The Market Today
Fed “Closely Monitoring” Coronavirus, but Not Yet Ready to Act
by Craig Dismuke, Dudley Carter
Coronavirus Update: The number of confirmed cases increased to 44,653 in China overnight, up 2,071 from yesterday’s tally. The rate of daily growth has continued to decline although there is some uncertainty around those figures. The drop in daily growth of confirmed cases coincided with a change in how those cases are tabulated (see Chart of the Day). According to guidance from the N.H.C. dated February 6, China began classifying coronavirus results into four categories: “suspected cases,” “clinically diagnosed cases,” “positive tests,” and “confirmed cases.” Only patients who test positive for the virus AND who have symptoms will be included in the count of “confirmed cases.” If someone tests positive but shows no symptoms, they will classified in the “positive tests” category. The number of deaths has now risen to 1,115. The case fatality rate is up now up to 2.47%, following a similar growth path of the SARs case fatality rate. To see our updated Coronavirus Chartbooks, please click here.
Mortgage Applications Benefit from Lowest Rates Since 2016: Mortgage applications for the week ending February 7 rose 1.1% on a 5.8% decline in purchase apps and a 5.0% increase in refis. The 30-year mortgage rate, according to the MBA report, ticked up 1 bp to 3.72% during the observation period, remaining near the lowest level since 2016. The four-week average for refi apps is now up 60% and the average for purchases is up 13% from one month prior levels.
Chair Powell Testifies: Fed Chair Powell will testify before the Senate Banking Panel today at 8:30 a.m. CT. Yesterday’s House testimony favored a wait-and-see approach to any policy decision (more below).
Stocks Managed Records with Modest Gains: U.S. stocks closed little changed on Tuesday, although modest gains for the S&P 500 and Nasdaq were enough to push both indices to new all-time highs. Stocks opened stronger after small business confidence rose more than expected to start the year and weathered another drop in job openings and Fed Chair Powell’s testimony without much disruption. After slowly trimming its morning gains during afternoon trading, however, the S&P 500 closed up 0.2% but near its lows of the day. Powell said the Fed is “closely monitoring” the virus outbreak and watching for signs that the expected negative effects on the Chinese economy could be spilling back into the U.S. However, he balanced that by saying that it’s still too early to say how it may impact the U.S. or estimate the effect on the global economy.
Yields Moved Up after Powell Said Fed is “Closely Monitoring” But Noted It’s Too Early to Assess Potential U.S. Economic Impact: Treasury yields also moved up and down throughout Powell’s testimony but within a tight range above Monday’s final levels. However, the Treasury curved inched higher steadily during the final hours of trading to close around its daily highs. For the day, the 2-year yield rose 3.0 bps to 1.42% while the 10-year yield added 3.1 bps to 1.60%. Fed Funds futures adjusted higher in yield as well to reflect slightly less easing from the Fed, although at least one rate cut this year remained fully priced in. In other markets, oil prices rose while gold remained weaker through the session.
Stocks Climb on Containment Hopes: Much of China remains closed for business and there is significant uncertainty about the economic fallout from the virus that paralyzed the world’s second largest economy and key link in the global supply chain. Additionally, there are questions about the nature of the virus itself and speculation that definition changes in China’s protocol could impact consistency of case reporting. However, as new reported confirmed cases continue to slow, investors continue to push equities higher with hopes that the containment measures taken by world governments have been effective in limiting the contagion. Stocks rose 0.5% in both Asia and Europe, the latter to a new all-time high, and U.S. futures had gained 0.4% at 7 a.m. CT. Oil prices added more than 1% with U.S. WTI trading back above $50 per barrel.
Bond Yields Tick Higher: Stronger equities were pressuring bond yields higher ahead of the second leg of Fed Chair Powell’s semi-annual testimony before the Senate’s Banking Panel. If he feels it’s necessary, this morning’s testimony will give the Chair an opportunity to fine tune any signals the markets took away from yesterday’s appearance before the House (more below). The 2-year Treasury yield was 1.4 bps higher at 1.44% at 7:30 a.m. while the 10-year yield had added 1.9 bps to 1.62%. European bond yields also reflected a risk-one tone, but core yields were off their highs after data showed industrial production in the Eurozone fell 4.1% in December from a year ago, matching the weakest 12-month result since the recession.
Job Openings Decline Deepened in December: While most labor market data have pointed to a resilient jobs market at the turn of the year, the disappointing downward trend in job openings continued in December. Total job openings fell 364k to 6.423MM to close 2019 after dropping 574k in November, with the cumulative 938k drop registering the largest two-month decline since records started in 2000. Compared with a year ago, job openings deepened a precipitous decline to down 14.1%, the sharpest 12-month pullback since the financial crisis, and each private sector reported fewer openings than in December 2018. While it could indicate slower job growth ahead, signals from other metrics in the report were more stable and, even after the decline, openings exceeded the number of unemployed for a 22nd month.
Several Fed Officials Signaled It’s Too Early To Call for a Cut Amid Coronavirus Uncertainty: Fed Chair Powell’s testimony headlined Tuesday’s Fedspeak, but there were a couple of others that offered an updated to their individual outlooks. Powell admitted the virus outbreak in China will undoubtedly have negative effects on the Chinese economy, and is “very likely” to cause some hiccups here in the U.S. However, it’s still too early to assess the size or magnitude of any domestic disruptions. President Kashkari from the Minneapolis Fed, who votes on policy this year, said the virus “clearly is a downside risk for China, and if it were to come to the U.S. in scale, would be a downside risk for our economy” which “could affect the path of monetary policy.” St. Louis President Bullard noted that, “Experience with previous viral outbreaks suggests that the effects on U.S. interest rates can be tangible and last until the outbreak is clearly contained,” although he later characterized the virus as a “tail risk.”
Fed Thoughts Away from the Virus: Powell said the U.S. economy is in very good shape, but joined others who have pushed back consistently against any expectations that the Fed might raise rates in the near-term. Powell pointed to “significant [positive] effects [of the record-long expansion] now in low and moderate income communities” and said “Unemployment can be lower than many had expected without raising inflationary, or other concerns.” Bullard’s forecast is “steady as she goes right now” for interest rates and said, “Given that we have missed our target to the low side for quite a while, I think it would be appropriate to be a little above target in the current environment.” Kashkari gave only a relative comparison, saying the U.S. economy looks incredibly strong relative to Europe.