Real concerns about a global pandemic have finally gripped the markets after headlines emerged about the serious virus several weeks ago. Markets didn’t come to grips with the potential human and economic toll of the outbreak until it became clear that the coronavirus would not be restrained by borders. Now the question has become whether this is the ‘black swan’ event that market bears are always girding against or just a short term bump in the road as many economists were predicting just a week or two ago.
In matters of health it is generally better to listen to medical experts than economists, and global health officials are deeply concerned though not panicked. The WHO in its daily briefings has stated that there is still time to thwart a ‘pandemic’, but it will not hesitate to give the outbreak that label if it becomes accurate. Meanwhile drug makers are racing to produce an effective vaccine, though realistically there won’t be a vaccination available until late 2020 at the earliest.
Until a few days ago, tame inflation, good corporate results, and continued central bank stimulus appeared to have investors convinced that the good times could keep rolling. That may hold true as monetary and fiscal policy officials put their heads together in efforts to curtail the impact of coronavirus on consumer confidence and financial markets. Unless the Coronavirus takes the shape of a truly serious pandemic, on the order of the 1918 Spanish flu outbreak that took 50 million lives, the market should shake off the damage to confidence within a quarter or two. But there could be some wreckage left behind if financial markets start to seize up or if supply chains are disrupted for too long.
March 3: Extraordinary G7 finance ministers and central bankers teleconference
An emergency meeting of senior G7 economic officials has been hastily set up for March 3, creating expectations of new stimulus measures from the group. There have already been some noises out of member nations about possible fiscal measures to allow more deficit spending to support local economies, and central banks may also be ready to act in concert after this meeting. Goldman Sachs analysts are now predicting that central banks will react this month, possibly in a coordinated manner, including 50 basis points by the Fed, and even a token 10 basis point cut by the ECB.
Unfortunately, more monetary policy stimulus might not be very effective at easing the outbreak concerns that are slowing travel and commerce. Going back to the monetary stimulus well could also backfire with rates still very low among most central banks. Mohamed El-Erian, chief economic advisor at Allianz, has warned that the Federal Reserve will not be able to stop the financial markets from freezing amid economic fallout from the coronavirus outbreak, and that the biggest risk now might be that we will get to the point where central bank stimulus is shown to be ineffective.
Fiscal stimulus seems to be the more appropriate response and government officials are to be coming around to this idea. The White House is contemplating a tax cut, though it’s not clear if that would fly with the Democrats in Congress (though it’s still sure to be another political football for the election season). Even countries that have tighter controls over the purse strings are looking at more fiscal stimulus. For example, Germany, which the IMF and other international economic bodies have urged to provide more largesse, has finally decided to be more open handed in the face of coronavirus, just recently deciding to loosen budgetary strictures.
The risk now is that if G7 minsters and global central banksdon’tcome up with some significant new stimulus markets could lose confidence and spiral lower. Some officials may still be on the fence about whether the virus will have much economic impact past mid-year and may advocate waiting to see if things get worse before taking any coordinated action.
March 3: Super Tuesday
The race for the Democratic nomination has narrowed after Joe Biden scored a resounding ‘comeback’ by garnering nearly half of the votes in the South Carolina primary. That result drove Tom Steyer, Pete Buttigieg, and Amy Klobuchar out of the race, essentially setting up Super Tuesday as a contest between the emerging leaders of the moderate and progressive wings of the party. Unless Mike Bloomberg’s barrage of ad spending creates a surprise result or Elizabeth Warren manages to convert some ‘Bernie-bros’ to her camp, it appears the race will essentially be down to Joe Biden and Bernie Sanders.
Most market watchers will favor Biden in the head-to-head Democratic race, as the former VP represents the status quo for the party. Any signs that Mr. Sanders is maintaining his front runner status could be a thorn in the side of stock market participants worried about radical changes in policy, but if Biden consolidates the moderates and minority voters into a solid majority then some of the political risk to the markets will be eased. The two wings of the party appear closely balanced, so a brokered convention still remains a very real possibility, which would likely benefit the incumbent candidate as the general election approaches.
