Economic Outlook – 15 March 2020

GENERAL:  Most of the data releases this week can be ignored as they are from before the spreading of the coronavirus. The data releases are in fact outdated since the economy is another place now.


  • Stocks suffered a week of historic losses as worries deepened about the impact of the novel coronavirus outbreak. The declines pushed the major indexes well into bear market territory, with the Dow Jones Industrial Average falling over 28% from its recent peak to its Thursday low and the S&P 500 Index down about 27%. The onset of the bear market was the fastest in history (major indexes were setting new highs as recently as mid-February) and the Dow suffered its worst daily decline since 1987 on Thursday. The Cboe Volatility Index (VIX) reached its highest level since the financial crisis of 2008, and “circuit breakers” designed to halt trading when the S&P 500 falls by more than 7% were deployed on Monday and Thursday for the first time since 1997.
  • Consumer and producer price inflation eased up in February as energy prices declined. A further slowdown is in train. The downdraft in financial markets early in the week was in part triggered by a plunge in oil prices after the OPEC+ alliance unraveled and Saudi Arabia announced an increase in production despite a quickly deteriorating demand picture. The sharp decline will drag down energy-related capex over the coming months, while the more moderate rate of inflation is unlikely to help personal spending in the near term, given that concerns over COVID-19 are keeping consumers at home.
  • Jobless claims through the first week of March dipped slightly and give no sign of the labor market unraveling at this point. However, with layoffs only half of the net hiring equation, slower payroll growth ahead is likely as businesses start to bring on fewer new workers.
  • Sentiment indicators are only now beginning to overlap with the period in which the coronavirus began to clearly spread beyond China, let alone the recent financial market volatility. The preliminary March University of Michigan Consumer Sentiment Survey, which gathered responses from 27 February to 11 March, shows signs of households’ confidence beginning to buckle. The index fell to 95.9 and supports expectation that consumer spending is set to weaken dramatically in the near term
  • Treasuries were extraordinarily volatile, with the yield on the 10-year Treasury note decreasing to below 0.35% in overnight trading before Monday’s US market open as investors flooded into perceived safe havens. However, in unusual trading activity later in the week, investors sold Treasuries even as equities and other riskier asset classes plummeted. This drove the 10-year Treasury yield rapidly higher (on Friday it traded near 0.90%).
  • Saudi Arabia’s move to cut oil prices triggered a record sell-off in high yield bonds on Monday. Issuers from energy-related sectors account for a large proportion of the US high yield bond market, so the plummeting oil prices suddenly put the fundamental condition of these energy companies under pressure and damaged their ability to repay their debt going forward.
  • It has long been a market fear that the quality of US investment-grade bond indices has been eroding, with fully 50.0% of the index made up of BBB-rate paper, the lowest investment grade. That fears is starting to be realized. Investors have begun pricing many BBB-rated bonds as though they had already been downgraded. If downgraded by the credit rating agencies, those bonds will be forced out of the investment-grade index and into the high-yield category.
  • Speaker of the US House of Representatives Nancy Pelosi said she hopes to announce an agreement with the White House as soon as today on economic aid for those impacted by the coronavirus outbreak. The House could vote on a bill as early as today while a Senate vote would have to wait until Monday.
  • The New York Federal Reserve announced it will increase its short-term repo lending $1.5 trillion over the next few days. The action is aimed at ensuring adequate liquidity in overnight funding markets. On the fiscal front, there is speculation of a major package, but few details just yet. Trump’s speech on Wednesday announced some small measures including providing SBA loans to businesses impacted by the virus, and deferring tax payments without interest or penalties. He has also called for a payroll tax cut, but so far has not had Congress agree.


