Economic Facts – 16th March 2020

General

General: The World Health Organisation (WHO) has declared the COVID-19 outbreak as a global pandemic, on 11 March. The US also declared the outbreak as a public health emergency on 1st February and temporarily banned travel from European nations to the US. The world’s most affected economies due to coronavirus are European Union, the US, Japan, South Korea, Taiwan, and Vietnam, according to UNCTAD’s preliminary estimates of trade impact.

General: Many countries have introduced travel restrictions to try to contain the virus’s spread.

General: The airline body also added that the losses in passenger revenues would be about $63 billion, if the corona virus does not spread further and is contained at current levels.

General: The virus has now been found in more than 100 countries. It has infected some 120,000 people, killing more than 4,000 of them. Several nations have closed schools in a bid to stop the virus, and Italy has entered an unprecedented countrywide lockdown.

General: Put simply, a supply shock means that manufacturers don’t have the parts to produce final goods, which results in stores no longer having goods to put on their shelves. The best example of a recent supply shock was the oil-supply shocks of the 1970s. Production bottlenecks, shortages of heating oil and gasoline, long lines at the gas station and rising prices followed in their wake. As the flow diagram above illustrates, the coronavirus outbreak is an exogenous shock that — because of the need to engage in self-distancing and remote working — is causing the current supply shock.

General: The outbreak has led major institutions and banks to cut their forecasts for the global economy. One of the latest to do so is the Organisation for Economic Co-operation and Development. In a March report, the OECD said it downgraded its 2020 growth forecasts for almost all economies.

General: Slowdown in manufacturing activity. The manufacturing sector in China has been hit hard by the virus outbreak.

 

General: The Caixin/Markit Manufacturing Purchasing Managers’ Index — a survey of private companies — showed that China’s factory activity contracted in February, coming in at a record-low reading of 40.3. A reading below 50 indicates contraction.

General: China is not the only country where the services sector has weakened. The services sector in the U.S., the world’s largest consumer market, also contracted in February, according to IHS Markit, which compiles the monthly PMI data. One reason behind the U.S. services contraction was a reduction in “new business from abroad as customers held back from placing orders amid global economic uncertainty and the coronavirus outbreak.

General: A reduction in global economic activity has lowered the demand for oil, taking oil prices to multi-year lows. That happened even before a disagreement on production cuts between OPEC and its allies caused the latest plunge in oil prices. Analysts from Singaporean bank DBS said reduced oil demand from the virus outbreak and an expected increase in supply are a “double whammy” for oil markets.

General: Worries about balance sheets make sense just because of the virus. The earnings slump may last only a matter of months, but that may be longer than a heavily indebted company can survive. The V-shaped recovery for profits and share prices could be imperilled by a wave of bankruptcies. Then there is the impact of the oil price decline, which will make it hard for many high-yielding borrowers in the energy sector. If they default, that will mean losses for their creditors, which could affect the entire credit market.

General: Fear surrounding the impact of COVID-19 on the global economy has hurt investor sentiment and brought down stock prices in major markets. We have identified three channels through which the COVID-19 outbreak was going to weigh on markets so that’s the slowdown in China, the slowdown from domestic outbreaks … and the third channel was financial markets stress.

General: VIX closed at 75 yesterday, the highest since Sep-08. These extreme technical levels reflect significant market stress but were more often than not followed by higher equity prices on a 6-12-month horizon on past occasions.

General: It’s possible investors would wait for signs the policy was working, and that the daily number of new Covid-19 cases was peaking, before stepping back into the markets. The EU and US may still be weeks away from a turning point. As a result, “until there is a credible policy response, or the daily numbers of new cases peak, investors would be well advised to minimize their exposure to risk assets.”

General: Those numbers are for the U.S. Citi reckons that the downgrade for emerging markets, originally expected to log better earnings growth, will be even worse, taking them down to a 16% decline. Meanwhile, analysts are all over the place. It is easy enough for top-down strategists and economists to make sweeping downgrades for the entire corporate sector, but the individual broker analysts who cover single stocks take a while to catch up. “These numbers are Citi’s top-down and bottom-up estimates for 2020 earnings growth, by region:”

General: On average, bear markets have lasted 14 months in the period since World War II, while market corrections have lasted an average of five months. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market. History shows that the faster an index enters a bear market, the shorter they tend to be. Historically, stocks take 270 days to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 26%.

