Economic Outlook – 22 March 2020

GENERAL: most of the data releases last 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 The data releases are in fact outdated since the economy is another place now.


  • The government mandated closures of schools, bars, restaurants, gyms and movie theaters accelerated the shutdown and sent shockwaves through consumer-facing and discretionary industries. California, New York and parts of New Jersey went even further, ordering shelterin-place restrictions on non-essential movement. Thousands of retailers have closed and GM, Ford and Fiat Chrysler have shuttered their U.S. factories, with companies of all sizes and industries likely to follow. The situation has rapidly progressed beyond being either a “demand shock” or a “supply shock”; it is an unprecedented interruption and reorganization of economic life.
  • Consumer rent, utility and credit card payments are still due, and corporations must meet payroll, rollover short-term liabilities and maintain working capital. Recognising this risk, markets seized up, with assets selling off in unison and liquidity (even in typically very deep markets) evaporating.
  • The Fed responded swiftly with a barrage of moves, including establishing a commercial paper funding facility (CPFF), primary dealer credit facility (PDCF), money market mutual fund liquidity facility (MMLF) and swap lines with foreign central banks to improve dollar liquidity. This is in addition to massive overnight repo operations, a minimum of $700 billion of Treasury and MBS purchases, a fed funds rate back at the zero lower bound, the elimination of reserve requirements and the encouragement of banks to use the discount window to “support the smooth flow of credit to household and businesses.” In short, the Fed wants to prevent what is fundamentally a health crisis from becoming a financial crisis, a credit crisis or a liquidity crisis
  • The New York and Philly Fed indices fell 34.4 and 49.4 points in March, respectively, while jobless claims rose to 281K. This week, however, claims will likely be in the millions.
  • US stocks suffered another week of steep losses, as concerns deepened over the novel coronavirus and its economic impact. The S&P 500 Index fell back to its lowest levels since early 2017, while the Dow Jones Industrial Average touched lows not seen since late 2016. The downdraft was the most intense on Monday, with the Dow suffering its biggest %age loss since 1987 and the Nasdaq Composite Index experiencing its sharpest daily decline on record, according to The Wall Street Journal. The sell-off came despite the Federal Reserve’s announcement on Sunday that it would slash the federal funds target rate to the 0.00%–0.25% range and restart aggressive purchases of Treasuries and agency mortgage-backed securities. On Monday, the Cboe Volatility Index (VIX) hit its highest level on record, surpassing its peak during the financial crisis of 2008. Sharp declines on Monday and Wednesday again triggered “circuit breakers” designed to keep trading orderly. The New York Stock Exchange announced on Wednesday that it would temporarily move to fully automated trading beginning Monday, March 23
  • The blizzard of factors driving the market’s losses only grew in number during the week, but prominent among them appeared to be:
    • President Donald Trump stated Monday that the coronavirus might not be contained until late summer, and governors and mayors announced closures of schools, restaurants, and other public facilities.
    • Economists at major banks slashed their global growth forecasts, while many predicted the U.S. would fall into a recession—if it is not already in one.
    • Signs grew of increasing strains in corporate credit markets. On Wednesday, Boeing revealed that it had fully drawn down a nearly $14 billion credit line, although it still had access to others.
    • The “big three” traditional U.S. automakers agreed to union requests to temporarily shutter factories.
    • Oil prices reached the lowest level in almost two decades on Wednesday.
    • A prominent hedge fund manager told CNBC that he was expecting an economic depression, although he later qualified his remarks by saying that outcome could be avoided with proper actions.
    • The Federal Reserve announced Tuesday that it was establishing lending facilities to support the market for commercial paper, or very short-term loans used by corporations to fund operations. The Fed also announced new coordination measures with other central banks to support the international supply of U.S. dollars through the borrowing of dollars in non-U.S. currencies.
    • Congress and the White House agreed on the outlines of a roughly $1 trillion stimulus plan designed to send money directly to U.S. citizens, while supporting small businesses and strategic industries.
    • China and South Korea announced significant progress in containing their coronavirus outbreaks.
    • Oil prices rebounded and posted their largest daily %age jump ever on Thursday after a report that the U.S. may intervene in the Saudi Arabia-Russia oil pricing clash. Additionally, the Energy Department submitted a formal request to buy up to 30 million barrels for the Strategic Petroleum Reserve. Oil prices slipped again on Friday, however.
  • Short- and intermediate-term Treasury yields decreased after the Fed’s interest rate cut, while longer-term yields increased, moving the Treasury yield curve to its steepest point in the last 12 months. The yield on the 10-year Treasury note continued to fluctuate in a broad range, moving from under 0.70% on Monday to just above 1.25% on Thursday before trading around 0.95% on Friday.
  • A tit-for-tat expulsion of journalists worsened after China ousted reporters for the New York Times, Wall Street Journal and Washington Post. The move followed a US action to designate five Chinese media outlets as foreign missions and to restrict the number of Chinese nationals that can work for them. China’s expulsion of three Wall Street Journal reporters in February is said to have kicked off the recent skirmish. Tensions remain high as the two countries point fingers at one another over the origin of COVID-19. A Chinese foreign ministry official accused the US of bringing the coronavirus to Wuhan while President Trump has repeatedly blamed China for the outbreak and the subsequent global pandemic. Against a volatile global backdrop, rising geopolitical tensions are one more source of investor anxiety.
  • In terms of data release, on Tuesday the US Markit PMI for March will be released while Thursday brings the US initial jobless claims.


