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  • Stocks extend their plunge as CDC warns U.S. virus outbreak is inevitable
  • 10-year T-note yield falls to record low with expectations for 2.5 Fed rate cuts by year-end
  • U.S. new home sales expected to rise to near Sep’s 12-year high
  • 5-year T-note auction


Stocks extend their plunge as CDC warns U.S. virus outbreak is inevitable
 — The U.S. stock market on Tuesday fell sharply after an official from the U.S. Center for Disease Control (CDC) warned Americans to prepare for a coronavirus outbreak.  A CDC official said on a call with reporters that, “We expect we will see community spread in this country.  It is not a matter of if, but a question of when, this will exactly happen.”

An outbreak of the virus in Italy in the past week has contributed to fears that a similar outbreak could occur in the United States.  Italy now has 322 confirmed cases of the virus, and the tenth person in Italy died of the virus on Tuesday.  Parts of northern Italy are under quarantine, and there has been hoarding of supplies in cities such as Milan.

The VIX S&P 500 volatility index on Tuesday extended this week’s upside breakout to a 14-month high of 30.25 and closed the day +4.15 at 29.18%.  However, the VIX is still below the 2-year high of 36.20 posted in December 2018 when the S&P fell on a heavy downside correction, and is also below the 4-1/2 year high of 50.30 posted in Feb 2018 when Volmageddon caused some VIX products to blow up.

The S&P 500 index on Tuesday plunged by another -3.03%, adding to the combined -4.40% sell-off seen in the two previous sessions.  The S&P 500 index has now corrected lower by a total of -8.1% from last Wednesday’s record high.  The index has retraced 26% of the extraordinary 44.6% rally seen over the past 14 months from the 3-year low posted in Dec 2018. 

From last week’s respective record highs, the Nasdaq-100 index has corrected lower by a total of -9.5%, and the NYSE Fang+ index has corrected lower by a larger -11.2%.

Energy stocks were hit hard again on Tuesday as April Brent crude oil prices plunged by another -2.27%, adding to the combined -5.13% sell-off seen in the two previous sessions.  The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) on Tuesday extended its 3-session meltdown to a total of -13% and posted a new record low (going back to its initial listing in 2006).

10-year T-note yield falls to record low with expectations for 2.5 Fed rate cuts by year-end — The 10-year T-note yield on Tuesday fell to a new record low of 1.306%, taking out the previous record low of 1.318% posted in July 2016.  The history of the 10-year T-note yield goes back to 1962 when the yield started trading near 4%.  In an extraordinary sign of the times, the 10-year T-note yield is currently one-half percentage point below the 2.03% low established during the Great Recession.

The 10-year T-note yield on Tuesday fell to a new record low on (1) safe-haven demand with the plunge in stocks and the coronavirus risks, (2) expectations for weaker U.S. and global economic growth due to the coronavirus, (3) increased expectations for Fed easing, and (4) a new 4-1/2 month low in inflation expectations.

The 10-year breakeven inflation expectations rate on Tuesday slumped to a 4-1/2 month low of 1.527% and finished the day down by -4.9 bp at 1.537%.  The 10-year inflation expectations rate is now a hefty one-half percentage point below the Fed’s +2.0% inflation target.

The markets on Tuesday boosted expectations for Fed easing by year-end by another 6 bp to 62.0 bp, or 2.5 rate cuts.  Specifically, the Dec 2020 federal funds futures contract on Tuesday closed at a yield of 1.005%, representing expectations for a 62 bp cut from the current target midpoint of 1.625%.

The markets believe the Fed will implement its first rate cut by June and its second cut by September.  The market is discounting only a 22% chance for a rate cut at the next FOMC meeting on March 17-18.  Fed Vice Chair Clarida on Tuesday said it is “still too soon” to say whether the China coronavirus outbreak will cause a material change to the U.S. interest rate outlook, suggesting the FOMC will wait as long as it can to see whether a rate cut becomes necessary.

U.S. new home sales expected to rise to near Sep’s 12-year high — The market consensus is for today’s Jan new home sales to show an increase of +3.0% to 715,000, more than reversing Dec’s -0.4% decline to 694,000.  New home sales are in strong shape at only 4% below the 12-year high of 725,000 units posted in Sep 2019.  New home sales through December saw strength from solid consumer confidence and low mortgage rates.  The current 30-year mortgage rate of 3.49% is only 4 above the early-Feb 3-1/4 year low of 3.45%.  However, home sales may sink starting in February on caution about the coronavirus.

5-year T-note auction — The Treasury today will sell $18 billion of 2-year floating-rate notes and $41 billion of 5-year T-notes.  The Treasury will then conclude this week’s $131 billion T-note package by selling $32 billion of 7-year T-notes on Thursday.  The benchmark 5-year T-note yield on Tuesday fell to a new 3-1/2 year low of 1.128% and closed the day -2.6 bp at 1.184%.

The 12-auction averages for the 5-year are as follows:  2.39 bid cover ratio, $31 million in non-competitive bids, 4.2 bp tail to the median yield, 18.8 bp tail to the low yield, and 63% taken at the high yield.  The 5-year T-note is slightly below average in popularity among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of 59.8% of the last twelve 5-year T-note auctions, which is slightly below the median of 60.1% for all recent coupon auctions.

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