Looking Ahead – Political Economics of a Pandemic 3-6-2020

The coronavirus outbreak may not yet fit the scientific definition of a pandemic but it is clearly heading in that direction, according to some leading public health officials. Global financial markets are certainly not waiting for the official notification. Price action this week in Treasury markets is consistent with an exceedingly grim economic outlook and acute risk aversion, while the previously resilient S&P 500 is under increasing pressure.

Policymakers are not standing idly by. This week has seen a raft of rate cuts from global central banks, including an emergency 50 basis point reduction from the Fed on Tuesday. Meanwhile, the Trump administration is deploying an $8 billion spending package, which the President signed this morning after its swift trip to approval in Congress, and National Economic Council Director Kudlow is indicating that more fiscal measures are in the pipeline.

Meanwhile, US politics played out as a side-plot to the main narrative of the unfolding outbreak and the official responses being marshaled against it. There was plenty of debate among market participants over the extent to which US politics played a role in last week’s selloff, as Senator Sanders gained momentum in the Democratic field, and this week’s twin rallies on Monday and Wednesday, of 4.6% and 4.2%, respectively, which bookended a storming Super Tuesday comeback for Joe Biden, who is back as the presumptive frontrunner.

Many market contacts opined that Wednesday’s surge in the S&P 500 was specifically driven by Biden’s big win, and we certainly agree that healthcare stocks in particular received a boost given Biden’s opposition to Medicare-for-all. Shares of UnitedHealth and Anthem, two managed care giants, are up 9.2% and 6.8% this week despite all the chop in broader indexes. The degree of Joe-mentum in broader indexes and financial markets, however, is debatable.

Whether Medicare-for-all and other more radical healthcare reform proposals really are going to disappear with the Sanders campaign is also not so clear. Analysts are noting that a true pandemic has the power to shape societal norms and ideas, supporting (as one put it) “collectivist notions.” Calls from even Republican quarters that coronavirus patients should receive free treatment even if not insured may be just politicking, or it may represent a real shift. Bailouts for the service sector are unworkable, so perhaps direct payments to service sector workers (aka “helicopter money”) might be considered. It is certainly the time for policymakers to try to think creatively about responses to the epidemic, some of which might be difficult to entirely reverse when the coronavirus mercifully abates.

Looking ahead to next week, the European Central Bank is set to ease and global economic data will be scrutinized for any impact from the coronavirus epidemic.

  • US Economic Data
  • European Central Bank
  • EU Economic Data
  • China Economic Data

US Economic Data: Focus on consumer sentiment for virus impact  

Wednesday’s focus will be on the US Consumer Price Index (CPI) for February. January Headline CPI rose 0.1% m/m, coming in below forecasts of 0.2%. Shelter accounted for the largest increase, with cost of food and medical care services also rising. These increases offset a 1.6% decrease in the gasoline index. On a year-over-year basis CPI climbed to 2.5% from 2.3% in December and is the highest rate since October of 2018, mainly boosted by a 12.8% jump in gasoline cost. Core CPI, which excludes volatile items such as food and energy, increased 0.2% m/m, following a 0.1% gain in December and matching market expectations. Core CPI has risen 2.3% y/y, the same as in December.

The Producer Prices Index (PPI) for February will be released on Thursday. In January the PPI jumped 0.5% m/m, coming is well above market expectations of 0.1% rise. This was the largest monthly gain since October 2018, as services prices rose 0.7% and boosted by apparel, jewelry, footwear, and accessories retailing. On the other side, goods cost only advanced 0.1%. Year-on-year, the PPI rose 2.1%, the largest advance since May 2019. Core PPI also rose 0.5%, also well above the 0.1% forecasted.

On Friday the University of Michigan Consumer Sentiment Index for March will be released and will provide one of the first readings on how the coronavirus is affecting the consumer. February was revised slightly higher to 101 from a preliminary 100.9 and is the highest reading since March of 2018. The gauge for current conditions was higher than expected, while expectations rose less. One-year inflation expectations were 2.4%, while the five-year outlook was 2.3%. The coronavirus was mentioned by 8% of all consumers in February although on the last days of the February survey, 20% mentioned the coronavirus due to the steep drop in equity prices, as well as the CDC warnings about the potential domestic threat of the virus. While too few cases were conducted to attach any statistical significance to the findings, it is nonetheless true that the domestic spread of the virus could have a significant impact on consumer spending.

