The Market Today

COVID-19 Continues to Crush Sentiment


by Craig Dismuke, Dudley Carter

COVID-19 Update: The coronavirus continues to weigh on sentiment globally and in the U.S.  The number of confirmed cases globally has now exceeded 89,000 and the number of deaths has reached 3,048.  The virus has now spread to 58 countries, although the most affected countries have been China, South Korea, Italy, and Iran. Since Friday, the number of cases in South Korea has risen from 2,337 to 4,335 (+85%) while the number of cases in Italy has increased from 650 to 1,694 (+161%).  In the U.S., the number of confirmed cases continued to climb over the weekend with new cases reports in Washington, Oregon, California, Illinois, New York (Manhattan), and Florida (according to the Johns Hopkins CSSE data).  While the virus itself is unlikely to cause economic damage, the response as people try to protect themselves is. Our current view on COVID-19 is as follows:

  1. COVID-19 has spread dramatically larger and faster than SARs – comparisons are now essentially useless
  2. Growth of COVID-19 has not been contained to China
  3. The outbreak is now likely to cause a response from monetary policymakers, including the Federal Reserve
  4. Key questions we are now focused on
    • How long will the outbreak last?
    • How much economic activity will be lost?
  5. The answer to the questions above will determine how much the Fed will have to ease
    • Currently expect 25-50 bps in short order
    • Other policy tools may come into play
    • Markets projecting as much as 100 bps in cuts
  6. There is now likely to also be fiscal stimulus eventually

 

TODAY’S CALENDAR

U.S. Manufacturing Indices: Today’s economic calendar brings the February ISM Manufacturing index, the January construction spending data, and the Markit manufacturing PMI.  The U.S. manufacturing indices come on the heels of the weakest Chinese manufacturing PMI on record (more below).


OVERNIGHT TRADING

Chinese PMIs Confirm COVID-19 Has Caused Sharp Economic Contraction: Global markets have been whipsawed overnight after the first pieces of virus-impacted data confirmed how significantly economic activity in China has been impacted by the virus outbreak and the drastic measures taken by the government in an attempt to contain COVID-19. The official government PMIs came in shockingly low, with the manufacturing index tumbling from 50.0 to 35.7, well below the 45.0 expected, while the services PMI plunged from 54.1 to 29.6; both were the lowest readings on record. On Monday, a private survey of activity at smaller companies in China slid from 51.1 to 40.3. Chinese stocks, however, surged more than 3.3% as the number of cases in China have continued to slow and investors hope policy stimulus from world governments and central banks will help mitigate some portion of the economic damage.

Bank of Japan Echoes Fed’s Willingness to Act with Unscheduled Statement: Japan’s Nikkei also gained, adding 1.0% following remarks and actions from the Bank of Japan showing it would step in to support activity in the country. Following the Fed’s unscheduled statement released last Friday that amped up expectations for imminent policy easing, the Bank of Japan said in a statement of its own that it “will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.” Later, the central bank offered to buy billions in government bonds through repo operations and snatched up a record amount of stock funds according to Bloomberg.

Treasury Yields Burst Lower on More U.S. Cases, First Deaths: In the U.S., updates throughout the weekend reported more suspected community transmission cases; cases popping in states away from the West Coast, where most cases had been contained; and the first American deaths caused by COVID-19. When markets opened in Asia, Treasury yields exploded lower sending the 10-year yield down as far as 1.0283% before bouncing. In choppy trading since hitting that level, the 10-year yield has moved within a 13-bp range, climbing back as high as 1.16% before dropping back to 1.07% at 7 a.m. CT. The 2-year yield continues to pace the declines, down more than 16 bps to 0.75%, a new low back to September 2016 (when target fed funds was at a range of 0.25%-0.50%). Fed funds futures now expect roughly 100 bps of easing from the Fed by the end of the year, with at least 25 bps, if not 50 bps, coming this month.

ICYMI – February 28, 2020 Weekly Market Recap: Generally-upbeat economic data were ignored last week as hopes the virus could be contained to China were dismantled, with cases continuing to drive higher in South Korea, Italy, and Iran and the number of countries reporting their first identified cases continued to grow. The contagion beyond China included warnings from the U.S. CDC that “it is not matter of if, but a question of when” the virus spreads in the U.S., adding “the disruption of daily life might be severe.” A day later, the health organization confirmed the first U.S. case with no known travel to China or ties to anyone that had been infected, raising alarms about community transmission in the U.S. Global markets fell apart, with U.S. and European equities, oil, and Treasury yields also posting their largest weekly declines since the financial crisis. Midday Friday, Fed Chair Powell issued an unscheduled statement that said the virus “poses evolving risks” that the Fed is “closely monitoring,” and that the U.S. central bank will “use our tools and act as appropriate to support the economy.” Click here to view the full recap.


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