Economic Outlook – 23 February 2020


  • Minutes from the January FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates. Positive housing and manufacturing survey data last week supported that view. While trade tensions have receded markedly in recent months, the coronavirus has taken its place as the latest source of uncertainty plaguing businesses and investors. The outbreak has certainly worsened since the meeting. The eight mentions of “coronavirus” in the minutes suggest the Fed, with its goal of sustaining the economic expansion top of mind, was closely monitoring even in late January. Despite the outbreak, the committee viewed the “distribution of risks to the outlook for economic activity as more favorable than at the previous meeting,” while also noting downside risks “remained prominent.” Its conclusion, however, that the virus has yet to cross the “material” threshold warranting a reassessment of the need for additional accommodation is disputed by the bond market. Market positioning now implies close to two cuts in the fed funds rate this year, while the 10-year to 3-month yield curve is inverted.
  • The Leading Economic Index (LEI) jumped 0.8% to an all-time high, easing some concerns generated by its dip into negative year-on-year territory the prior month.
  • Two encouraging manufacturing index readings reported by the Federal Reserve Banks of New York and Philadelphia were offset by downbeat readings from Markit’s US purchasing managers’ indices. The Empire State Manufacturing index rose to 12.9 in February from 4.8 in January while the Philadelphia Fed index jumped to 36.7 from 12. Friday’s flash PMIs, however, showed the manufacturing component slipping to 50.8 in February from 51.9 in January and services falling to 49.4 from 53.4. The contraction in the services sector metric was eye opening given the segment’s dominant position in the US economy.
  • Housing, meanwhile, continues to exceed expectations. Housing starts fell modestly in January, but only because of the incredibly high pace registered in December. Starts in both months were boosted by some of the warmest winter weather on record. Despite the fall, January’s pace was 21.0% above the total level of starts for 2019, meaning that if housing construction maintains its current pace, there will be strong year-on-year numbers in 2020. As normal weather returns, payback is expected this spring from December and January, which were the two strongest housing starts months since 2006. Still, the underlying trend remains very strong, low mortgage rates have improved buying conditions and consumers increasingly report now is a good time to buy.
  • Builders have turned very optimistic, with the NAHB index, a measure of single-family homebuilder sentiment, hanging near a 20-year high in February. Existing home sales fell 1.3% in January, but are up nicely over the year.
  • US stocks ended lower for the holiday-shortened week as worries grew about the impact of the COVID-19 outbreak on the global economy. The S&P 500 Index and the technology-heavy Nasdaq Composite Index reached record highs on Wednesday before falling back, but the smaller-cap benchmarks held up best for the week. Technology stocks were among the worst performers in the S&P 500, weighed down by worries over disrupted supply chains in Asia. Communication services shares were also weak following a sharp earnings-related drop in ViacomCBS, while materials shares outperformed, helped by a rise in gold prices. US markets were closed last Monday in observance of Presidents’ Day.
  • Evidence early in the week indicated that the COVID-19 outbreak was having a ripple effect throughout the global economy, even if the large majority of cases remained contained in China. Stocks fell as trading began Tuesday after Apple revealed that it would miss sales forecasts while the company was unsure of the extent of supply and demand shortfalls due to the new coronavirus. After the close of trading, auto parts company Aptiv also warned that the outbreak would weigh on its revenue and operating income more than anticipated.
  • Virus fears and Friday’s PMI report appeared to foster a renewed flight to the perceived safe haven of the US Treasury market. The yield on the benchmark 10-year Treasury note hit a new five-month low, while the yield on the 30-year Treasury bond hit the lowest level on record (1.89%).
  • In terms of data releases, US core capex is due out on Thursday while the print on US private consumption is out on Friday.