European Central Bank: No time to waste 

On Thursday the ECB will hold their Interest Rate Decision. At its January meeting the ECB left the key interest rate on the main refinancing operations steady at 0%, which was widely expected. The marginal lending facility was also kept at 0.25% and the deposit facility at -0.50%. During the press conference, ECB President Lagarde failed to provide any new information on the monetary policy, economic outlook and strategic review. Lagarde added that incoming data is in line with the ECB baseline scenario and there are some signs of moderate increase in underlying inflation. She added that the governing council stands ready to adjust the instruments if needed. At a subsequent speech in February, Lagarde called for fiscal stimulus measures in the Eurozone, warning that monetary policy isn’t “the only game in town” and the longer the accommodative measures remain in place, the greater the risk that side effects will become more pronounced.

EU Economic Data: Feeling contractions 

Thursday begins with Eurozone Industrial Production (IP) for January. December IP plunged 4.1% y/y, following a 1.7% contraction and compared to market forecasts of a 2.3% decline. The latest figure matched the December 2018 drop, which was the biggest since November 2009. Capital goods output led the fall, followed by intermediate goods, energy and durable consumer goods. Among the bloc’s largest economies, there was a contraction in Germany, Italy and France, while Spain’s output was little changed. For full year 2019, IP shrank 1.7%, the steepest contraction since 2012.

Chinese Economic Data: Price check  

The week begins with China’s Consumer Price Index (CPI) for February. January CPI jumped to 5.4% y/y from 4.5% in December and above market consensus of 4.9%. This is the highest inflation rate since October 2011 due to rising pork prices, stronger demand during the Lunar New Year holiday and the ongoing coronavirus outbreak. Food prices went up 20.6% y/y, the most since April 2008, with pork prices rising for the 11th month in a row and at a steeper rate. Pork prices have been rising during the last year amid a prolonged African swine fever epidemic and in January 2020, several lockdowns and transport restrictions due to the coronavirus outbreak weighed on the pork cost even more.

Friday begins with Chinese Foreign Direct Investment (FDI) for February. In January FDI into China rose 4% y/y to CNY 87.57 bil, or 2.2% to $12.68 bil. In yuan terms, foreign investment in high-tech industries went up 27.9 percent and accounted for 35.8 percent of the total FDI, with investment in high-tech service increasing 45.5 percent. Among the main sources of investment, FDI into China rose mainly from Singapore (40.6 percent), South Korea (157.1 percent), and Japan (50.2 percent); while FDI from the countries along the “Belt and Road” and ASEAN advanced by 31.3 percent and 44.8 percent, respectively.

Morning Markets Brief 3-13-2020

Summary and Price Action Rundown

Global financial markets are attempting to stabilize this morning after historic levels of volatility this week began to translate into more disorderly trading conditions and rapidly rising systemic risks, prompting an increasingly proactive response from central banks, though fiscal measures, particularly in the US and Germany, remain lacking. S&P 500 futures point to a 4.4% jump at the open, though this is dwarfed by yesterday’s plunge of 9.5%, which was the heaviest percentage point decline for the index since “Black Monday” in 1987. The index’s year-to-date losses stand at 23.2% while the downside from the mid-February record high is 26.7%. For context, investor optimism over prospects for synchronized stimulus from global central banks and governments to counteract the economic costs of the coronavirus epidemic evaporated yesterday as wrangling continued over US fiscal support and central bank action failed to support broad investor confidence. But nerves are steadying a bit this morning as headlines suggest that Congress and the administration may be closing in on an emergency spending deal today, while investors are focused on potentially dramatic stimulus from the Fed at their meeting next week, if not before. Equities in Asia posted steep losses overnight but today’s equity rebound began this morning in the EU. After the Fed stepped in yesterday to address some trading dislocations in Treasuries, the 10-year yield is up to 0.86%, and the dollar is hovering near top of its recent trading range. Brent crude is bouncing to $35 per barrel.

Hope Reemerges for a More Concerted US Government Response to the Pandemic  

After market confidence was progressively undermined by this week’s lagging US efforts to marshal a significant fiscal response to counter the economic fallout from the pandemic, investors will be intently focused on the US spending bill expected to be finalized today. With fiscal support widely deemed to be the most effective means for governments to diminish the human and economic toll of the outbreak, a sizeable and strategic US emergency budget that is emblematic of bipartisan unity would be a key step toward stabilizing market sentiment. Lack of apparent progress and partisan bickering over government budgetary support to help address the growing economic impact of the pandemic has been a significant downside catalyst this week, alongside President Trump’s Wednesday address to the nation, which focused on travel restrictions from the EU rather than domestic economic support or progress on virus testing capabilities. Meanwhile, fiscal stimulus measures have been ramping up overseas this week. The UK unveiled a $39 billion spending package, Australia announced a $10-13 billion plan, and Italy upped its program to $28 billion, which includes tax credits to hard-hit companies as the EU provides fiscal leeway to the indebted country. Also, Japan is marshalling a $15.6 billion anti-virus budget and Germany’s central bank president Weidmann advocated deficit spending. Meanwhile, the governments of Spain, Italy, and South Korea took a step reminiscent of the global financial crisis and banned short-selling of certain equities.    


