Economic Outlook – 1 March 2020


  • The bond market now expects almost four Fed rate cuts by the end of the year, but one might rightly wonder how lower short-term rates would alleviate supply chain disruptions and aversion to international travel. Prior to the last major financial market flare-up, in December 2018, one could make the case that short-term rates were overly restrictive. Now it is hard to make that same case, after the 75 bps of easing the Fed delivered last year after reversing course.
  • Dallas Fed President Robert Kaplan stated last Tuesday that the Fed is “a number of weeks away from being able to make the judgment,” while Vice Chairman Richard Clarida said “it is still too soon to even speculate about either the size or the persistence of these effects. If and when the committee decides it needs to ease again, it most likely won’t be just once. The FOMC has launched six easing cycles in the past thirty years, and each time was at least 75 bps. In short, it is entirely possible the Fed delivers three rate cuts for the second year in a row (the first time in response to the trade war and slowing global growth and the second in response to a viral epidemic). Yet despite the bond market’s conviction, it is impossible to say with certainty what will happen.
  • Nondefense capital goods orders rose 1.1% in January, pulling the three-month annualized rate up to the highest since the trade war flared up in August. Yet just as the Phase I trade deal provided relief to the lagging manufacturing sector, COVID-19 emerged as its latest scourge.
  • Consumer confidence rose to a six-month high, but frightening images from abroad should weigh against a historically strong labor market in coming weeks. Personal income rose 0.6% in January while personal spending rose 0.2%. New home sales set a cycle high, and housing should continue to strengthen, with mortgages rates at record lows and likely to stay there, particularly if the bond market’s forecast of lower rates pans out.
  • President Donald Trump named Vice President Mike Pence to lead the government’s response to the coronavirus threat while asking the US Congress to appropriate $2.5 billion dollars to fund the government’s countermeasures. Japan’s prime minister, Shinzo Abe, announced Thursday that in order to contain the spread of the virus Japanese schools will close until April. That action is likely to pose a major disruption of Japan’s economy. To cushion the economic blow caused by the outbreak, China trimmed the reference rate it uses for lending to small and midsized banks this week. Italy said it may allow delayed local tax and mortgage payments in parts of hard-hit Northern Italy. Worldwide, the number of coronavirus cases exceeds 82,000 with around 2,800 deaths reported. Later, the number of new cases outside China exceeded the number of new cases inside the country.
  • A major contributor to the rally that lifted US equities to record highs little more than a week ago was the expectation that S&P 500 earnings per share would grow approximately 8.0% this year. Now, expectations are falling dramatically as the spread of the coronavirus creates headwinds to global growth and supply chains remain disrupted. As a result, multiple companies this week downgraded or withdrew their earnings guidance for 2020.
  • All the major indexes fell into “correction” territory, down more than 10.0% from their recent peaks just a week earlier. According to Deutsche Bank Global Research, the S&P 500 Index recorded its fastest correction in history. All the sectors within the S&P 500 suffered a correction as well, with energy stocks faring the worst amid plunging oil prices. Communication services stocks held up the best, helped by some resilience in Netflix shares. The Cboe Volatility Index (VIX) spiked to near 50 on Friday morning, its highest level since the global financial crisis in 2008. The Wall Street Journal reported that stock trading volumes reached a one-year high on Thursday, while options volumes hit an all-time high.
  • In terms of data releases, the ISM indexes for February will be released on Wednesday and it will be interesting to check for early signs on how business sentiment held up in the face of early news on COVID-19. Some weakness in both manufacturing and services sentiment is to be expected, but it will become clearer how factories are dealing with disruptions to their Asian supply chains.
  • This week will bring the Super Tuesday’ US Primaries. Vermont Senator Bernie Sanders leads the Democratic primary delegate count leading up to the 15 “Super Tuesday” primaries, where about 38.0% of pledged delegates to this summer’s nominating convention will be chosen. Sanders, who lost the 2016 Democratic nomination to former Secretary of State Hillary Clinton, is expected to build on his delegate lead. Betting odds give the senator about a 54.0% chance of securing the nomination. Former Vice President Joe Biden has the second-best odds, with around a 23.0% chance of being his party’s standard-bearer. 
  • Friday brings the US Job report numbers for February but it is unlikely it will reveal any impact of COVID-19, although some weakness in leisure and hospitality hiring as tourism might be registered.