General: Concerns over the global spread of the new coronavirus has also driven investors to bid up bond prices, resulting in yields in major economies to inch lower. U.S. Treasury’s, which are backed by the American government, are considered haven assets that investors tend to flee to in times of market volatility and uncertainty. Yields on all of the U.S. Treasury contracts fell below 1% in the past week — a development not seen before. The benchmark 10-year contract also touched its historic low of around 0.3%.

Credit: There was more pain in credit markets on Thursday.  Here are High-yield (HY) and investment-grade. (IG) CDX spreads: Interest rates on the lowest-rated companies have spiked, rising above their government bond counterparts in a fashion not seen in 15 years. Default rates are expected to climb, and there’s fear that the worst could be yet to come amid roiled markets and growing expectations for a global recession.

General: Just about every corporate yield spread has widened to levels unseen since early 2016. The spread between single-B and double-B junk bonds climbed to 204 basis points. The spread between double-B and triple-B corporate bonds, which crosses the divide between investment-grade and speculative-grade, increased to 264 basis points. The spread between triple-B and single-A bonds widened to 91 basis points.

General: Global central banks decided against joining the Federal Reserve’s rate cut this week, but it is only a matter of time before policymakers elsewhere decide to add stimulus too.

General: We expect policy responses across economies to be loosely coordinated – yet differentiated – due to the varied characteristics of economies as well as political and policy constraints. One example is the key funding sources of economies – and their implications on policy actions.

 

Gold

General: Gold was not able to escape the massive market sell-off this week, which accelerated on Thursday as U.S. stocks posted their worst day since 1987. Gold fell victim to margin-calls, as investors were forced to sell their gold positions to cover for losses elsewhere. We suspect that margin calls and losses in other markets are driving investors to search for cash, and gold happens to be the liquid position they are choosing to cash out on.

 

Central Banks Action

In China, the central bank has avoided macro stimulus measures, but Beijing and local governments show little restraint otherwise. They are cranking up all kinds of infrastructure projects and subsidizing businesses to pay workers for the containment periods. Banking regulators are letting small businesses delay debt payments. Some are also being exempted from social insurance taxes for the next few months.

Hong Kong is simply giving away cash, with every adult set to get the equivalent of $1,285. I suspect this is about more than virus relief, though. It might also reduce some of the recent protests.

Japan is allocating trillions of yen to subsidise workers who were forced to stay at home, often with children whose schools the government closed. Small companies will get zero-interest loans. Prime Minister Shinzo Abe promises more is coming, too.

Italy, Prime Minister Giuseppe Conte says he will deliver “massive shock therapy” to an economy that, in theory, should be practicing fiscal austerity. That era seems to be over. The government is planning a debt moratorium, including mortgages. How they will do that in one of the world’s weakest banking systems, and still stay in the eurozone, is unclear.

 European Union is preparing to relax limitations on “state aid” its members can provide. They may (shudder) even create a “coordinated” fiscal stimulus package.

US  Federal Reserve policymakers have already begun responding to the coronavirus with an emergency interest rate cut and a reopening of their crisis tool kit, This week, the Federal Reserve announced that it would inject as much as $1.5 trillion into the short-term money markets, an intervention designed to ease the pressure on the financial system and lower the chances of a financial crisis all without a clear idea of what damage is being done outside of plummeting financial markets’ .S. Federal Reserve policymakers have already begun responding to the coronavirus with an emergency interest rate cut and a reopening of their crisis tool kit, all without a clear idea of what damage is being done outside of plummeting financial markets.

 

 

America

Younger Americans are more concerned than older people about the dangers of COVID-19, and they’re far more likely to have taken actions to protect themselves.

United States: The surge in the recession probability reflects a sharp deterioration in financial conditions that began in mid-to-late February. As the number of cases — and deaths — from the rapidly spreading coronavirus increased, stocks plummeted, and credit spreads widened. The market suffered yet another blow after a collapse of OPEC+ talks led to a price war between Russia and Saudi Arabia, sinking oil prices.