Focus on the Fed as Extraordinary Easing by the European Central Bank Rings Hollow 

Monetary accommodation is being deployed in an attempt to blunt the deepening economic impact of the coronavirus and address liquidity issues, but the European Central Bank (ECB) underwhelmed yesterday, putting additional pressure on the Fed to step up its stimulus. The adverse market reaction to central bank easing yesterday highlights the difficult situation for monetary policymakers who lack cover due to stalled fiscal efforts. The ECB did not cut rates as expected but augmented its extraordinary monetary support by creating a new concessionary loan facility for small businesses and upping the asset purchase program, though some analysts were unimpressed with the temporary nature of the increase as well as well as ECB President Lagarde’s remarks that suggested a less permissive stance toward stabilizing the sovereign market pressures in the EU. Italian bonds sold off sharply following the ECB decision but have stabilized this morning. Later in the day, the Fed announced that $1.5 trillion would be on offer to address liquidity strains in short-term funding markets, as well as indicating that its balance sheet expansion program would now include purchases beyond three months, although this was not explicitly labeled quantitative easing. While short-term funding markets were soothed, broader markets received only a temporary lift from the targeted action. Futures markets project at least 75 basis points (bps) of Fed rate cuts by next week’s meeting and market participants are broadly expecting the official restart of quantitative easing.


Additional Themes

Overseas Monetary Easing – Overnight, central banks in Australia, China and Sweden released further liquidity into their banking systems, while Norway enacted an emergency 50bps rate cut. The Bank of Japan is reportedly mulling buying commercial paper and corporate bonds.

US Consumer Confidence in Focus – This morning, the March U. Michigan Consumer Sentiment index will be one of the earliest indicators of how the US economy is weathering the epidemic.


Looking Ahead – Tariff Man or Davos Man?

Looking Ahead – Tariff Man or Davos Man?

The new year has gotten off to a disquieting and dispiriting start in many ways, although through the lens of financial markets, the view is considerably rosier. Investors have remained quite calm in the face of a potential US-Iran war and now a deadly virus outbreak from China, with the quiet interim between these two worrisome developments featuring big equity gains.

The array of upside catalysts for US equities are well understood: easing global trade tensions, the positive tone of fourth quarter earnings reports, some encouraging global economic readings in recent days, and ultra-easy monetary conditions in the US and abroad.

On the last point, some Fed officials have recently sought to refute the idea that their massive asset purchases, which restarted in October and coincide with a ruler-straight uptrend in the S&P 500 since their inception, are anything but a technical tweak to lubricate front-end funding and bank reserve dynamics. But it seems that most market participants roundly disagree with this hair-splitting and see Fed liquidity operations as a key factor in fueling asset price upside.

Given ongoing uncertainty over funding market issues and prevailing belief that the Fed is effectively engaged in quantitative easing (QE4), we believe it is highly unlikely that the Fed will cease or even taper its balance sheet expansion as the program extends into 2Q and beyond. It is inauspicious for the Fed to make consequential policy decisions too close to an election, and that is all the more true now, as the Fed already blundered by overtightening in 2018 and has had President Trump on their case ever since, regularly lambasting them on Twitter.

While President Trump is sure to keep up rhetorical pressure on the Fed, his performance this week in Davos was considerably more balanced than some of his prior appearances. Attendees have told us that his speech was viewed as more of a campaign event than a real statement of global leadership on specific issues, but it was relatively restrained on the subjects of trade and geopolitics. He even put his hand up to join the Trillion Tree initiative.

However, Tariff Man was not entirely sublimated to Davos Man, as President Trump reiterated his threat to slap 25% tariffs on EU auto imports absent a trade deal. But he and French President Macron agreed to a tariff truce until year-end, past the US election, over digital taxes that US officials say unfairly single out US tech companies. And with the EU in a scramble to negotiate a post-Brexit trade deal with the UK, it is not clear that the negotiations with the US can be prioritized despite the US auto tariff threat.

Given the amorphous timeline for negotiating an EU trade deal and the lingering uncertainties over the executive authority to impose those particular auto tariffs, a full-blown US-EU trade fight seems unlikely to metastasize into a major market-mover this year, unlike the US-China tariff brawl from 2018 through last December. But that certainly does not mean that this week’s declines in shares of BMW or Daimler represent a great buying opportunity. EU auto stocks are undoubtedly suffering in part from fears that the virus in China will weaken demand in that key market for their vehicles, along with stocks of luxury goods companies and airlines. The evolution of the coronavirus outbreak trumps tariff considerations, and most other global macro factors, for the foreseeable future.