  • The Eurozone Flash Composite PMI was 51.6 in February compared to 51.3 the previous month. Meanwhile, the Manufacturing PMI was 49.1 compared to 47.9 the month before, and the Services PMI was 52.8 compared to 52.5. All indices were above expectations. The eurozone economy thus grew at its fastest rate in six months, albeit still at a historically low level. Throughout the region, demand has started showing signs of dampening and production has similarly been affected by COVID-19. In both sectors, expectations of future business declined, albeit more so in manufacturing. The outlook remains uncertain with regards to how the impact of the virus outbreak in China will be felt in the coming months. Whereas this was arguably the first month in which activity was affected, the next set of releases are likely to reveal the impact to a fuller extent.
  • The German Flash Composite PMI was 51.1 in February compared to 51.2 January, the Manufacturing PMI was 47.8 compared to 45.3 and the Services PMI was 53.3 compared to 54.2, with all indices but services above expectations. The rate of contraction in manufacturing continues to recede, with slower falls in all of output, employment and new orders. Markit reported that  almost half of the index’s month-on-month gain was attributable to a deterioration in supplier delivery times, which panellists predominantly linked to coronavirus-related disruption in China. The same was considered a factor behind the reduction in export orders and sentiment. This overall likely contributed to the first drop in expectations of future output since August last year.
  • The French Flash Composite PMI was 51.9 in February compared to 51.1 in January, the Manufacturing PMI was 49.7 compared to 51.1 and the Services PMI was 52.6 compared to 51.1. The negative surprise to manufacturing, which is contracting again, was more than accommodated by the above-expectations print for the service sector. In the former, new orders declined, reported by Markit as being due to softer demand in the automotive sector, the discontinuation of Boeing 737 Max production and disruptions related to coronavirus.
  • European shares ended little changed near record highs, clawing back losses as a faster-than-expected bounce in business activity helped ease concerns around the impact of the COVID-19 coronavirus on regional economic growth. The pan-European STOXX Europe 600 Index ended the week almost flat. Germany’s Xetra DAX Index slipped 0.59% and France’s CAC-40 Index declined 0.23%.
  • In terms of data release, German Ifo expectations and the economic confidence indicators from the EU are due out on Monday and Thursday, respectively.


  • UK consumer prices rose for the first time in six months in January, accelerating to an annual rate of 1.8% versus 1.3% in December. The figure matched the consensus estimate of economists’ forecasts in a FactSet survey but was just below the Bank of England’s 2.0% inflation target. An official statistician said the increase was largely the result of higher gasoline prices and airfares. In January, the BoE said that it expected inflation to undershoot its target through 2020 and reach a low of about 1.2% in the third quarter.
  • The UK jobs market remained resilient in the final quarter of 2019 despite a stagnating economy. Official data showed that 180,000 new jobs were created compared with the previous quarter, exceeding the 145,000 new jobs forecast by economists in a Reuters survey. The employment rate, which is the share of working-age people in work, rose to 76.5%, the highest level since records began in 1971. The unemployment rate was unchanged at a near-record low of 3.8%. However, wage growth dipped to 2.9%, the slowest rate in more than a year. Labor productivity shrank 0.5%, remaining much slower than before the economic downturn of 2008/2009. The indicator has contracted for three of the past five quarters.
  • British shoppers started spending again early this year after a sluggish end to 2019 and industrial orders hit a six-month high. Further signs that improved sentiment since December’s election is translating into stronger economic activity. Retail sales beat forecasts to rise by 0.9% in January after a 0.5% monthly decline in volumes in December, Britain’s Office for National Statistics said on Thursday. The recovery was more marked if fuel sales are excluded, which can give a better picture of underlying demand. Sales on that basis rose 1.6% on the month, the most since May 2018 and above all forecasts in the Reuters poll.
  • On Tuesday, the EU is set to agree on the final negotiation objectives ahead of the EU-UK trade negotiations.


  • China began to ease monetary policy late last year, even before the onset of the coronavirus, but it took additional steps to add liquidity to the system by making modest cuts to two closely watched benchmarks, the medium-term lending facility (MLF) and the loan prime rate (LPR). The People’s Bank of China trimmed the MLF, the rate at which it lends to banks, to 3.15% from 3.25%, while cutting the LPR, the benchmark for mortgages, to 4.05% from 4.15%. In the months ahead, markets expect significant fiscal stimulus to shore up the economy, which has been nearly paralysed for weeks due to quarantines aimed at slowing the spread of the coronavirus.
  • Reports from China last week indicated that the pace of the spread of the coronavirus had slowed dramatically, but figures published Friday showed an uptick, undermining market confidence. While the spread of the disease looks like it may have peaked in China, reports of rising numbers of new infections in South Korea and Japan are causes for concern, as are reports of a number of deaths attributed to the virus in Iran.
  • Recent reports also indicate that factories have been slow to open as quarantines continue to keep workers stuck in their homes. The Chinese authorities have issued guidelines to local officials to help get people back to work, but this would have to be done carefully so as not to undermine containment efforts. Global manufacturing supply chains are beginning to feel the effects of the virus. Foxconn, Samsung, and various car manufacturers have all faced supply chain disruptions. Companies have also looked to continue production by bypassing China. Samsung, for example, has moved parts of its manufacturing process for its new Galaxy phone from China to Vietnam.
  • In terms of economic impact, it may take some time before the sharp fall in the number of ships underway feeds into lower global PMI manufacturing and there are downside risks to manufacturing PMIs in coming months.
  • There are no market movers in China.

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