The Market Today
Growing Likelihood of Significant Economic Damage from Coronavirus – Forecast Revision
by Craig Dismuke, Dudley Carter
Coronavirus Update: The W.H.O. declared COVID-19 a pandemic yesterday. The number of cases continues to rise, up 6,699 over the past 24 hours. This includes 4,717 total deaths. The number of cases in the U.S. is up 28% to 1,323. Nearly unthinkable just weeks ago, the NBA announced last night that it was suspending the remainder of the basketball season after a player tested positive for COVID-19, leading to teams being quarantined inside locker rooms for hours. More important globally, however, was President Trump announcing in his evening address from the Oval Office a 30-day suspension of entry into the U.S. for anyone, with limited exceptions which include U.S. citizens, who have been to Europe, excluding the U.K. and Ireland, within the last 14 days.
The news regarding the coronavirus outbreak and the expected economic implications has deteriorated further since our last forecast revision. In our attached revision, we include an unexpected, best-case scenario in which the Fed is not forced to cut to zero and the economic damage is limited. That possibility appears dimmer and dimmer each day. The more likely scenario highlights rates being cut to zero, remaining there through 2Q 2021.
- Economic conditions have deteriorated further in the U.S. and globally; likelihood of recession has increased
- Uncertainty about duration of outbreak makes economic and interest rate projections unreliable
- Sufficient reasons to believe Fed will respond with another 50-basis-point cut at, or before, their March 18 meeting
- Increasingly reasonable argument for Fed to cut to zero
- Yields rebounded sharply after 2003 SARs event, but this scenario is materially different
- Expect double-barreled stimulus from monetary and fiscal policymakers
- For link to full Coronavirus Chartbook, please click here
- For link to Forecast Revision, please click here
Jobless Claims Hold Strong: Initial jobless claims for the week ending March 7 remained encouraging, dropping from 215k to 211k. This data is beginning to cover the period likely to be affected by the coronavirus. We expect claims to begin to increase as workers in specific, travel and services-related industries are first affected.
ECB Disappoints Market with Limited Measures: The ECB decided to leave rates unchanged at today’s meeting but announced new longer-term refinancing operations (LTRO) “to provide immediate liquidity support to the euro area financial system,” sweetened the terms on existing TLTRO programs for the period from June 2020 to June 2021, and announced additional asset purchases to add 120B euro to the stock of QE holdings with focus on the private sector.
Dow Dropped into Bear Market as Historic Volatility Continues: Longer Treasury yields rose sharply even as stocks plunged again in what turned out to be quite a frenzied and somewhat unusual day on Wall Street. Stocks stumbled out of the gates and weakened steadily throughout day, sending the Dow down 5.9% and into a bear market. The S&P 500 slumped 4.9% to finish down 19% from the record high back on February 19. All eleven sectors were pummeled as worries about the effects of COVID-19 continued to overwhelm any optimism from a growing amount of global stimulus. The average volatility for the S&P 500 over the last 14 days has been nearly unprecedented (see Chart of the Day). The Bank of England enacted an emergency rate cut ahead of U.S. trading as part of a package of monetary measures aimed at treating the economic symptoms of the virus and investors braced for today’s ECB announcement.
Virus Headlines Kept Concern Level High: Still, the flow of negative virus-related headlines was steady and endless. The WHO finally labeled the outbreak a pandemic. Global cases continued to grow with Italy now the hardest hit outside of China and its government announcing all stores, except for groceries and pharmacies, would be shuttered nationwide. Chancellor Merkel said Germany could see up to 70% of the population infected. Domestically, numerous U.S. universities and colleges announced a shift to online classes. More companies announced work-from-home arrangements for employees. The NCAA formally decided to host the March Madness with no fans in attendance. Multiple cities announced cancellations of public events for St. Patrick’s Day. The Golden State Warriors will now play home games with no fans and the CDC recommended the NBA consider a similar policy league-wide. And despite the pressure from equities and the incessant influx of economic-affecting headlines, longer Treasury yields finished the day sharply higher.
Confounding Jump in Treasury Yields Raised Questions: The 2-year yield closed down 1.5 bps at 0.52% and fed funds futures rose in price (fell in yield) to reinforce expectations for another steep cut from the Fed in the days ahead. Nonetheless, the 5-year yield added 3.6 bps to 0.70%, the 10-year yield rose 6.7 bps to 0.87%, and the 30-year yield jumped 11.2 bps to 1.39%. Early divergence between stocks (lower) and yields (higher) was blamed on concession being priced in ahead of a 10-year note auction; a Tuesday auction of 3-year notes was abysmal based on a large tail and notably weaker bid-to-cover interest. However, yields reversed higher again after the 10-year auction saw solid demand that only briefly pulled Treasury yields lower. Some speculated expectations for imminent fiscal stimulus announcements in the U.S. while others leaned on the Fed raising its repo size limits again to blame the surprising rise in yield on liquidity concerns. Whatever the reason, markets remain notably volatile in the face of much uncertainty.
Global Equities Tumble into a Bear Market: For a second time this week, U.S. equity futures limited down overnight, falling at least 5% to trigger trade-halting circuit breakers. The moves unfolded after the NBA announcement and the President’s speech in another session of violent global selling that has tipped global equities into a bear market. Adding to the continued increase in the number of global virus cases, the growing list of significant disruptions sent Asian stocks sliding more than 4% with sharper losses seen in several countries. Europe’s Stoxx 600 cratered more than 6%. At 7 a.m. CT, the major U.S. index futures were limited down after falling more than 5%. Adding to the market’s concerns, President Trump echoed efforts previously discussed – assistance for affected workers, liquidity and capital support for small businesses with increased funding for the SBA, deferral of income tax payments for affected businesses and individuals, and calling on Congress to consider a payroll tax cut – but offered no new firm details on the timing or degree of fiscal stimulus. Oil prices have now given up all of Tuesday’s recovery with WTI down 6% and back below $31 per barrel. Treasury yields have tumbled after yesterday’s climb with the 2-year yield down 13.4 bps to 0.39% and fed funds futures pricing in a chance that the Fed cuts rates to zero before the end of the month. The 10-year yield fell 19 bps to 0.68%.