Markets Looking for Action, Not Words, as Virus Spreads

March 3, 2020

Share prices had rallied sharply on Monday amid hopes for an appropriately forceful policy response to counteract the drag from the spreading covid-19 pandemic. The OCED is warning that global growth this year will slow to an 11-year low even if the virus impact is comparatively short-lived and that growth could be as low as 1.5% if it lingers and is worse than hoped.

Two central banks cut rates earlier today, and the Bank of Canada will likely follow suit tomorrow.

The Reserve Bank of Australia’s official cash rate was sliced 25 basis points to a new record low of 0.50%, and commercial banks have been quick to pass on the easing with prime rate reductions. There have been ten OCR cuts of 25 basis points since May 2013. Today’s move follows three cuts last year done in June, July and October. RBA Governor Lowe’s statement explaining today’s decision concedes that growth in the first half of 2020 will be weaker than expected previously and observes the extreme volatility of financial markets lately including record low long-term interest rates. He concedes not knowing theduration of the impact from the coronavirus, and says that the easing is meant to support employment as well as GDP growth in the face of the pandemic. The statement concludes, “the Board is prepared to ease monetary policy further to support the Australian economy.”

Bank Negara Malaysia reduced its overnight policy rate (OPR) by 25 basis points to 2.5%, its lowest level since July 2010. This was the second cut of 2020 and brings the cumulative reduction since May 2019 to 75 basis points. Today’s move may not be the final gesture according to a released statement: “The reduction in the OPR is intended to provide a more accommodative monetary environment to support the projected improvement in economic growth amid price stability. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.” The statement warns of disruptions to manufacturing production and projects still modest inflation this year.

A fiscal stimulus was unveiled in Indonesia, and Governor Carney of the Bank of England told parliament that monetary officials will undertake all necessary steps in a timely, powerful and coordinated way.

Most dramatically today, Group of Seven central bank heads and finance ministers released the following rare joint statement, which fell short of satisfying market participants because no explicit actions to happen immediately were unveiled:

We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.

Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.  Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.  G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.

We welcome that the International Monetary Fund, the World Bank, and other international financial institutions stand ready to help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible.

G7 Finance Ministers and Central Bank Governors stand ready to cooperate further on timely and effective measures.

Share prices in Asia closed down 1.2% in Japan, unchanged in Hong Kong, but up 2.9% in Indonesia, 1.4% in Taiwan, 1.6% in India, 0.7% in China and 0.6% in South Korea. The major markets in Europe are up at least 1.0% and 2.0% in the case of Germany.

The 10-year U.S. Treasury yield fell 3 basis points, while its German, British and Japanese counterparts are 3, 2, and 1 basis points higher.

WTI oil shot up 2.6% in price, and gold has risen 0.5%.

The dollar is narrowly mixed, with drops overnight of 0.4% against the yen, 0.3% versus the Aussie dollar, 0.1% relative to sterling and 0.2% vis-a-vis the Swiss franc, but upticks of 0.5% against the peso, 0.3% relative to the euro, 0.2% versus the yuan and loonie and 0.1% against the kiwi.

Consumer confidence in Japan dropped in February to a 4-month low of 38.4 and to within less than 3 points of last September’s level, which had been the weakest since mid-2011.

Euroland released CPI, unemployment, and PPI data today. Consumer prices in February rose 0.2% on month but decelerated 0.2 percentage points to a 1.2% 12-month rate of increase. Core CPI was also at 1.2%. The common currency area’s jobless rate stayed at 7.4%, match the three previous months but 0.4 percentage points lower than a year earlier. Producer prices climbed 0.4% on month in January, led by a 0.7% increase in energy, but were 0.5% lower than in January 2019.

Swiss real GDP grew 0.3% last quarter, a tad more than expected, and 1.5% on year, which is the largest such advance since 2.5% in the year through the third quarter of 2018.

The South African rand reacted adversely to confirmation of that economy’s second recession in two years. Real GDP sank by 1.4% on quarter at an annualized rate in 4Q following a 0.8% drop in 3Q. Compared to the final quarter of 2018, GDP was 0.5% weaker, and calendar-2019 growth of only 0.2% was down from 0.8% in 2018 and the weakest since 2009.

Czech GDP rose 2.4% last year versus 2.8% in 2018, and Cypriot GDP growth also slowed from 4.1% in 2018 to 3.2% in 2019.

South Korean GDP growth on a quarterly basis rebounded to a 9-quarter high of 1.3% in the final quarter of 2019, lifting the on-year pace to 2.3% from 2.0% in the prior two quarters but still below 2.9% in the year through 4Q18.

Turkish inflation is accelerating again. The 12-month increase in consumer prices of 12.37% in February was up from 12.15% in January and 8.55% last October. PPI inflation of 9.26% was up from 8.84% in January and 1.70% last October. Both the CPI and PPI are back to 6-month highs.

Australia’s current account surplus narrowed to A$ 955 million last quarter from a record high of A$ 6.503 billion in 3Q but still compared favorably against a A$ 6.72 billion deficit in the final quarter of 2018. Australian building permits plunged 15.3% in January and were 11.3% lower than a year earlier.

Great Britain’s construction purchasing managers index spiked up 4.2 points to a 14-month high of 52.6 in February, marking the first reading above the 50 level that separates improving from deteriorating conditions for the first time in 10 months.

Non-oil middle eastern purchasing managers indices in Saudi Arabia of 52.5 and the U.A.E. of 49.1 in February were the weakest scores in 22 and 127 months, respectively.

Today is Super Tuesday Primary Day for the U.S. Democratic Party. The field of candidates pits two moderates (Biden and Bloomberg) against two progressives (Sanders and Warren). Among recent drop-outs, Buttigieg and Klobuchar have endorsed Biden.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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