United States: In contrast with financial market data, initial readings of economic data for February remain positive. The unemployment rate returned to a 50-year low as hiring at U.S. companies remained strong. While monthly measures of consumer confidence have held up, Bloomberg’s weekly gauge has declined to its lowest level of the year. The Conference Board’s gauge hit a six-month high in February and the University of Michigan’s measure climbed to its best reading in almost two years.

United States: The University of Michigan’s survey of consumer sentiment, 20 percent of respondents interviewed last week cited the coronavirus as a concern, and even they were relatively confident about the economy on average. sentiment indicators could be among the first to detect trouble. Economists will also be watching weekly claims for unemployment insurance to see if layoffs are picking up and monthly retail sales data for signs that consumers are deferring restaurant meals or other spending.

United States: American consumers are feeling the impact. The average rate for a 30-year fixed rate mortgage spiked to 4.12 per cent on Friday, up from 3.55 per cent at the beginning of the month and the highest since June 2019, according to Bankrate.com. The development is frustrating for the Fed because it means reductions in its policy rate are no longer translating into lower mortgage rates.

United States: President Trump is pushing a nearly $1 trillion fiscal stimulus that some economists say would not be well targeted to offset damage from the coronavirus. Mr. Trump, after weeks of playing down potential effects of the virus, called for a temporary elimination of payroll taxes that could cost nearly $700 billion, rivalling both the financial bailout of 2008 and the economic stimulus measure that followed. Members from both parties oppose the payroll tax plan, but some lawmakers believe it could ultimately be included in a broader package focused on sick pay, unemployment benefits and food assistance.

 

Europe

The Eurozone: European Union said it would allow members to run bigger budget deficits than normally allowed. We will do whatever is necessary to support the Europeans and the European economy,” said Ursula von der Leyen, the president of the European Commission, the bloc’s executive arm. She said the commission would allocate 37 billion euros, or $41 billion, to fight the health and economic consequences of the coronavirus.

The Eurozone: The growth rate for Europe’s biggest economies has been slashed in the wake of the Coronavirus epidemic of 2020, with the Italian economy not expected to grow at all, and the German economy only growing by 0.3 percent. Compared with November 2019, the growth rate for Italy fell by 0.4 percent, the UK and France by 0.3 percent, and Germany by 0.1 percent.

The Eurozone: Until only a few weeks ago, it had seemed the ECB would be responding to a brightening economic outlook. After two years of sagging growth and inflation the eurozone economy seemed to be turning a corner at the start of this year, with rebounding factory orders and improving business sentiment.

The Eurozone: One way to address this would be to expand the ECB’s €2.6tn asset purchase programme, which was relaunched last year. The ECB could temporarily increase its size, particularly by buying corporate paper. Another possibility would be to bulk up the ECB’s existing programme of targeted loans to banks at sub-zero rates on the condition that they use them to fund lending to small businesses.

 

China

China: Coronavirus infections in China have markedly declined in recent weeks, but the Asian giant’s economic recovery may be held back by the global outbreak, as countries around the world struggle to contain the rapidly spreading disease. China has seen a drastic drop in infections — from hundreds of cases per day in February, to less than 50 each day this week.

China: A dramatic slump was observed in the Shanghai Composite Index on the first day of trading after the Lunar break amid the fear of broad weakening of demand. The outbreak created a ripple effect on commodities such as iron ore, copper and crude oil, which have witnessed the maximum downfall in prices and have hit multi-year lows. The People’s Bank of China (PBOC) injected US$175bn into the economy and cut interest rates in February 2020 to tackle the situation. These steps may lead to hyperinflation as a result of lockdown and minimal supplies, consecutively leading to depreciation of Yuan, in the impending quarters.

TOKYO: Rising Chinese pollution levels measured from space are showing a gradual but uneven industrial pickup after the economic slowdown caused by the nation’s fight to contain the deadly novel coronavirus. Although the level of nitrogen dioxide (NO2) in China’s atmosphere has risen nearly 50% from Feb 17, it was still roughly 20% below the equivalent period last year, according an analysis from the Helsinki-based Centre for Research on Energy and Clean Air.

China: Only six weeks after the initial outbreak, China appears to be in the early stages of recovery. Congestion delays currently stand at 73% of 2019 levels, up from 62% at the worst part of the epidemic, indicating that the movement of people and goods is resuming. Similarly, coal consumption appears to be recovering from a trough of 43% to currently 75% of 2019 levels, indicating that some production is resuming. And confidence appears to be coming back as seen in real estate transactions, which had fallen to 1% of 2019 levels but have since bounced back to 47%.

