Less than two weeks ago, the 10-year U.S. Treasury bond yield hit a record low of 1.31 percent. I wrote Sunday about why I was alarmed that the yield had fallen well below that, dropping below 0.7 percent and portending significant and protracted weakness in the U.S. economy. Well, it’s gotten worse: In trading early Monday morning, the 10-year yield fell below 0.4 percent.
Bond yields aren’t alone: All sorts of financial-market indicators are moving swiftly and soundly in a bad direction. Asia-Pacific markets fell sharply on Monday — the Japanese Nikkei exchange fell more than 5 percent, and Australian stocks were down more than 7 percent — and the Dow Jones Industrial Average opened down more than 1,800 points once Monday morning reached New York. Europe is a mess, too, with most major indexes around 6 percent, and more in Italy, which is hit hardest by the outbreak. The story across all these markets is the same: The novel coronavirus is a big deal, and it’s going to be very bad for the global economy.
A new wrinkle on Sunday was a stunning 26 percent drop in oil prices. Oil had already been under pressure as the coronavirus crisis suppressed demand, but this particular price drop was driven by a Saudi announcement that the country will slash the price of the oil it sells and ramp up production. Last week, the “OPEC+” group of oil-producing countries, which includes traditional OPEC members, like Saudi Arabia and Iran, plus Russia, had tried and failed to reach an agreement on a plan to cut oil production in response to the oil-demand slump. Russia resisted the production cut, and now the Saudis — who can produce oil more cheaply than any other country in the world — are trying to squeeze the Russians into agreeing to production cuts by driving down the price. Whether this will ultimately work to prop up oil prices is unclear, and in the meantime the result has been oil prices falling below $30 a barrel.
Several news organizations have been running a quote from Vital Knowledge founder Adam Crisafulli, who said Sunday that the oil-price crash “has become a bigger problem for markets than the coronavirus,” but this claim does not make a lot of sense to me. First of all, the oil-price crash is the coronavirus: It is a knock-on effect from the sharp drop in consumer demand for oil due to virus-related disruptions. Second, from a U.S. perspective, the effect of cratering oil prices is decidedly mixed: It’s bad for firms in the oil industry and for regions where oil extraction is a major industry (Exxon was down 14 percent just after the open Monday), but it’s good for businesses and consumers that rely on petroleum products, which will get cheaper.
“Oil-price declines have mixed effects, and more or less wash out in aggregate,” said Ernie Tedeschi, a macroeconomist at the investment-research firm Evercore ISI, in reference to the U.S. economy. “The oil-price volatility may be a net negative for financial markets right now as it’s feeding into risk-off/uncertainty. But even there, it’s catalyzing the virus effect that’s already present.”
Investors are pricing in more reaction from the Federal Reserve: Bond futures indicate that investors expect the central bank will cut short-term interest rates by at least 0.75 percentage points at a regularly scheduled meeting later this month, after the Fed already did an unscheduled cut of 0.5 percent last week. But, as I have written, interest rates can only do so much to foster economic activity in a crisis where disease risk is suppressing both supply and demand. The Fed’s last cut did not impress the stock market that much. The primary driver of coronavirus-related economic concerns remains the trajectory of the epidemic itself, and measures to mitigate the spread of the virus remain policy-makers’ best hope to contain the economic damage.