Monetary Efforts to Counter Covid-19 Economic Damage All in Vain

March 16, 2020

The contagion news over the weekend was very bad. Italy suffered a bigger daily jump in deaths than even China had, and all evidence suggests that governments that did not test extensively for the virus at the first sign of trouble have brought upon their countries larger humanitarian disasters. The United States seemingly falls into this category.

A slew of Chinese data for January-February revealed a much greater-than-anticipated drop in economic activity due to the Covid-19 virus.

  • The jobless rate increased a full percentage point to 6.2%.
  • Industrial production, which had risen 5.7% in 2019, posted a 13.5% year-on-year plunge in January-February. This was the first 12-month decline of any magnitude in three decades.
  • In contrast to an 8.0% increase in 2019, retail sales crashed 20.5% on year in the first two months of 2020.
  • Fixed asset business investment had risen 5.4% last year but recorded a 24.5% on-year drop in January-February.
  • The 5.8% 12-month rise in new house values was the smallest such gain in 31 months and compares with a 10.7% rise last May.

Coronavirus cases now top 173,000 and have caused 6,664 deaths worldwide.

An FOMC meeting had been planned for Tuesday-Wednesday, but the Committee moved that meeting up to Sunday and announced a series of stimulus moves before Asian markets opened, including a full percentage point cut in the federal funds target to a range of 0-0.25%, a 150-basis point reduction in the discount window, a drop to zero percent in reserve requirements, and a coordinated enhancement with central banks in Japan, Euroland, Switzerland, the U.K., and Canada of swap line-financed dollar liquidity around the world.

Emergency monetary policy meetings followed the Fed’s cue in Japan, New Zealand, Hong Kong, South Korea, Kuwait, and Macau. And verbally, several monetary policy chiefs, including Fed Chairman Powell and incoming Bank of England Governor Andrew Bailey told markets of a readiness to provide even more monetary policy support if such becomes necessary. Powell’s press conference elicited many questions attempting to get an indication of how long and how pronounced the coronavirus showdown in growth might be. Monetary officials don’t know that answer, as it depends on the uncertain epidemiology of the pandemic. All that monetary policy can do is try to keep financial markets liquid, functional, and orderly. Fiscal policy is better suited to the task at hand, and the most effective response ought to be one doing “whatever it takes” to address the medical origin of the crisis. If that means testing every person over aged 65 and isolating anyone testing positive and all people who’ve been in contact with someone testing positive, so be it. If it means shutting down wide bands of economic activity temporarily, so be it. People and that means markets are grasping for signs of competence in their political leadership and acting on fear until that happens.

Stock markets in the Pacific Rim tumbled 9.7% in Australia, 8% in India, 5.3% in Singapore, 3.3% in Indonesia, 4.1% in Taiwan, 4.0% in Hong Kong, 3.4% in China, 3.1% in New Zealand, 3.2% in South Korea and 2.5% in Japan. Losses so far in Europe amount to 10.2% in Spain, 9.7% in France, 8.6% in Germany, 7.1% in Switzerland and 7.0% in Great Britain. U.S. futures are down over 7%.

The price of West Texas Intermediate crude oil fell 7.9% overnight to less than $30 per barrel, and gold sank 3.6% and is below $1465/ounce.

Wild swings in 10-year sovereign debt yields continued, with a drop of 20 basis point in the U.S. Treasury but increases of 35 bps in Greece, 16 bps in Portugal and 15 bps in Italy.

The dollar has slumped 2.3% against the yen, 1.2% versus the Swiss franc, and 0.9% relative to the euro, but the U.S. currency also rose about 3.0% versus the peso and ruble and reached a new record high relative to the Norwegian krone.

The Bank of Japan took a number of quantitative monetary policy actions to increase liquidity but disappointed investors by failing to cut either its short-term interest rate target of -0.1% or its 10-year JGB yield target of “around zero percent.”

The Bank of Korea‘s base rate was reduced 50 basis points to 0.75%.

Base rates were reduced by 64 basis points by the Monetary Authorities of Hong Kong and Macau.

The Reserve Bank of New Zealand slashed its Official Cash Rate to 0.25% from 1.0%. This was the first reduction in 7 months and the ninth cut from a peak of 3.50% prior to June 2015. The action today is meant to counter the drag of the coronavirus pandemic, about which officials observed, “The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.” Officials do not expect to raise the interest rate for at least 12 months.

New Zealand’s service sector purchasing managers index dropped 5.2 points to an 89-month low in February of 52.0.

Japanese core machinery orders rebounded 2.9% in January but were still 0.3% lower than a year earlier.

Indian wholesale price inflation decelerated from a 10-month high of 3.1% in January to a 3-month low of 2.26% in February.

Indonesia in February recorded its largest monthly trade surplus since 2011, $2.34 billion, as imports dropped 5.1%.

The Swiss PPI/import price index sank 0.9% in February and posted its most negative on-year slide (2.1%) since November. Domestic producer prices were 1.2% below their year-earlier level, and import prices dropped by 3.9%.

Italian consumer prices dipped 0.1% in February and to a 3-month low of 0.3% in year-on-year terms.

Czech PPI inflation dropped a percentage point to 1.4% in February.

Greek construction output was 5.7% lower last quarter than in 4Q18.

South African consumer confidence fell to an 11-quarter low in the first quarter of 2020.

In the U.S., the Empire State manufacturing index swung from +12.5 in February to -21.5 in March, its weakest reading since 2009. In last  night’s debate between Joe Biden and Bernie Sanders for the Democratic Presidential campaign, experts by and large thought that Biden had won. There are primaries tomorrow in Ohio, Illinois, Florida and Arizona. 663 delegates to the convention in Milwaukee are at stake.

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

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