Looking ahead to next week, more 4Q earnings are due alongside US and Chinese economic data and meetings for the Federal Reserve and the Bank of England.


  • Corporate Earnings
  • US Economic Data
  • US Housing Data
  • Federal Reserve
  • Bank of England
  • EU Economic Data
  • China Economic Data

Corporate Earnings Reporting: Packed calendar

Peak Earnings Season moves into its third week on Monday beginning with D.R Horton and Whirlpool. Tuesday will focus on Apple, AMD, eBay, Harley Davidson, 3M, Pfizer and Starbucks. Wednesday is one of the busiest reporting days of the season with ADP, Boeing, Facebook, General Dynamics, GE, Hess, Mastercard, McDonald’s, Mondelez, Microsoft, Nasdaq, PayPal, AT&T, T. Row Price and Wynn Resorts. Thursday brings Amgen, Amazon, Biogen, DuPont, MSCI, Northrop Grumman, Raytheon, Sherwin-Williams, UPS, Visa and Verizon. Friday closes out the week with Caterpillar, Colgate-Palmolive, Chevron, Honeywell and Exxon Mobil.

Of the 86 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates.

US Economic Data: Big figures

Tuesday will revolve around US Durable Goods Orders for December. In November new orders unexpectedly fell 2% month-on-month (m/m) while the market was expecting a 1.5% rise. This also followed a weak October where orders only grew 0.2%. Demand for transportation equipment led the fall, while declines were also seen in orders for machinery and primary metals.

With the signing of the Phase 1 trade deal with China last week, the US Trade Deficit has become a little less market-moving, but still important. In November the deficit narrowed to $43.1 bil from $46.9 bil. The trade gap shrank for the third straight month to the lowest since October 2016. Imports dropped 1% to the lowest level in 2 years due to falling purchases of aircraft, computers and cell phones. Exports increased 0.7% to $209 bil, boosted by sales of drilling and oilfield equipment, jewelry, autos and aircraft engines. The goods trade deficit with China narrowed 15.7% to $26.4 bil, with imports dropping 9.2% and exports jumping 13.7%. Year-to-date, the total deficit has narrowed $3.9 bil.

On Thursday in the US we will get the first estimate of US 4th Quarter 2019 GDP. In 3Q19 the US economy grew by an annualized rate of 2.1%, following a 2% expansion in 2Q19. The increase reflected positive contributions from PCE, federal government spending, residential investment, exports, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. Consensus estimates are looking for GDP growth of 2.1%.

Friday’s focus will be on US Personal Income and Spending for December.  In November Personal Income rose 0.5% m/m, following a 0.1% advance in October. Consumer Spending rose 0.4% m/m, following a 0.3% rise, as purchases of motor vehicles increased, as well as spending on healthcare. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, is also included in the same report. November PCE rose 0.2% m/m, the same pace as in October. Services prices advanced 0.2%, while goods prices were flat, after rising 0.3% in the prior month. Prices slowed for non-durable goods along with fell for durable goods. Year-on-year, the PCE price index advanced 1.5%, above the 1.4% rise in October. Core PCE, which excludes prices of food and energy, increased 0.1% m/m, the same pace as in October. Core PCE is the Fed’s preferred measure of inflation and they target a 2% level. Year-on-year, Core PCE went up 1.6%, easing from a 1.7% increase.

The week closes with the MNI Chicago Business Barometer. In December the PMI rose to 48.9 from 46.3 in November. The index remained in contraction territory for the fourth straight month. Production, new orders, order backlogs, employment and inventories indexes continued in negative territory. Supplier delivery times was the only component among the main five remaining above the 50-mark, which denoted expansion. Prices at the factory gate jumped 9.2% to 58.4, hitting the highest level since August. Business sentiment dropped by 1.2 points to 46.2 in the fourth quarter, marking the lowest quarterly reading since 2Q09.

US Housing Data: Safe as houses 

New Home Sales for December will be released on Monday. In November sales rose 1.3% m/m to a seasonally adjusted annual rate (SAAR) of 719K, recovering from a 2.7% drop in October and handily beating market expectations of a 0.3% fall. Analysts are crediting low mortgage rates supporting the housing market.

Wednesday will see Pending Home Sales for December. November sales climbed 7.4% year-on-year (y/y), the largest annual increase in pending home sales since June 2015. Contracts rose in all 4 regions, with the West up 14.0%, the South 7.7%, the Midwest 5.0% and the Northeast 2.6%. On a monthly basis, pending home sales rose 1.2%, rebounding from a 1.3% fall in October.