March 5-6: Extraordinary OPEC meeting
Energy markets have seen even more swings than the Democratic polls as coronavirus has wreaked havoc on demand for oil. Demand in the China market is estimated to be down about 1 million bpd, and the slowdown in international travel is also seen crimping fuel usage. In late February, WTI crude broke the key support level of $50/bbl followed quickly by Brent crude, sending OPEC members scrambling to firm up prices.
Even though Russia has continued to be reluctant to cut production further during preliminary meetings with other producer nations, it appears very likely that a pledge to cut additional barrels of production will be on the table in early March. Saudi Arabia had hoped that the wider OPEC+ club would lead to more burden sharing, but Saudi remains the swing producer and may have to act almost unilaterally this time (along with a couple of close Gulf allies that could make nominal cuts). The talk is that Saudi Arabia, Kuwait and UAE could muster another 300K bpd cut, though there is still a chance they could persuade OPEC+ to take that figure to 600K altogether.
Either amount should provide a temporary boost to oil prices, especially if it is accompanied by a short term rally in the equity market – bear markets can produce some of the sharpest rallies. But any reversal may be short-lived unless there is better news about containment of the coronavirus. If the news is not positive, WTI crude could head to the low $40’s and may even start sliding toward the 2016 lows below $30/bbl.
March 18: FOMC policy decision
Slumping energy prices could put a fresh curb on inflation, which might in turn make it easier for central banks like the Fed to pull the trigger on more stimulus. Indeed the Fed outlook on additional stimulus appears to be rapidly evolving, at an even faster pace than the directional change seen in 2019.Until recently the whole spectrum of FOMC doves to hawks proclaimed they want to let 2019’s three rate cuts feed into the economy before making any further policy course corrections, but coronavirus may be changing that calculus.
Fed Chair Powell has set the standard for altering monetary policy at a “material change in the outlook.” It’s not clear if the Chairman now sees that threshold as being met, but he did say in recent days that coronavirus poses an “evolving risk to economic activity” and that the Fed will act as appropriate to sustain the economy. That may well mean the Fed is ready to act as soon as March, and the Fed fund futures are predicting as much with a full 50 basis point cut priced in for the next meeting.
For fear of being cast as political, the Fed is usually loathe to shift policy much during an election year, so the central bank would probably want to engage in any new stimulative activity sooner rather than later. Some analysts are thinking that the Fed could use the timing of a rate cut to add some ‘shock and awe’ to the move. That might manifest as a 25 basis point cut in early March, followed up by more if necessary at the March 18th FOMC meeting.
Early March: China National People’s Congress (postponed) March 30: China manufacturing PMI
Emblematic of China’s extraordinary efforts to contain the coronavirus outbreak, the nation’s biggest annual political gathering has already been postponed. China has by far been hit the hardest by the outbreak, but the measure that temporarily turned many of its cities into veritable ghost towns seem to have paid off. The numbers of new infections in China’s hot zone have been steadily declining for about two weeks, so assuming that the government is not suppressing the numbers, their efforts appear to have been effective.
People in China are getting back to work and supplies chains have not been irrevocably harmed, but manufacturing has definitely suffered a downturn. The February manufacturing PMI not only slid into contraction for the first time in six months, it did so in spectacular fashion by hitting a record low for the series. Economists are still waiting for the March numbers to get a clean reading of the virus’ economic impact without the distortions of the Lunar New Year. Evidence of the true extent of the impact may indicate how long it might take to get the manufacturing index out of contraction. It could also add to forecasts of whether the government might look at more stimulus efforts to get the economic engine back in good form.
April 29: US Q1 Advance GDP
Global growth data from Q1 will start to be tallied in late April including GDP for the US, which has been the bright spot for the developed world over the last few years. The coronavirus scare is expected to shave a few tenths off of GDP readings, but the magnitude of the hit won’t be known until the final, more complete data is out in May. The US data will also feel a continued drag from Boeing’s 737 MAX fiasco, which like the virus outbreak, could extend its impact into the second quarter.
Still, most economic experts are forecasting that the lost growth will be made up later in the year as supply chains are reestablished and consumers continue to put in orders for new goods. That may give companies reporting their Q1 earnings results in April a “pass”, allowing for some more conservative guidance on the understanding that some revenues will be deferred to later in the year (earnings start the week of April 13).
