The Market Today
Coronavirus Taking a Toll
by Craig Dismuke, Dudley Carter
Now Expect Fed to Cut Rates in 2020, Forecast Revisions: As the coronavirus has now crossed a key threshold, we have revised our 2020 economic and interest rate projections. The virus has now convincingly spread outside of China. Policymakers have responded by implementing protective measures which are sure to have negative economic consequences. And financial conditions have turned sufficiently concerning. We now expect the Fed to ease policy at either their March or April meeting and for the economic impact to drag 1Q GDP down 0.9% to 1.0%. We expect the rebound to be more sluggish than the v-shaped rebound from the SARs pandemic. We will release the updated forecast this morning.
Coronavirus Update: The spread of the coronavirus continues within China, albeit at a slowing pace, but is escalating outside of China. Another 619 cases outside of China were confirmed since yesterday morning, a 24% increase. The number of deaths has now reached 2,715 in mainland China and another 55 reported outside. In a seemingly conflicting message, the C.D.C. warned yesterday that the risk to the U.S. is low but that it is only a matter of time before there is a larger outbreak in the U.S. As discussed below, markets continued to convulse as global anxieties continue increasing. The U.S. equity markets have now lost 7.5% over the last four trading days, down $2.6 trillion in value. To see our updated Coronavirus Chartbooks, please click here.
Mortgage Applications and New Home Sales: Mortgage applications rose 1.5% for the week ending February 21. Purchase applications rose 5.7% while refi apps dropped 0.8%. The February purchase application data point to a soft month for home sales in the month; but with mortgage rates falling again, the housing outlook remains positive. At 9:00 a.m. CT, the January New Home Sales report is expected to show a 3.5% gain after falling over 4.0% in the final three months of 2019.
Equities Slumped Again as Virus Fears Linger: U.S. equities slowly bled away an opening jump and Treasury yields fell again as virus worries lingered and concerns about more infections in the U.S. added to investors’ anxieties. The major equity indices registered Tuesday’s peak on the opening tick as the S&P 500 and Dow both opened 0.7% higher. Mirroring the daily trendline of equities in Europe, U.S. equities quickly turned back to fall into negative territory within the first thirty minutes of trading. The averages made new lows around lunch after a director at the CDC said, “We expect we will see community spread in this country, …It is not a matter of if, but a question of when, this will exactly happen.” She went on to say “the disruption of daily life might be severe” and asked the public to “prepare for the expectation that this is going to be bad.” She did note that her concern was premised on observations of the spread in other countries, not any ongoing activity currently in the U.S.
Treasury Yields Tumbled But Trimmed the Declines by the Close: As stocks retreated, Treasury yields pressed even lower in a risk-off rally that drove the 10-year yield past its previous all-time intraday low from July 2016. At one point in the afternoon, the benchmark yield fell as much as 6.5 bps to 1.3055%, a new historic low, before ending the day down 1.8 bps at 1.352%, a new record-low close. Similarly, yields at other maturities extended their recent declines but closed up off their lows. The 2-year yield dropped 2.3 bps to 1.23%, a low back to April 2017.
Global Equities Extended the Weekly Sell-Off: The risk-off shift in recent days has knocked trillions of Dollars off the value of global equities and remains firmly in place on Wednesday. Investors continue to monitor the growing number of cases in South Korea and Italy, the largest hot spots outside of China, and reports of new possible cases in other countries such as Greece and Brazil. Following a tumultuous Tuesday on Wall Street, caused in part by health officials warning of COVID-19 possibly becoming a pandemic, the MSCI Asia Pacific Index slid 1.2% marking a ninth decline in the last ten sessions. Around the halfway point, Europe’s Stoxx 600 was 1.1% lower. The price of gold regained a bid after falling Tuesday for just the second time in nine sessions and oil prices slumped. U.S. WTI dropped nearly 2% to the lowest level in fourteen months.
Bond Yields Break With Other Asset Classes: The overnight move in global bond markets, however, has been counter to the risk-off evident across other assets classes. Higher yields on peripheral European debts are consistent with a weakened risk appetite, but the rates charged to core countries have also climbed. Germany’s 10-year yield rose 2.1 bps from a four-month low after a weak auction of 5-year notes and a report that the country’s finance minister would ask parliament to temporarily suspend the so-called “debt brake.” The constitutional measure, which would require two-thirds support in parliament to overturn, currently limits the federal government to a budget deficit of 0.35% of GDP. In other fiscal news, Hong Kong announced a deficit-bloating budget that includes, among other items, cash-payments directly to citizens, a clear attempt to shore up an economy destabilized by months of political protests and now the global virus outbreak. At 7:30 a.m. CT, U.S. equity futures had actually recovered by 0.5% and the 10-year Treasury yield was 1.5 bps higher at 1.37%.
Consumer Confidence Inched Higher on Improved Expectations: The Conference Board’s consumer confidence index inched up to 130.7 in February from a revised-lower level in January, coming up short of expectations for 132.2. However, the index held at a solid level and reflected little if any effect from worries around the virus. The details of the report showed a large 6.4-point gain in future expectations to a seven-month high was essentially offset by an 8.8-point deterioration in the current assessment to an eight-month low. Comparing the current assessment index with future expectations, a ratio that typically tightens before activity moderates, consumers reported the weakest net optimism about the current environment since October 2018. Consistent with softer labor data recently, a decline in the labor market differential (jobs plentiful minus jobs hard to get) accounted for most of the weaker current assessment, although the assessment of business conditions also cooled. The forward-looking details were broadly better.
Richmond Fed Index Recoiled in February after Strong January Surge: The Richmond Fed’s Manufacturing index dropped more sharply than expected in February, almost fully unwinding an awkwardly large gain in January that lifted the index to a sixteen-month high. The headline index fell from 20 to -2, reentering negative territory and pointing to below-trend growth in activity across the District. The details reported notable downward reversals in most components, including new orders, shipments, backlog of orders, and employment. Looking ahead, orders activity is expected to improve while expectations for employment and wage growth, along with most other components, weakened from January.
Fed’s Clarida Joins the Chorus of Officials Saying It’s Too Soon to Know What the Virus Impact Will Be: Fed Vice Chair Clarida echoed other Fed officials who have said publicly that it is still too early in the COVID-19 outbreak to know what the ultimate economic effects will be. Clarida said that the virus is “likely to have a noticeable impact on Chinese growth” that “could spill over to the rest of the global economy,” but it’s “too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook” that could lead to a rate cut. However, he did note that the virus situation is a “complex and rapidly evolving situation” that he and his colleagues are closely monitoring, and that policy decisions will be made on a “meeting-by-meeting” basis.