  • The ECB late on Wednesday (March 18) announced a surprise measure dubbed the Pandemic Emergency Purchase Programme (PEPP), which includes three main components: (1) The launch of a new temporary asset purchase programme of both private and public sector securities amounting to a total of EUR 750bn. Purchases are expected to continue until the end of 2020 and to include all securities already eligible under the existing purchasing programmes. For purchases of public sector securities, the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks. Moreover, a waiver of the eligibility requirements for securities issued by the Greek government means the ECB can now buy Greek debt under its asset purchase programme for the first time. (2) The existing corporate sector purchase programme (CSPP) has been expanded also include non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under the programme. (3) The ECB also decided to ease the collateral standards by adjusting the main risk parameters of the collateral framework.This included expanding the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector. As such, counterparties can expect to make full use of the Eurosystem’s refinancing operations.
  • European equities posted sizable losses, as countries imposed lockdowns and economies faltered, raising the prospect of a prolonged recession. However, a flood of fiscal stimulus and further interest rate cuts helped equities claw back some losses at the end of the week. The pan-European STOXX Europe 600 Index fell 1.85%. Germany’s Xetra DAX Index slipped 3.56%, France’s CAC-40 Index declined 2.51%, and Italy’s FTSE MIB Index dropped 0.4%.
  • The sell-off continued in the early part of the week despite government pledges of further fiscal support and central bank injections of economic stimulus, as countries moved into lockdown and closed borders or tightened border controls to contain the coronavirus outbreak. In the European Union (EU), governments considered a sizable fiscal package to support economies. Finance ministers agreed to an increase in spending of 1% of gross domestic product (GDP) and discussed how the European Stability Mechanism might be used to tackle the crisis. German Chancellor Angela Merkel said the federal government would not rule out joint EU debt issuance to help contain the impact of the coronavirus.
  • Many European companies have begun revising or suspending earnings guidance on expectations of a deepening slowdown, and scores withheld dividend payments in the UK. Travel stocks were among the hardest hit as the EU said it would curb most foreign travel for 30 days, and airlines announced measures, including grounding fleets, reducing flights, and laying off employees.
  • In terms of data release, Tuesday brings the Euro PMI while on Wednesday the German Ifo (final) for March is published.


  • The Bank of England (BoE) yesterday announced further monetary policy measures to try to alleviate the impact on the UK economy of the COVID-19 crisis. The BoE cut the policy rate by 15 basis points, to 0.1 %. It also decided to increase its holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by GBP 200bn, to a total of GBP 645bn. The BoE announced it will enlarge the Term Funding Scheme for Small and Medium-sized Enterprises (TFSME). According to the BoE, the majority of additional asset purchases will comprise UK government bonds and the purchases will be completed as soon as is operationally possible, to improve market functioning.
  • Britain’s government will pay a massive share of private sector wage bills to discourage bosses from firing staff as it resorts to war-time levels of borrowing to prop up the economy during its coronavirus shutdown.
  • British corporation tax receipts posted their biggest drop for any February since 2012, before the coronavirus outbreak began to seriously harm the economy, official data showed on Friday. Britain’s government said it received 4.7 billion pounds of corporation tax revenue in February, down 5.4% compared with a year ago, the Office for National Statistics (ONS) said.


  • Chinese industrial production, retail sales and fixed asset investment data for the January-February period were dramatically worse than expected, sending shockwaves through global markets. Industrial production plunged 13.5% while retail sales plummeted 20.5%. Investment in property, machinery, infrastructure and the like dropped 24.5%. All three measures fell for the first time on record.
  • While the extent of the declines in key monthly economic data was jarring, investors will be watching whether China’s economy remains on a recovery path and if Beijing can jumpstart the process via appropriate policy innovations. On the first point, the high frequency data are continuing to improve. Daily coal consumption is around 80% of the normal level, while around 65% of migrant workers have returned to their place of work. Mass transit journeys remain about 70% below normal, though strict quarantine arrangements are being rapidly loosened by local authorities across China. On the second point, it appears that China intends to rely more on additional construction and infrastructure spending to reboot the economy than on direct income transfers to all households in a particular locality (where a proportion of the transfer would leak into savings).
  • The People’s Bank of China (PBoC) surprised markets by not following the Fed and 17 other central banks in cutting interest rates at its monetary policy meeting on March 20. The interest rate for five-year bank loans remains at 4.75%, which is relatively high compared with elsewhere in Asia. This possibly reflects a view that it may be better not to stimulate demand until supply has returned to normal. Given the strong depreciation pressure on some Asian currencies, the PBoC may also wish to preserve a relatively wide rate differential versus the U.S. to maintain a stable renminbi.
  • China equity markets fell over the week. The Shanghai Composite (SHCOMP) index dropped by 4.9%, while the CSI 300 index of large-cap stocks lost 6.2%. Both indices recovered some ground on Friday, with the SHCOMP up 1.6% and the CSI 300 gaining 1.8%.

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