Economic Outlook – 8 March 2020


  • The Federal Reserve cut interest rates by a half percentage last Tuesday, hours after a G7 teleconference in which officials vowed to coordinate policy. Other central banks cutting rates include the Bank of Canada, which also cut rates by a half percentage, and the Reserve Bank of Australia, which cut by a quarter-point. While monetary policy is unlikely to address problems arising from a negative supply shock, it can help the economy recover when the pandemic begins to recede. Furthermore, while the coronavirus outbreak is mostly a supply shock, it is also a negative demand shock, against which rate cuts might provide a cushion. Fiscal measures are expected to be a part of the policy response, with many countries exploring ways to support vulnerable small and medium-sized businesses. On top of this move, the market is currently priced for almost four more rate cuts by year-end. The extent to which monetary policy can offset the economic impact of the ongoing outbreak, however, remains to be seen.
  • The ISM manufacturing index remained in expansion territory by a hair. The manufacturing sector had begun to stabilize following a de-escalation in trade tensions at the beginning of the year, but all bets are off now, as February’s report already showed some signs of supply disruptions from the coronavirus. Delivery times rose to a 16-month high, while the imports index fell to a 10-year low and purchasing managers in several industries noted trouble sourcing parts. Normally, supplier setbacks and the rising order backlogs would be inflationary, but prices paid actually dropped 7.4 points on the month, suggesting demand is pulling back. Beyond the virus, lingering issues with Boeing’s 737 MAX also weighed on this month’s report.
  • As for the non-manufacturing side of the economy, February’s ISM non-manufacturing index jumped 1.8 points to 57.3. This increase was at odds with the Markit Services PMI, which turned sharply into contraction territory. The two indices are not identical and some of the gap likely comes from strength in mining and construction, goods-producing sectors not included in the Markit Services PMI. Moreover, the Markit Services headline number is based on a single question of whether business activity has improved, and the corollary sub-index in the ISM survey did pull back some in February. Parsing the signs from these two indicators on the health of the service sector will be important going forward, given the sector’s large share of total employment and its exposure to the virus. Companies and consumers are already starting to curtail travel on top of shipping delays that are hitting the transportation sector. Accommodation & food services, entertainment & recreation, retail and arts also stand to take a hit.
  • The US economy added a more-than-expected 273,000 new jobs in February while the unemployment rate declined to 3.5%. Market participants largely looked past today’s solid report, concerning themselves instead with the economic implications of the coronavirus, which began to manifest themselves in the US only in late February. If the outbreak turns out to be less disruptive than feared, the strong labor market heading into the crisis combined with the additional monetary stimulus supplied by the Fed could set the stage for a recovery, but for now, the market continues to grapple with rising recession odds.
  • The race for the US Democratic presidential nomination took a dramatic turn on Tuesday, with former Vice President Joe Biden winning 10 states and one-time frontrunner Vermont Senator Bernie Sanders winning four, including delegate-rich California. Biden far exceeded expectations and benefited from a consolidation of the moderate wing of his party after the withdrawal from the race of former South Bend, Indiana Mayor Pete Buttigieg and Minnesota Senator Amy Klobuchar, both of whom threw their support behind Biden. After poor performances in Tuesday’s primaries, former New York Mayor Michael Bloomberg withdrew from the race and endorsed Biden while Massachusetts Senator Elizabeth Warren pulled out on Thursday. So far, Warren has made no endorsement. A week ago, Sanders, a progressive, was the favorite for the Democratic nomination. Today, the betting odds give the more moderate Biden an 85.0% chance of becoming securing the nomination.
  • The major US stock indexes ended mixed after a second week of extraordinary volatility driven by COVID-19 fears. The large-cap benchmarks and the technology-heavy Nasdaq Composite Index recorded gains, thanks to sharp rallies on Monday and Wednesday, but the smaller-cap indexes ended modestly lower. Within the S&P 500 Index, the typically defensive utilities sector performed best. Health care shares were also strong after the prospects for Senator Bernie Sanders’ “Medicare for All” system seemed to diminish following former Vice President Joe Biden’s solid performance in many presidential primary elections on Super Tuesday. Energy shares again led the declines as US oil prices plunged to multiyear lows on Friday following OPEC’s failure to convince non-OPEC member Russia to agree to production cuts.
  • The bond market seemed unimpressed by the payrolls report, and the week’s drastic moves in Treasury yields appeared to be another factor driving equity market volatility. After falling sharply, the previous week, the yield on the benchmark 10-year Treasury note tumbled further following the Fed’s rate cut, moving below 1.0% for the first time in history on Tuesday and then reaching a new record low of around 0.66% on Friday morning.
  • In terms of data release, Friday will bring the NFIB Small Business Optimism release on Tuesday and the US University of Michigan consumer confidence print on Friday.