Federal Reserve: How easy is too easy?

Wednesday’s focus will be on the Federal Reserve’s first Interest Rate Meeting of the new year.  At its meeting in December the FOMC left the target range for the federal funds rate unchanged at 1.5-1.75%, as was widely expected and following a 25bps cut at the October meeting. Policymakers consider the current stance of monetary policy appropriate to support sustained growth, strong labor market conditions, and inflation near the 2% target. They also kept their growth forecasts unchanged for this year at 2.2%; 2% for 2020; 1.9% for 2021 and 1.8% for 2022. Inflation is projected at 1.5% in 2019; 1.9% in 2020; 2% in 2021 and 2% in 2022, same as the September projection. Regarding the future path of the fed funds rate, most participants expect no changes in 2020, although a hike is still seen in 2021, while the market is currently pricing in one cut in the back half of 2020. At next week’s meeting the market is pricing in 86% odds that the Fed keeps rates at the current levels and 14% chance that they hike 25bps. Investors will be attuned to any discussion by Chair Powell of financial conditions or, more specifically, asset price inflation. Expressions of concern on either of these points are unlikely but would have a material impact on investor sentiment.

Bank of England: Coin flip

On Thursday the Bank of England (BoE) holds their own Policy Meeting. At their December meeting the BoE’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to hold the Bank Rate at 0.75%, as policymakers took a wait-and-see approach following Prime Minister Boris Johnson’s election victory and its possible implications on Brexit. Two members voted for a second month in a row for a rate cut amid concerns about the job market. With the House of Lords dropping their opposition to Prime Minister Johnson’s bill this week and the Queen signing it into law, the UK is now set to formally leave the EU at the end of the month. However, the agreement needs to be formally ratified by the European Parliament on Jan. 29, following which Britain will enter a transition period, scheduled to last until the end of the year, during which it will continue to be bound by EU laws until it negotiates a new trade deal with the remaining 27 member states. On the back of these recent developments the market is pricing in 46% odds that the MPC votes to cut rates by 25bps next week and 54% odds they hold steady.

EU Economic Data: Winter thaw?

On Monday in Germany the focus will be on the Ifo Business Climate Index. December rose to 96.3 from 95.1 in November and easily beating market expectations of 95.5. This is the highest reading since June and was boosted by an improvement in companies’ assessment of the current situation, as well as their expectations of the future. Across sectors, sentiment improved among manufacturers and service providers, but deteriorated among traders and constructors.

Wednesday brings a glimpse into the state of the German Consumer with the GfK Consumer Sentiment Indicator. January edged down to 9.6, which is the lowest level since November 2016. Economic expectations dropped 6.1 points to -4.4, far below the long-term average of 0, as Germans were less optimistic about the growth outlook. Furthermore, income expectations fell 10.5 points to 35.0, the lowest since October 2013, amid fears of more job cuts in some industrial sectors, mainly in the car industry and its suppliers. However, the willingness to buy went up 2.2 points to 52.2.

Thursday will show how the European business sector is feeling about the economy with the Business Climate Indicator for the Euro area for January.  December fell by 0.04 points to -0.25, the lowest level since August 2013, as managers’ assessments of past production and stocks of finished products declined sharply. Also, their assessments of overall order books and export order books deteriorated, while production expectations improved firmly.

Chinese Economic Data: Pre-outbreak reading

Also, on Thursday is the Official NBS Manufacturing PMI in China. In December the PMI was unchanged at 50.2. The latest reading pointed to the second straight month of expansion in factory activity, supported by government stimulus measures and optimism surrounding a trade war truce with the US. Output growth accelerated and new orders continued to rise, boosted by a rebound in exports. However, employment fell further. Future expectations softened slightly from November’s seven-month high. January’s readings are expected to settle slightly lower and manufacturing is forecast to barely avoid dipping back into contraction.


Looking Ahead – 12/6/19

Just OK is Not OK

Today’s highly-anticipated nonfarm payroll report featured a blockbuster number of 266k new jobs, handily topping an estimate of 183k and giving the many traders who were playing for a mildly disappointing reading a case of whiplash. But the reflexive selloff in Treasury markets settled down quickly and futures markets are still projecting that the Fed will be back cutting interest rates in the second half of next year. That bond market price action is consistent with a pretty sober outlook for growth in 2020, which matches the broad consensus among economists that US GDP is going to soften modestly to 1.8% from this year’s 2.3%. Continue reading “Looking Ahead – 12/6/19”