Unsurprisingly, sectors and product groups recover at different speeds, thus requiring distinct approaches. Stock prices fell across all sectors in the first two weeks that China’s epidemic accelerated, but leading sectors, such as software and services, and healthcare equipment and services, recovered within a few days and have since increased by an average of 12%. The bulk of sectors recovered more slowly but reached prior levels within a few weeks. And the hardest-hit sectors — such as transportation, retail and energy, representing 28% of market capitalization for China’s largest stocks — are still down by at least 5% and showing only minimal signs of recovery.

China: The coronavirus outbreak will curb profit this quarter by as much 18 cents a share, the Seattle-based company said in a filing Thursday. The key measure of comparable sales in China, meanwhile, will fall about 50% in the second quarter from a year earlier. Still, Starbucks said the impact will be temporary.

China: The OAG data also reveals that there will be about 66,100 flights departing from Chinese airports next week, up from 53,300 this week. The total number of departures dipped as low as 28,700 during the week beginning February 17, at the height of the COVID 19 coronavirus outbreak in China.

China: Earlier this month, the Civil Aviation Administration of China announced a series of support measures to encourage airlines to recommence air services. This includes offering subsidies to Chinese and foreign airlines to resume non-stop international services that have been suspended.

China: Non-manufacturing gauge, employment indicators hit new lows. About 91% of factories will have restarted by end of March.

China: China is an important supplier of intermediate goods to the rest of the world, particularly in electronics, automobiles, and machinery and equipment. The disruption there is already having knock-on effects to downstream firms. Together, these disruptions contribute to a rise in business costs and constitute a negative productivity shock, reducing economic activity.

 

Australia

Australia: Now the stimulus is coming and yet the market is pricing in another rate cut to 0.25%, at which point it is unlikely the Reserve Bank will go any lower as it will instead embark on more unorthodox measures.

Australia: Within the labour market what we find is youth unemployment is the canary in the coalmine. Young, inexperienced workers are always the first to be cut, so when youth unemployment starts rising, start worrying. Certainly, this happened during 2008’s global financial crisis:

Australia: When you hear “coronavirus” you think travel bans. This is going to be the most immediate hit to our economy – a drop in arrivals not just from China but from all nations as tourists avoid planes and stay home. For comparison we can look at what happened after the September 11 attacks and the Sars outbreak. In those cases, annual short-term arrivals fell up to 14%:

Australia: The coronavirus, as during all recessions, is going to hit our exports. Again this happened in the GFC – both good and services exports fell in early 2009, not long after unemployment began rising: Given that the centre of the coronavirus is China we should expect these figures to begin falling earlier than they did in the GFC.

Australia: When the economy turns sour, among the first to react are people looking at buying a home. You don’t think about doing that when you are worried there is a chance your hours can be cut or you could lose your job. When the GFC hit, housing finance began falling before unemployment really started rising. That was because the GFC was a pointedly financial issue, but we can still look to housing finance figures to see signs of concern: The next monthly trade data, containing the February figures, is out on 7 April.

Australia: Retail trade is also a strong indicator of sentiment. During the GFC we absolutely stopped shopping – and that was a major reason for the cash payment stimulus. But one area we can look at first is the spending on eating out at restaurants. During the GFC we stopped eating out before we reduced other spending:

Australia: Fiscal stimulus was a larger than expected $17.6bn across 5-years – with $11.0bn in 19/20 (0.5% of GDP), $6.6bn in 20/21 (0.3%), & $5.4bn in 21/22 (0.3%); before ‘reversing’/improving by $5.3bn. Today’s stimulus is 0.9% of GDP across 19/20 & 20/21. “This is on top of $2.4bn extra health funding (announced earlier) & $0.6bn pensioner deeming change, so the total stimulus in 19/20 & 20/21 is ~$21bn or ~1.0% of GDP.”

Australia: For now, yes. But the government is flagging that more stimulus may be necessary, with most of the measures “scalable”. Morrison has flagged that the package could be updated in the May budget, depending on how the coronavirus plays out, and how severely the economy is affected as a result.

 

 

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