- S&P 500 accelerates lower on implications of serious fall-out if virus spreads in U.S.
- Market expectations surge to 89% for a rate cut in 2-1/2 weeks
- U.S. consumer sentiment expected to ease slightly
S&P 500 accelerates lower on implications of serious fall-out if virus spreads in U.S. — The U.S. stock market plunged Thursday afternoon after news emerged that California is monitoring 8,400 people for the coronavirus who returned from overseas travel. The markets were already concerned about the possible spread of the virus in the U.S. after officials late Wednesday announced the case of the woman in northern California who caught the virus from an unknown source, suggesting it may be the first case of community transmission.
The U.S. markets on Thursday were also alarmed by the news that Japan will shut down its schools starting Monday, which means that some 13 million students will need to stay at home. That could put a big hole in the work force since many parents will presumably have to stay home with their children during the school shutdown. Japan’s situation highlighted how bad things could get in the U.S. if the virus were to spread rapidly in multiple locations in the U.S.
The S&P 500 index on Thursday plunged to a new 4-1/2 month low and closed the day sharply lower by -4.42%, the largest single-day drop so far in this sell-off. On Thursday’s low, the S&P 500 index corrected lower by a total of -12.3% from last Wednesday’s record high and retraced 40% of the extraordinary 44.6% rally seen over the past 14 months from the 3-year low posted in Dec 2018.
Tech and momentum stocks have fared worse than the broad market during this week’s sell-off. From last week’s respective record highs, the Nasdaq-100 index has corrected lower by -13.4%, and the NYSE Fang+ index has corrected lower by -15.6%.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) on Thursday was hammered by another -6.55% and has now plunged by an extraordinary -39% on a year-to-date basis. April Brent crude oil prices on Thursday plunged by another -2.34% to $52.18 per barrel, bringing the 5-session sell-off to a total of -12.0%. OPEC+ holds a regular meeting next week and may be able to corral Russia into a new production cut, although any agreed-upon cut may still be less than the plunge in oil demand caused by the coronavirus.
The VIX S&P 500 volatility index on Thursday soared to a new 2-year high of 39.31% and closed +11.60 at 39.16%. The VIX on Thursday easily took our the previous 2-year high of 36.20 posted in December 2018 when the S&P fell on a heavy downside correction. However, the VIX on Thursday remained below the 4-1/2 year high of 50.30 posted in Feb 2018 when Volmageddon caused some VIX products to blow up.
Market expectations surge to 89% for a rate cut in 2-1/2 weeks — Market expectations for Fed easing through year-end increased by another 7.5 bp to 75.0 bp (3.0 rate cuts) on Thursday. Specifically, the Dec 2020 federal funds futures contract on Thursday closed at a yield of 0.875%, representing expectations for a 75 bp rate cut from the current funds rate target mid-point of 1.625%.
The market is now discounting an 89% chance of a rate cut at the next FOMC meeting on March 17-18. That is a dramatic change from the market’s opinion at the beginning of this year that there was a zero chance of a rate cut at the March FOMC meeting.
The market is now fully expecting the Fed’s first rate cut by the April 28-29 meeting, the second rate cut by the July 9-10 meeting, and the third rate cut by the Nov 4-5 meeting. The markets are expecting rate cuts in three of the next six FOMC meetings.
The surge in expectations for a Fed rate cut, combined with a sharp drop in inflation expectations and safe-haven demand, have helped push the 10-year T-note yield to a new record low. The 10-year T-note yield on Thursday fell to another new record low of 1.241% and closed the day -7.6 bp at 1.261%.
The 10-year breakeven inflation expectations rate on Thursday fell to a new 4-3/4 month low and closed the day down -4 bp at 1.50%, which is a hefty one-half point below the Fed’s 2.0% inflation target.
Elsewhere on the inflation front, the consensus is for today’s Jan PCE deflator to rise slightly to +1.8% y/y from Dec’s +1.6%, and for the core PCE deflator to rise to +1.7% y/y from Dec’s +1.6%. However, the global shock from the coronavirus has caused commodity prices to plunge and will undoubtedly push all the inflation measures lower starting with next month’s inflation reports for February.
U.S. consumer sentiment expected to ease slightly — The consensus is for today’s final-Feb University of Michigan U.S. consumer sentiment index to fall by -0.2 to 100.7, which would leave the index up by only +0.9 points from January versus the preliminary-Feb increase of +1.1. Consumer sentiment may not show much reaction to the coronavirus crisis until the March reports since the stock market did not plunge until late February, which then forced consumers to pay closer attention to the threat of the coronavirus.
China’s PMI reports will provide the first solid look at economic fallout from coronavirus — The markets will carefully watch China’s PMI reports to be released on Friday night and Sunday night (U.S. ET time). The markets are expecting a debacle considering that at least half the Chinese economy was shut down from late January through mid-February. The consensus is for Friday night’s Feb Chinese manufacturing PMI to plunge by -5.0 points to 45.0, and for Sunday night’s Feb Caixin manufacturing PMI to fall by -4.8 points to 46.3.