Late April: Olympic decisions
The ultimate signifier of the impact of coronavirus on travel, health and commerce may be the disposition of the summer Olympics set for late July and early August in Japan. Cautious governments in many nations have already begun to prohibit large indoor gatherings like concerts and sporting events to stem the spread of the virus, and private organizers have also been calling off conventions and other business gatherings, even in countries that aren’t seeing significant numbers of infections.
These preventative measures have raised questions about the 2020 Tokyo games (July 24-August 9), similar to the 2016 games in Rio de Janeiro, which were threatened by the Zika virus epidemic. With the exception of the two world wars, the Olympics have never been canceled since they were revived in 1896, so cancellation would be an extraordinary move. Currently London bookmakers see the odds of the Olympics being called off at around even money, and if the virus has reached ‘pandemic’ levels by the late spring, the games may indeed never happen.
Because of the logistical challenges surrounding the event, the IOC will need to come to a decision in the next few months. A cancelation would be demonstrative how seriously global officials are taking this viral outbreak. Either way, hopefully by the summertime the coronavirus will be in decline in the northern hemisphere, assuming it follows a flu-like pattern. And if the Games do go on as scheduled it could signal that things are normalizing again and that life goes on even in the face of a new disease emerging.
MARCH 1: China Caixin Manufacturing PMI 2: UK Manufacturing PMI; ISM Manufacturing PMI 3: China Caixin Services PMI;ExtraordinaryG7 Fin Min meeting;US Super Tuesday Primaries 4: UK Services PMI; ISM Non-manufacturing PMI 5:Extraordinary OPEC meeting(March 5-6) 6:US Payrolls & Unemployment
8: China Trade Balance 9: China CPI 10: 11: UK Manufacturing Production; US CPI; UK annual budget (tentative) 12:ECB Policy decision & press conference;US PPI 13: Preliminary University of Michigan Consumer Sentiment
15: China Industrial Production 16: 17: German ZEW Economic Sentiment; US Retail Sales 18: US Housing Starts & Building Permits;FOMC policy statement & press conference; BOJ policy statement & press conference 19: Philadelphia Fed Manufacturing Index 20:
23: 24: Euro Zone Flash Manufacturing and Services PMIs; Richmond Fed Manufacturing Index 25: German Ifo Business Climate; UK CPI & PPI; US Durable Good Orders 26: UK Retail Sales;BOE policy statement 27: US Personal Spending; US Core PCE Price Index
30: German CPI; UK Current Account; UK Final GDP;China Manufacturing and Non-manufacturing PMIs 31: Euro Zone Flash CPI; Chicago PMI; US Consumer Confidence; China Caixin Manufacturing PMI
APRIL 1: UK Final Manufacturing PMI; ISM Manufacturing PMI 2: China Caixin Services PMI 3: UK Final Services PMI; US Payrolls and Unemployment; US ISM Non-manufacturing PMI
6: 7: 8: FOMC Minutes 9: UK Prelim Q1 GDP; UK Manufacturing Production; ECB Minutes; US PPI 10:Good Friday market holiday; US CPI
13: 14: China Trade Balance 15: US Retail Sales 16: BOE Credit Conditions Survey; US Building Permits; Philadelphia Fed; China Q1 GDP; China Industrial Production 17:
20: 21: German ZEW Economic Sentiment 22: Euro Zone Flash Manufacturing and Services PMIs; UK CPI & PPI; US Flash Manufacturing PMI 23: German Ifo Business Climate; UK Retail Sales 24: US Durable Goods Orders
27: BOJ policy statement & outlook report 28: German Preliminary CPI; US Consumer Confidence; Richmond Fed Manufacturing 29:US Q1 Advance GDP;FOMC policy statement & press conference;China Manufacturing and Non- manufacturing PMIs 30: Euro Zone Flash CPI Estimate; ECB policy statement & press conference; US Personal Spending; US Employment Cost Index; Chicago PMI
MAY 1: UK Final Manufacturing PMI; US Payrolls and Unemployment; US ISM Manufacturing PMI