  • Italian authorities moved quickly to contain Europe’s largest outbreak of the COVID-19 virus, sealing off 11 towns in the northern Veneto and Lombardy regions. In Milan, the financial and business capital, schools, offices, and tourist sites were shuttered. The southern region of Basilicata imposed a quarantine on people arriving from the north of the country. Italian shares fell more than 11.0% over the week amid heightened worries of a technical recession in the first quarter, which would be the fourth in 12 years.
  • European Central Bank (ECB) officials in France and Italy indicated that governments must take the policy lead should the COVID-19 virus have a deeper impact on economic growth, Bloomberg reported. Bank of France Governor Francois Villeroy de Galhau said delegates at a meeting of central bank and finance officials spoke about daily monitoring and contingency plans, even if the scenario remains for a V-shaped recovery. He said there was a feeling that monetary policy could not be the sole response and that the policy mix needed to be strengthened. Bank of Italy Governor Ignazio Visco said fiscal policy must be used because monetary policy is already extremely accommodative around the world. He said policymakers should unleash a coordinated fiscal stimulus if the world economy fails to recover from the impact of the virus after two quarters. In an interview with the Financial Times newspaper, ECB President Christine Lagarde played down the chances of an imminent response to counter the impact of the virus. She said the ECB was monitoring the outbreak “very carefully” and that it was not yet at a stage where it would have a lasting impact on inflation. Eurozone markets now fully price in the likelihood of an interest rate cut at the European Central Bank’s July meeting.
  • German business confidence unexpectedly strengthened in February, mainly reflecting an improvement in the manufacturing purchasing managers’ index, according to the Ifo institute’s business survey. However, an economist at the institute said that the COVID-19 epidemic was not yet fully reflected in the survey and that Germany as an export nation would be particularly badly affected if the coronavirus becomes a pandemic.
  • The EU and UK are set to start their trade negotiations this week. Judging from the already-published negotiating objectives, a rocky path lies ahead, as the UK rejects following EU rules, while the EU sees this as a precondition for granting the UK quota and tariff free access to the single market.
  • There are no market movers in EU.


  • British house prices rose in February at their fastest annual pace since July 2018, mortgage lender Nationwide said, adding to signs of a rebound in the housing market and the broader economy since December’s election. Prices rose by 2.3% compared with February 2019, Nationwide said on Friday, speeding up from a 1.9% rise in January and matching the median forecast in a Reuters poll of economists.  The emphatic election victory of Prime Minister Boris Johnson cleared much of the short-term uncertainty hanging over Britain’s economy, paving the way for the country’s exit from the European Union and ending the possibility of a political shift to the left under the opposition Labour Party.
  • Confidence among British consumers hit its highest level in 18 months in February, and there were fresh signs that companies have also become more positive since December’s election, surveys showed. Market research firm GfK’s index of consumer confidence rose to -7 in February from -9 in January, its strongest since August 2018 and a touch higher than the median forecast of -8 in a Reuters poll of economists. A measure of how willing people are to make major purchases such as a car rose sharply.
  • There are no market movers in the UK this week.


  • The rapid spread of the coronavirus to other countries has drawn attention away from China, where recent news has been relatively encouraging. Nevertheless, the spread of COVID-19 was the catalyst for the sharp global sell-off in risk assets, with US equity indices leading the way. China stock indices held up relatively well compared with other markets. But on Friday, the CSI 300 large-cap index and the Shanghai Composite Index both fell by around 3.7%, responding to sharp falls in developed markets on Thursday. From Monday through Friday, they lost 4.7% and 5.0%, respectively, faring significantly better than the S&P 500, which lost more than 11.0%.
  • Much attention has been focused on the high-frequency travel data, which still signal a very slow return of migrant workers. This may have led to too much pessimism with regard to supply chain disruption and hence the shock to manufacturing production. There are many Chinese firms that do not rely on migrant labor and areas of China left relatively unscathed by the coronavirus.
  • Official surveys on business resumption conducted in mid-February suggest that over 50% of enterprises with ¥20 million or more in sales had reopened. China’s State-owned Assets Supervision and Administration Commission, which oversees large state-owned enterprises, reported a resumption rate of 80%. The China Association of Automobile Manufacturers said 75% of plants were operating by mid-February. Based on these and other surveys, the consensus view of a sharp dip in Chinese first-quarter gross domestic product (GDP) growth followed by a second-quarter rebound appears to be on track.
  • A large number of fiscal stimulus measures were announced across Asia. China added to its considerable earlier policy support with a temporary but very large ¥650 billion reduction in social security tax. This is aimed at helping smaller and mid-size companies that China’s big banks are often reluctant to lend to.
  • Chinese PMI figures for February are due out over the weekend and are likely to show a sharp fall in manufacturing activity due to the production shutdowns.

Sources: T. Rowe Price, Danske Bank, Wells Fargo, TD Economics, Reuters, M. Cassar Derjavets.