Bracing for Impact But Investors Take a Pause
March 19, 2020
The count of identified global coronavirus infections (230,041) and deaths (9,386) has risen by 26,429 and 1,097 in the past 26 hours.
Investors are getting a glimpse of just how bad the economic impact could be.
- The IFO Institute’s monthly index of Germany’s business climate fell 8.3 points in March to a 127-month low of 87.7. That’s the greatest month-to-month slide since 1991. Expectations fell to a record low. Service sector activity printed at a record low. Commenting on the latest data, IFO officials said sentiment has worsened drastically and that the German economy is speeding into recession.
- The Philly Fed manufacturing index fell 49.4 points between February and March to a 92-month low of -12.7. This was the greatest month-to-month decline ever.
- U.S. new jobless insurance claims leaped 70k last week to a 30-month high.
- Excessively low Japanese inflation became even more so in February, declining 0.3 percentage points to 0.4% overall and 0.2 percentage points to 0.6% on core CPI. Falling oil prices point to more deceleration or a possible return to negative territory ahead.
Investors are bracing for a big social and economic blow from the pandemic but after Wednesday’s difficult session have been hunting bargains.
- Asian stock markets initially extended yesterday’s stock market losses with additional share price declines of 8.4% in South Korea, 5.2% in Indonesia, 5.8% in Taiwan, 4.7% in Singapore and 1.0% in Japan and China. Markets in Australia and New Zealand fell somewhat more than 3.0%. European markets also fell in the morning hours but late in their day showed net daily gains of 1.8% in Germany, 1.6% in Spain and France, and 0.8% in Great Britain. The Dow shortly before noon was up by 1.6%.
- The price of West Texas Intermediate crude oil recovered 18.5% but remains quite depressed for the month (down 46% so far). Gold is 0.4% firmer.
- The 10-year Treasury yield slipped back six basis points, but its German counterpart is five bps higher.
- The U.S. dollar remains volatile, with declines of 2.3% against the New Zealand and South Korean dollars and 1.6% versus sterling but appreciations on the day of 1.6% versus the yen and Swiss franc, 1.9% relative to the Mexican peso, 1.4% vis-a-vis the euro and 0.9% against the Chinese yuan.
Governments have been scrambling to legislate fiscal stimulus packages on the economic front to gear up capacities to care for critically ill patients and to slow down out the evolution of the infecting virus. U.S. President Trump signed the first fiscal bill of about $100 billion and is working with Congress on a second much larger package of about $1.3 trillion.
Central banks are also bracing for the virus storm, cutting interest rates and announcing additional actions to promote low-cost and liquid markets.
The Central Bank of Brazil’s Selic interest rate was cut twice as much as expected to 3.75% from 4.25%. (see my earlier review). The rate had earlier been sliced 25 basis points in February and 200 bps in 2019.
The Reserve Bank of Australia, which at a scheduled meeting on March 3 had cut its official cash rate by 25 basis points, cut the OCR by an additional 25 bps today to a record low of 0.25%. This move was only part of a multi-pronged package spelled out in a statement. A significant loss of jobs is predicted over a number of months in spite of the stimulus. (Australia was one of very few economies not to experience a recession in 2007-9). Among other actions unveiled by the central bank today, a promise was made not to lift the OCR before until evidence arises of a return toward full employment and officials become confident about a return of inflation to the 2-3% target. Asset purchases will be used to target the 3-year Aussie government bond yield at around 0.25%, and a term funding facility for the banking system was introduced, with particular support for credit to small and medium-sized businesses.
The Swiss National Bank‘s sight deposit rate of negative 0.75% since January 2015 was retained at that central bank’s quarterly policy review, and officials characterized the franc as even more overvalued than before, which will necessitate more intense intervention in the FX market. Extra steps are being taken to ensure ample liquidity. Officials do not foresee a rate hike through the entire forecast horizon. They revised projected GDP growth this year to negative territory after having predicted a growth range of 1.5-2.0% at their December 2019 policy review. Inflation also was revised lower for the entire forecast horizon, reaching -0.6% next quarter and getting up only to 0.8% by the third quarter of 2022. The previous forecast for that quarter had been 1.2%.
The Central Bank of the Republic of China (Taiwan) reduced its discount rate by a greater-than-anticipated 25 basis points to 1.125%. This was the rates first change since a cut of 12.5% in June 2016. Officials also established a special loan facility for small and medium-sized enterprises. The coronavirus will be a big growth depressant but not the only one. Officials also mentioned falling global inflation, geopolitical conflicts, and the uncertain resolution of trade talks. GDP in Taiwan is expected to slow to 1.9% this year, and inflation is currently under 1%.
Officials at Bank Indonesia reduced the 7-day reverse repo rate by 25 basis points to 4.5%. There was also a 25-basis point cut in February and a full percentage point of reduction in four moves during the second half of last year. Taken together all but 25 basis points of the 175-bp of tightening in 2018 has been reversed. Inflation in Indonesia is still lower than officials want, and they are ramping up intervention to support the rupiah.
Today was the originally scheduled policy meeting at the Bank of Norway, but officials there jumped the gun a week ago and cut their policy rate by 50 basis points to 1.0% then. They justified the move by uncertainty regarding the duration and impact of the coronavirus outbreak.
At Bangko Sentral ng Pilipinas, the policy interest rate of the Philippines was cut to 3.25% today from 3.75%. That increment of reduction doubles the previous easing done in February and brings the total cut since May 2019 to 125 basis points. Inflation is firmly anchored within the central bank target of 2-4% according to a released statement, and price risks are skewed to the downside.
The latest and largest rate cut today has been a 100-basis point reduction in the South Africa Reserve Bank’s repo rate to 5.25%. This follows a 25-basis point cut in January and an initial 25-bp cut in July 2019. The repo rate had been as high as 7% from March 2016 through July 2017. Ahead of the Covid-19 pandemic, central bank officials now foresee a 0.2% contraction of GDP this year in South Africa followed by 1.0% positive growth in 2021, but such forecasts are fraught with uncertainty.
Other data reported today of note reveal
- A rise of only o.1% in the U.S. index of leading economic indicators last month.
- A 12.4% quarterly narrowing of the U.S. current account deficit to $109.8 billion last quarter, equal to -2.0% of GDP. The 2019 deficit equaled $498.4 billion, still a bit above the prior year’s deficit of $491 billion. The calendar year deficits over the last four years ranged narrowly between 2.3% and 2.4% of GDP and also averaged 2.4% of GDP in 2013-15.
- Japan’s all industry index, a monthly proxy for GDP, rose 0.8% in January but was still 1.4% weaker than a year earlier. The all industry index had dropped 3.1% in the final quarter of 2019 and by 0.3% for last year as a whole.
- Real GDP growth in New Zealand slowed to 0.5% last quarter, trimming the on-year growth rate by a half percentage point to 1.8%.
- Australian monthly labor statistics for February show an unchanged 5.1% jobless rate, a 26.7k increase in jobs, and a 0.1 percentage point dip to 66.0% in labor participation.
- Construction output in the euro area rose 3.6% in January. Output was 6% higher than in January 2019.
- Swiss exports fell 3.3% last month, and the trade surplus fell to a 2-month low of CHF 2.018 billion.
- In the 12 months to February, consumer prices in Iceland rose 2.4%, and producer prices in Poland edged up just 0.1%.
Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: COVID-19, German business climate index, U.S. current account