The Market Today
G7 ‘Ready to Act’ as Virus Continues to Weigh on Economic Outlook
by Craig Dismuke, Dudley Carter
G7 Leaders “Ready to Take Action,” But Not Yet: Finance ministers and central bankers from the Group of Seven nations held a call this morning to discuss a coordinated policy response to the growing coronavirus threat. The group released a statement saying, “We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions. … Given the potential impact of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks. … G7 finance ministers are ready to take action, including fiscal measures where appropriate, to aid in the response …”. Also in the statement, the leaders called on the IMF, World Bank, and other international financial institutions to stand ready to help. G7 nations include the U.S., the U.K., Canada, France, Germany, Italy, and Japan.
More Containment Measures Implemented as Case Count Increases: The number of confirmed cases continues to grow rapidly in South Korea, Iran, and Italy. Additionally, the number of new cases in the U.S. continues to increase, now up to 105 cases according to the Johns Hopkins CSSE data. More containment measures were announced yesterday from U.S. companies adding more fuel to the belief that the economic impact in the U.S. will be meaningful. We now believe the Fed will need to cut rates 50 bps in short order (presumably before the March 18 FOMC Meeting). Additionally, we now believe the likelihood that the Fed cuts its overnight rate to zero this year has increased to be a noteworthy possibility, although we are not yet convinced this will occur. For link to COVID-19 Chartbook, please click here.
Fed Watch Party, Vehicle Sales: February vehicle sales are scheduled for release today. Sales are expected to tick lower, a trend which began in 2017 when sales peaked. Also today, Cleveland Bank President Mester and Chicago Bank President Evans are both on the tape. Additionally, the watch party continues for any signs of an intra-meeting Fed rate cut.
Super Tuesday: Super Tuesday is finally here with fourteen states going to the polls for primaries today (CA, UT, CO, OK, TX, MN, AR, TN, AL, NC, VA, VT, MA, and ME). Biden is attempting to consolidate support of moderates after Klobuchar and Buttigieg exited the race. However, today will be the first chance to see what kind of support Bloomberg is able to garner.
U.S. Markets Convincingly Diverged from Global Counterparts: After a whippy overnight session for stock futures, U.S. equities surged during U.S. trading Monday as investors stepped back in after the worst week since 2008, despite a persistently-uncertain situation with COVID-19. Global stocks moved wildly in different directions overnight as European equities gave up early gains after most Asian stocks staged a modest recovery from steep losses last week. Weekend economic reports confirmed the economic destruction of the virus in China as official manufacturing and services PMI plunged to all-time lows. The Bank of Japan followed the Fed in issuing a statement that it would use its tools to support the economy, the first of several daily developments that signaled markets were right to expect global policymakers would provide stimulus.
Stocks Surged as Global Policymakers Signal Coordinated Stimulus Efforts: Stocks made another leg higher after reports indicated G-7 finance ministers and central bank governors would hold a teleconference today to discuss the virus outbreak, and presumably a coordinated stimulus response. Around the same time as the G-7 headlines hit, the IMF and World Bank issued a joint statement saying they would use “available instruments to the fullest extent possible, including emergency financing, policy advice, and technical assistance,” to cushion member countries’ economies as needed. The Dow surged nearly 1,300 points, or 5.1%, by the close while the S&P 500 rallied 4.6%. After equity trading ended, President Lagarde said the ECB “stand[s] ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.” Amid the surge in equities and expectations for global stimulus, Treasury yields pushed swiftly and sharply off their lows. After shedding more than 20 bps overnight, the 2-year yield closed down 1.0 bps at 0.88%. The 10-year yield actually rose 1.5 bps to 1.16% after dropping as many as 12 bps overnight.
Early Overnight Reports Hint at Coordinated G-7 Statement, Not Action: Global markets remained upbeat Tuesday despite overnight reports that this morning’s teleconference between G-7 policymakers would result in a coordinated statement, but no coordinated policy action. As described above, the official statement released after the conclusion of the meeting confirmed those reports. With a corner of the market coming to expect this meeting could be the first domino to fall to set off a chain reaction of policy stimulus, the disappointment of just a pledge that leaders “stand ready to cooperate further” dragged U.S. equity futures and Treasury yields lower.
U.S. Equities, Treasury Yields Fall Back After G-7 Holds Off On Stimulus for Now: S&P 500 contracts gave up a 1.0% gain to trade 0.2% lower around 7 a.m. CT. The 10-year Treasury yield fell from unchanged to down 4.0 bps at 1.13%. The 2-year yield dropped 4.8 bps to 0.86% despite fed funds futures trimming the likelihood of an emergency 50-bp cut this week. To be sure, the markets still fully expect a 50-bp rate cut in March and roughly 100 bps of easing by the end of the year. Despite the larger central banks’ contentment with “closely monitoring,” other central banks opted for quicker action. To help combat the economic effects and uncertainty created by the virus, central banks in Australia (to a record low) and Malaysia (to a ten-year low) both lowered their target rates by 25 bps.
Virus Outbreak Weighs on ISM Manufacturing Index: The ISM’s manufacturing index fell more than expected in February, avoiding contraction solely because of supply chain disruptions resulting, at least in part, from the global virus outbreak. The headline PMI fell from 50.9 in January to 50.1, slightly weaker than the 50.5 economists had expected. However, the expansionary signal from the above-50 reading is misleading considering shifts in the underlying details. Supplier delivery times slowed from January, pushing the related index up 4.4 points and adding just under 1 point to the headline. Slower deliveries, typically associated with brisk economic activity and therefore mathematically accretive, told a more negative narrative in the current report. The sharpest contraction of imports this cycle signaled the virus has disrupted U.S. supply chains, a story corroborated by a worrisome comments section. Elsewhere, new orders, inventories, and employment contracted and production fell notably back near neutral. The report confirms that any post-trade-deal bounce will at the least be delayed by the economic uncertainty caused by the virus.
Construction Spending Starts 2020 on Strong Note: January’s construction spending report was much stronger than expected and there were positive revisions to the prior two months’ activity. Overall spending rose 1.8% to start 2020 as each of the major categories strengthened from December. Private residential spending rose 2.1% and continued to reflect positive effects of warmer winter weather and the 2019 housing recovery amid a drop in mortgage rates. Nonresidential construction spending, or spending by private U.S. businesses, rose 0.5% but still appears weak over a longer term. Public spending rose 2.6%, helped higher by increased outlays at both the federal and state and local levels. The January report should have positive implications for 4Q GDP revisions but will, like other data reports, be viewed cautiously amid the virus-related uncertainty.
ICYMI – February 2020 Monthly Review: Economic data released in February was generally upbeat, but entirely overshadowed by virus developments that severely limit investors’ ability to glean forward-looking indications from prior trends. Hopes that the new coronavirus, COVID-19, was contained to China crumbled as cases popped up in nearly 60 countries by the end of the month, leading to growing fears of a pandemic that could trigger a global recession. While new cases in China continued to slow, plunging PMIs to historic lows showed extraordinary containment measures come at a cost. Cases exploding in South Korea, Italy, and Iran and the widespread reach to other regions, including the U.S., worried investors that similarly strict containment efforts and resultant economic standstills could become a global reality. As part of a global market rout, U.S. and European equities, oil, and Treasury yields all closed February with their largest weekly declines since the 2008 financial crisis. The 10- and 30-year Treasury yields fell to all-time lows and shorter yields tumbled on expectations the Fed will cut rates in response. Click here to view the full recap.