  • The Bank of England (BoE) announced a package of emergency measures to try to alleviate the effects on the UK economy of the coronavirus outbreak. The BoE is cutting the policy rate by 50 basis points to 0.25%. It is also introducing a new Term Funding Scheme with additional incentives for small and medium-sized enterprises (TFSME), financed by the issuance of central bank reserves. Over the next 12 months, the TFSME will offer four-year funding of at least 5.0% of participants’ lending volumes at interest rates at, or close to, the bank rate (0.25%). Additional funding will also be available for banks that increase lending, especially to small and medium-sized enterprises. Given the experience from the Term Funding Scheme launched in 2016, the BoE expects that the TFSME could provide some GBP 100 billion in term funding.
  • The Financial Policy Committee (FPC) decided to reduce the countercyclical capital buffer rate from 1.0% to 0.0% with immediate effect for banks’ exposures to UK borrowers. The FPC expects to maintain the 0.0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
  • The Prudential Regulation Authority (PRA) has set out its supervisory expectation that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions. The FPC expects the release of the countercyclical capital buffer will support up to GBP 190 billion of bank lending to businesses. That would be equivalent to 13 times banks’ net lending to businesses in 2019. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption, according to the FPC. The BoE is coordinating its actions with those of HM Treasury in order to ensure that their initiatives are complementary and that they will have maximum impact. The BoE is also coordinating with international counterparts.
  • A measure of British house prices rose at the fastest pace in nearly four years in February as the residential property market picked up for a third month in a row, the Royal Institution of Chartered Surveyors (RICS).  However, a survey conducted by RICS also showed concerns over the potential impact of coronavirus on the market.  “For now at least, feedback around expectations are consistent with activity levels continuing to strengthen albeit relatively modestly,” Simon Rubinsohn, RICS’s chief economist, said in a statement.
  • British finance minister Rishi Sunak scrapped business rates for small firms in an “exceptional step” to help them get through disruption caused by the outbreak of coronavirus. The measure, announced in his first annual budget speech on Wednesday, means that over the next year nearly half of all business properties in England will not pay a penny of business rates.  It came hours after the BoE cut interest rates and outlined support for bank lending, saying it had acted after seeing a “sharp fall” in trading conditions in the last week, particularly in the retail sector and anything driven by discretionary spending.


  • As expected, the European Central Bank (ECB) chose not to cut its policy rate, and instead opted for a stimulus package using its additional policy tools of quantitative easing (QE) and long-term refinancing operations (LTRTOs). As for the latter, the ECB announced that it will utilise LTROs to temporarily provide immediate liquidity support to the financial system. This will be conducted through a fixed rate tender procedure with full allotment, with an interest rate equal to the average rate on the deposit facility. The LTROs will provide liquidity at “favourable terms” to bridge the period until the TLTRO III operation in June 2020. Secondly, “considerably more favourable terms will be applied during the period from June 2020 to June 2021 to all TLTRO III operations outstanding”, specifically to “support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises.” Moreover, throughout this period, the ECB announced, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations. Furthermore, for counterparties that maintain their levels of credit provision, the rate applied in these operations will be lower, and can be as low as 25 basis points below the average interest rate on the deposit facility for the period in question. Moreover, the maximum total amount that counterparties will from now on be entitled to borrow in TLTRO III operations is raised to 50.0% of their stock of eligible loans as of 28 February 2019.
  • The German government unveiled measures to help companies hit by the coronavirus outbreak and announced an additional €12.4 billion in state investment in infrastructure over the next three years. However, the measures stopped well short of the fiscal stimulus demanded by economists and companies. Finance Minister Olaf Scholz insisted Germany is prepared to do everything needed to stabilize the economy. A poll by the Association of German Chambers of Industry and Commerce showed that half of all German companies expect their revenue to shrink this year as a result of the coronavirus.
  • Authorities in Italy and Spain imposed measures to bring stability to asset prices as record declines almost paralyzed markets. Italian and Spanish regulators announced bans on short selling after their equity markets recorded the worst-ever one-day falls. The moves followed the US Federal Reserve’s injection of half a trillion dollars into the financial system on Thursday.


  • Expectations also grew among both domestic and overseas investors that the country will introduce greater policy easing in addition to the measures that have already been announced. The People’s Bank of China, as expected, announced a cut in bank’s required reserve ratio, but many agree that more accommodation is likely in the coming weeks and months. Retail investors play a predominant role in China’s equity markets (accounting for around 80.0% of daily turnover) and tend to focus as much on expected changes in government policies as on economic fundamentals.   
  • China appears to be incrementally rebooting its economy after a forced one-month shutdown. For example, coal output for power stations is currently 34.0% above the February average. Restaurant chains are reopening in China’s major cities, having been closed since late January. And construction (one of the sectors worst hit by the restrictions) has achieved a 58.0% restart rate, according to China’s housing ministry. In the logistics industry (vital for global supply chains) economic powerhouse Shenzhen reported that conditions were almost back to normal. This suggests a potential V-shaped rebound in the purchasing managers’ index surveys for March.
  • At first glance, China’s credit data for February appeared weak. In terms of month-on-month changes, M2 (broad money supply), bank loans, and TSF (total social financing, China’s broadest measure of new credit) all fell short. A shortfall may be understandable, given that residential home sales and mortgages ground to a halt in February, while many bank branches were shut under quarantine regulations. On the positive side, corporate bond issuance held up, and bank loans to companies showed a switch from long-term to short-term loans, signalling financial support to business. Shadow-banking categories have continued to shrink, reflecting policy directives given to banks last year. Banking data in China are heavily seasonal in addition to Lunar New Year influences. 

Sources: T. Rowe Price, Danske Bank, Wells Fargo, Reuters, Handelsbanken Capital Markets.