The Market Today

Markets Balance Coronavirus Fears, Positive Corporate Earnings, Fed Decision

by Craig Dismuke, Dudley Carter


Coronavirus Update: The total number of persons infected has now climbed to over 6,000 including 5,974 reported in China.  Deaths have risen to 132.  While there are questions of accuracy about the reporting in both the coronavirus and SARs outbreaks, the initial data paints a concerning picture (see Charts of the Day).  The coronavirus does, however, appear to have been more contained within China relative to the SARs outbreak. 

FOMC Policy Decision Likely to Be Uneventful: Today’s Fed policy announcement scheduled for 1:00 p.m. CT is expected to be unexciting. We expect no adjustments to the Fed’s target range, although there is a chance they nudge the interest rate on reserves (IOER) higher to facilitate an effective rate nearer to the midpoint of that range. If they opt for this adjustment, we would view this as operational in nature and not a change in the stance of policy. Looking back at the last Official Statement from December, there are no obvious changes needed to reflect an accurate economic assessment (see our Federal Reserve Scorecard). Fed Chair Powell’s press conference at 1:30 p.m. is, therefore, the biggest uncertainty, although we believe he will do his best to avoid making front page news. One of the more interesting topics is likely to be his take on the potential economic impact of the Wuhan virus.  Recall that in the midst of the SARs virus, the Fed cut rates 25 bps in a mid-cycle adjustment.

December Goods Trade Balance Disappoints, Lowers Expectations for 4Q GDP: In this morning’s economic data, the December advance goods trade balance showed a $3.3 billion larger deficit than expected.  The goods deficit jumped $5.3 billion from November. It now appears that the shrinking trade deficit will only add 0.5% to 4Q GDP rather than the previously-expected 0.8%.

Mortgage Applications Continue 2020 Acceleration: Also released, mortgage applications for the week ending January 24 rose 7.2% on a 5.3% increase in purchase apps and a 7.5% jump in refi apps.  After some December figures, applications have jumped in January.  The 4-week moving average for purchase apps is now at its highest level since early-2009 while the moving average for refi apps is up 75% from year-ago levels.

Pending Home Sales and Corporate Earnings: December’s pending home sales report is expected to show another positive report on the pace of home sales at 9:00 a.m. CT. The busy earnings calendar will also continue today with reports after markets close from Microsoft, Tesla, and Facebook.


Stocks Posted Solid Recovery: Stronger-than-expected economic data Tuesday was a shot in the arm to an overnight recovery staged by U.S. equities and Treasury yields. Global market sentiment had improved during European trading and held up after a weaker-than-expected reading on U.S. business investment in December. The positive trend in U.S. assets strengthened further at 9 a.m. CT following surprisingly-solid economic updates from the Conference Board and Richmond Fed (more below). The S&P 500 climbed steeply in morning trade and held most of its gain through the afternoon to close up 1.0%. All eleven sectors recovered from declines on Monday with tech finishing in the top spot. Shares of Apple, the index’s largest company by market cap, rose 2.8% ahead of its earnings results. Shares matched that gain in post-market trading after those results handily beat expectations.

Yields Moved Away from Multi-Month Lows as Fears Ebbed: Treasury yields also recovered notably on Tuesday, adding to overnight gains following the strong economic data and recovery in risk sentiment. Closing near the highs of the day, the 2-year yield rose 3.2 bps to 1.46% and the 10-year gained 4.8 bps to 1.66%. While the 3-year yield closed below the 2-year yield again, the 5-year yield moved back above the 2-year yield after closing Monday inverted for the first time since November. Tracking Fed expectations, Fed Funds futures ended Tuesday pricing in a higher effective rate for February. The higher rate reflects a belief by some that the Fed could make an operational tweak to its IOER rate today, not an expectation for the Fed to changes its target range.


Hong Kong Sells Off in Holiday Return as Virus Deaths and Diagnoses Keep Rising: Traders in Hong Kong returned from the Lunar New Year holiday to growing counts of deaths and diagnoses related to the coronavirus. Hong Kong’s Hang Seng sold off 2.8% after China reported that the death toll from the virus was now more than 130 and the number of cases had climbed to just under 6,000. While the total confirmed cases worldwide remains less than the total tied to the SARs virus, the number in China has now exceeded the level from that outbreak. Nonetheless, equities elsewhere were holding higher for a second day. An index of European stocks was 0.4% stronger around 7 a.m. CT and U.S. equity futures advanced by a similar amount. After yesterday’s Apple beat, investors received better-than-expected earnings data from GE, AT&T, and McDonalds this morning, although shares of those companies were mixed.  An interesting aside, Apple’s revenues from only wearables over the past year ($24.8 billion) equaled those of Starbucks.

Treasury Yields Edge Back Down Before the Fed’s Decision: While equity investors continued to get some relief from better earnings, Treasury yields returned lower ahead of this afternoon’s Fed announcement. The U.S. central bank is expected to keep its target range steady and make very few changes to the statement. However, investors will be anxious to hear Fed Chair Powell’s take on any potential economic impact of the virus as well as any thoughts on the balance sheet plan. Amid a daily decline in global yields, the 2-year yield was 1.8 bps lower and the 10-year yield had dropped 2.6 bps.


Consumer Confidence and Richmond Manufacturing Handily Beat Expectations: In the later data Tuesday, the Conference Board’s Consumer Confidence Index and the Richmond Fed’s Manufacturing index were both stronger than expected to 2020. Consumer confidence rose 3.4 points to 131.6, a five-month high, as indexes tracking current feelings and future expectations improved on firming outlooks for both the labor market and business conditions more broadly. The gain for the current assessment placed the related index at its second-best level of the cycle while a smaller increase left expectations in the middle of the 2019 range and well below 2018’s peak. As for manufacturing activity in the Richmond Fed District, the headline index surged 25 points out of contraction, the second-biggest turnaround in records back to 1993, to a sixteen-month high of 20. Details were broadly firmer across both current activity and the outlook for the next six months.

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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