread of the coronavirus. We have seen market moves like this before: 9/11, the Russian default/ Long-Term Capital Management (LTCM) in 1998 and the global financial crisis. Those were also periods of panic and uncertainty, but when we get through the worst and the dust settles, there will be opportunities.

We were looking forward to 2020 being a period where we could potentially add in opportunities as we got the confirmation of a rebound in global growth. Now that's changed. The virus on its own is enough to alter that view, but now it is combined with the supply shock in oil that we saw when Russia and Saudi Arabia decided to flood the market with oil. Both events together comprise a dramatic deflationary shock.

As more quarantines are put in place, we expect that global growth estimates will be revised down. We expect supply chain disruptions from the shutdowns which will impact manufacturing, which was just starting to recover. More importantly, the consumer and services will be impacted. Right now, we do not believe the US will enter a recession, but the odds have certainly risen. Once the quarantines stop, we expect a recovery in the US. We expect at least one quarter of negative growth in the second quarter and sluggish positive growth in the third quarter. Much of this depends on how long the various quarantines and shutdowns last, so our view of US and global growth will be fluid and changing.

Monetary and fiscal actions

We expect that central banks will continue to step in and help support the market. We have seen multiple countries cut rates in response to both the slowdown and some of the market instability and volatility. Our base case is that the Fed will go to the zero lower bound probably next week at their meeting, but certainly by the beginning of the second quarter. The support by central banks is a good confidence builder for the market, but we think there is a recognition of the limits of monetary policy.

(Post-call update: on Sunday, March 15, the Federal Reserve slashed its benchmark interest rate to near zero and launched a bond-buying program of $500 billion in Treasury securities and $200 billion in mortgage-backed securities).