  • The February flash annual headline and core inflation were both at 1.2 % and in line with expectations, compared with 1.4 % and 1.1 %, respectively, for the previous month. The drop-in headline and the rise in core inflation correspond to the decline in energy prices. This was also clear in the sequential uptick in headline inflation of 0.2 % month-on-month, which was largely driven by services and food inflation against declining energy prices. In all four core eurozone countries except for Germany, the annual inflation rate fell back in February, although they all remain higher than a quarter ago. Germany continues to exhibit the highest inflation among the four, at 1.7%, and has accelerated the most during the past quarter, showing non-decreasing rates of inflation year-on-year. In France, inflation was 1.6% and still above the historical median, whereas in Italy and Spain, inflation was significantly lower, at 0.3% and 0.9% respectively.
  • European Central Bank (ECB) President Christine Lagarde said in a statement after a meeting of the Executive Board that the ECB is “ready to take appropriate and targeted measures” to counter the economic impact of the coronavirus, signaling a greater willingness to act. The statement followed similar comments from the US Federal Reserve last week and the Bank of Japan on Monday. Last week, the ECB played down the need for a policy response. 
  • Some big European economies either implemented or prepared to take fiscal measures to deal with the impact from the coronavirus outbreak. Italy, where the outbreak has been worst, started with EUR €900 million for the hard-hit northern regions, rapidly followed by a EUR €3.6 billion stimulus package, which it subsequently doubled to €7.5 billion. German Finance Minister Olaf Scholz said that Germany would be ready to enact a fiscal stimulus package should the epidemic spark a global economic crisis. Germany has the means to act fast and decisively, he said. 
  • ECB’s governing council, which will meet on 12 March, may follow other major central banks and announce new measures to support the eurozone economy at a time when the spread of COVID-19 has led to heightened uncertainty. He notes that the measures could take the form of a new round of targeted longer-term refinancing operations (TLTROs), possibly aimed at encouraging banks to lend to small and medium-sized businesses. In his view, the central bank could also cut interest rates by another 10 basis points deeper into negative territory. An announcement that the ECB will increase the pace of its bond-buying program is more likely to come in April, although such a move should not be completely ruled out for this month. 
  • In terms of data release, German industrial production is due out on Monday while there is an ECB meeting on Thursday.


  • Andrew Bailey, the next Bank of England governor, said in testimony to a parliamentary committee that businesses would need emergency funding to cope with the “shock” caused by the coronavirus. He said that he had discussed the matter with Chancellor of the Exchequer Rishi Sunak. Bailey played down the prospect of an interest rate cut before the 26 March policy meeting, saying more evidence was needed about the COVID-19 pandemic’s effects on the economy. Markets responded by reducing the odds of an unscheduled rate cut to 50.0% from a near certainty earlier. Meanwhile, the UK Treasury also said that possible measures to support the health service, businesses, and the economy were being prepared, according to Reuters. Sunak said that his department would provide an update on economic developments and measures when it unveils his first budget on 11 March.
  • The first round of talks between the European Union (EU) and the UK on a future relationship ended with both sides emphasizing areas of disagreement. Major points of contention included the general level of the playing field between the UK and the EU, fishing rights in UK waters, the role of the European Court of Justice, and how a future deal would be policed. The EU’s chief Brexit negotiator, Michel Barnier, warned that there were some “very serious divergences,” while a UK government spokesman said that this was just the first round of negotiations that were going to be “tough.” Comments made in the press by British officials indicated less of a desire on the UK side for a comprehensive trade deal with the bloc, with Prime Minister Boris Johnson threatening to walk away from a deal if he judged insufficient progress had been made by the half-way point in June.
  • British house prices rose in February for the fourth month running, according to a survey from mortgage lender Halifax on Friday that added to signs of renewed confidence in the housing market. Halifax said house prices increased 0.3% month-on-month after a 0.4% rise in January. A Reuters poll of economists had pointed to a 0.2% uptick. In annual terms, house prices rose 2.8% in February, slowing from growth of 4.1% in January due to base effects.
  • In terms of data release, the UK GDP estimate and the UK budget will be out on Wednesday.


  • The first significant economic release for February, the official purchasing managers’ index (PMI) for manufacturing, plunged to a record-low 35.7 from 50.0 in January. (For this diffusion index, 50 is the threshold between expansion and contraction.) This reading came in well below most forecasts and could signal that China’s economy will suffer a worse-than-expected contraction in the first quarter. The Caixin/ Markit PMI likewise fell to a record low of 40.3 in February. Higher-frequency economic indicators suggest a similar level of weakness, with coal consumption at China’s top six power plants, for example, 70.0% below normal levels. While the PMI declines were dramatic, the sub-index for future output (a measure of business expectations) reached a five-year high, suggesting that businesses expect economic conditions to improve going forward. 
  • Although much attention has focused on the decline in manufacturing activity, the services side of the economy has also come under severe pressure. Markit’s services PMI fell 25.3 points in February, while the official number from the government fell 24.5 points, nearly twice the decline suffered by the manufacturing indices. The severity of this contraction reflects the person-to-person nature of many services transactions and the prohibitions on travel and public gatherings.
  • The Chinese government is also providing greater policy support to bolster the flagging economy. The Shanghai Composite A-share index closed 5.4% higher week-on-week, while the CSI 300 large-cap index gained 5.0%. The indices strengthened until Thursday but fell by 1.2% and 1.6%, respectively, on Friday in response to the sharp losses in overseas stock markets from midweek.
  • In terms of data release, Tuesday will bring the Chinese CPI and PPI readings.

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