Infection Rates Seem to be Slowing
As you would expect the coronavirus situation was the headline story all week. The situation continues to evolve, but it is pretty clear that simply counting the number of infections is far from simple. Is China fully disclosing the number infected? If infection rates have plateaued, why are roughly 400mm people in China under some form or quarantine? Investors were also thrown off balance on Thursday when China changed the definition of infection. Whereas previously a positive lab test was required, now a positive imaging-based clinical evaluation will suffice. This led to a jump in the numbers simply due to a definitional change.
It is worth noting that regardless of the definition, it does appear that the rate of growth in infections is slowing, as you can see below.
This is certainly what the markets are latching on to. In terms of the economic hit, it will depend on the region. Growth in China will undoubtedly struggle in the first quarter and a contraction is highly likely. Europe will also see a significant hit with renewed recession talk in Germany. This explains why the euro has been relatively weak. The U.S., as in so many things, is relatively insulated.
So far the markets are focusing on two things. First, as long as the outbreak is contained, global growth should bounce back significantly in the second quarter. The market is pricing in this scenario at the moment. The other focus is on renewed stimulus. Over the last few days Beijing has unveiled a raft of measures, including injecting $22 billion into the market, cutting banks’ reserve ratios, and instructing banks to not call in loans for companies based in the virus-stricken Hubei province. Efforts such as this combined with the renewed fall in interest rates around the world should cushion the blow from a temporary economic hit, or at least that is the current thinking. Even in the U.S. the market is pricing in at least one rate cut this year.
It is also notable that the data in the U.S. has come in better than expected, at least before the virus outbreak. For example, the last manufacturing PMI increased to 50.9% in January, up from 47.2% in December. This was above expectations of 48.5%, and suggests manufacturing expanded slightly in January after five months of contraction.
Job growth also remains robust. Last Friday’s nonfarm payrolls rose 225k in January, 60k above consensus.
Wage growth is running at a ‘not too hot, not too cold level.’ As you can see below wages are growing at roughly 3%, fast enough to bolster consumers’ pocket books but not too fast to cause an inflation scare.
But clearly the economic data over the next two-to-three months is going to be all over the place. The short-term data won’t have much of an impact on the markets as long as infection rates are coming down.
Lower Rates for Longer
One consequence of the coronavirus will be that interest rates stay lower for longer. Any Fed tightening is many months away, and as we noted earlier, we could even see a cut. Also, longer-term interest rates should behave as well. Investors are still clamoring for yield. For example. the U.S. Treasury sold $19 billion of 30-year bonds at a record-low yield of 2.061% on Thursday (chart below). Not only that, but investor demand was the highest for any sale of a new bond since August 2014.
This is naturally filtering through into mortgage rates which are close to the lows seen in 2016, as you can see below.
Then there is Greece. Remember how they basically went bankrupt a few years ago and nearly sank the global economy? Well, that’s not a thing anymore. On Wednesday the yield on Greece’s 10-year bond dropped below 1% for the first time ever. Ever!!
The recent drop in borrowing costs caps a dramatic turnaround since the height of the eurozone debt crisis when the country’s 10-year yield spiked above 30%, as you can see below. It closed Friday at just 0.94%.
Now looking at the chart above you might think rates are down because the country has their borrowing under control. Well, no, not really. The most recent data we have shows that Greece’s debt-to-GDP is at an all-time high of 181.1%.
But I guess the good news is that much of this debt is in the form of low-interest loans from bailout creditors such as other EU countries, the IMF and the ECB. So, I guess they have that going for them.
So Far the Flu is a Much Bigger Deal
While the coronavirus is getting all the attention, this year’s flu season is shaping up to be pretty bad. The share of influenza samples tested positive – an indicator of how the flu season is progressing – has reached 27.7% in the U.S. at the end of January, the highest level since 2017-2018.
Some interesting data:
1) According to reports from the CDC, the current flu season has caused at least 250,000 hospitalizations and killed at least 14,000 people in the U.S. in the 16 weeks since it began.
2) During the 2016-2017 flu season there were 51,000 deaths in the U.S.
3) So far, there are 65,000 coronavirus infections worldwide that has led to 1,400 deaths. However, the speed of infection is much quicker as they have developed over just four weeks.
4) In the U.S. there are 15 coronavirus infections and there have been no deaths.
Have a good weekend.
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