- Chinese stocks are down by -9.5% so far on coronavirus
- FOMC will leave policy unchanged this week but markets boost 2020 Fed easing expectations by nearly two-thirds of a rate cut due to virus scare
- Jan U.S. consumer confidence expected to improve
- Dec U.S. durable goods orders expected to improve
- U.S. home prices expected to march higher
Chinese stocks are down by -9.5% so far on coronavirus — The Chinese stock markets have been closed since last Friday and are scheduled to remain closed through this Thursday for the Lunar New Year holiday. However, the Chinese government on Sunday extended the New Year holiday by three days until this coming Sunday. Bloomberg News reported on Monday that the Chinese stock markets will also remain closed this Friday, although that has yet to be confirmed by the exchanges. If the Chinese markets are closed on Friday, then Chinese investors will remain frozen out of their domestic markets for another four sessions.
The fact that the Chinese stock markets are currently closed makes it difficult to gauge stock investor reaction in China to the spreading coronavirus. However, there are a variety of ETFs that trade on the U.S. and European exchanges that can serve as a proxy for what the Chinese domestic markets would be doing if they were open.
For example, the iShares MSCI China ETF (MCHI), which has $4.5 billion in assets, fell sharply by -3.79% on Monday, much more than Monday’s -1.57% sell-off in the S&P 500 index. The iShares MSCI China ETF has now plunged by a total of -9.5% in the past 1-1/2 weeks since the Jan 17 close, which is a 3.6 times larger sell-off than the -2.6% sell-off seen in the S&P 500 index over that same time-frame.
The Chinese markets are of course taking the brunt of the global stock market sell-off since the Chinese government has quarantined more than 50 million Chinese citizens (equivalent to 15% of the American population), bringing at least some of the Chinese economy to a near halt. China’s GDP and corporate earnings will take a significant hit in Q1. The SARS pandemic in 2003 resulted in a 0.8 percentage point hit to China’s GDP and an overall cost of $40 billion to the global economy.
FOMC will leave policy unchanged this week but markets boost 2020 Fed easing expectations by nearly two-thirds of a rate cut due to virus scare — The unanimous market consensus is that the FOMC at its 2-day meeting that begins today will leave its federal funds rate target range unchanged at 1.50-1.75%. However, the FOMC this week may raise its IOER rate (interest on excess reserves rate) by 5 bp to 1.60% in a technical move because the funds rate has recently been pushing the lower end of its target range due to the Fed’s massive repo injections and T-bill purchases.
The markets are mainly interested in any news from the Fed about how long it will continue its program of buying $60 billion per month of T-bills that started Oct 1. That program has provided underlying liquidity support for the U.S. stock and bond markets. The market consensus is that the Fed will continue its bill-buying program until June. Due to the T-bill purchases, the Fed’s balance sheet has risen by a total of $386 billion from the 6-year low seen in August 2019, reversing about half of the overall drawdown of the balance sheet seen during 2015-19.
While the market is expecting the Fed to announce an unchanged policy tomorrow, the market in the past 1-1/2 weeks has boosted its expectations for Fed easing in 2020 by a total of 15.5 bp, which equates to almost two-thirds of a rate cut. Specifically, the market is now expecting the funds rate to average 1.23% in December 2020 (i.e., the Dec federal funds futures contract), down by -15.5 bp from the 1.385% level seen on Jan 17 before the Chinese virus scare began.
The market is now expecting an overall rate cut of -39.5 bp by year-end from the current funds-rate target mid-point of 1.625%, which equates to 1.6 rate cuts. That is much more dovish than the Fed-dot forecast for no rate changes in 2020 and then a rate hike in 2021 and a second rate hike in 2022.
Jan U.S. consumer confidence expected to improve — The consensus is for today’s Jan Conference Board U.S. consumer confidence index to show a +1.5 point increase to 128.0, more than reversing Dec’s small -0.3 point decline to 126.5. The University of Michigan already reported that its consumer sentiment index in early January fell by -0.2 points. Today’s report will be somewhat stale since it will not capture the bulk of the U.S. consumer reaction to the news of China’s spreading virus, which did not hit the U.S. popular media in force until late last week.
Dec U.S. durable goods orders expected to improve — The consensus is for today’s Dec durable goods orders report to show an increase of +0.4% and +0.3% ex-transportation, improving from Nov’s report of -2.1% and -0.1% ex-transportation. The markets were hoping for a recovery in global manufacturing after December’s US/China phase-one trade deal, but the global manufacturing sector now faces major fall-out from the Chinese coronavirus. That fall-out will not be captured by today’s report for December.
U.S. home prices expected to march higher — The consensus is for today’s Nov S&P CoreLogic composite-20 home price index to show an increase of +0.4% m/m and +2.4% y/y, which would be close to Oct’s report of +0.4% m/m and +2.2% y/y. The FHFA has already reported that its home price index in Nov rose by +0.2% m/m and +4.9% y/y. Home price increases have recently been weaker in the metropolitan areas as seen by the fact that the Composite 20 index was up by only +2.4% y/y in October, much less than the +4.9% y/y rise in the broader FHFA index.
7-year T-note auction — The Treasury today will conclude this week’s $133 billion T-note package by selling $20 billion of 2-year floating-rate notes and $32 billion of 7-year T-notes. The benchmark 7-year T-note yield on Monday fell sharply to a 3-3/4 month low and closed the day down -7.4 bp at 1.53%.
