- Stocks fall as coronavirus spreads and business disruptions accumulate
- T-note market discounts more trouble ahead
- OPEC tries to strong-arm Russia into a big production cut
- Payrolls expected to show a solid increase as virus effects have yet to arrive
- U.S. trade deficit expected to narrow
Stocks fall as coronavirus spreads and business disruptions accumulate — The S&P 500 index (SPX) on Thursday plunged by -3.39%, giving back much of Wednesday’s +4.22% surge. SPX closed only 5.6% above last Friday’s 6-month low, where the index corrected lower by -15.8% from the mid-February record high.
The markets on Thursday became increasingly concerned about the expanding impact of the coronavirus as more cases popped up around the country in California, Colorado, New York, New Jersey, and Maryland. Another cruise ship was held off the coast of California until all passengers and crew could be tested after a previous passenger on the ship contracted the coronavirus and died.
The airline industry is taking a heavy hit. The International Air Transport Association said Thursday that the coronavirus outbreak would cost the airline industry between $63 billion and $113 billion in lost revenue this year, which is more than double its previous estimate. The S&P Airlines Index (S5AIRLX) on Thursday extended its 2-week plunge to a new 3-1/2 year low and closed the day down -8.19%, bringing the year-to-date plunge to -28%.
Businesses are seeing increased disruptions as some companies curb travel and tell some employees to work from home where possible. Amazon told its employees based in Seattle/Bellevue to work from home if their jobs allow through the end of March. A contract employee at Facebook’s Stadium East office in Seattle was diagnosed with the coronavirus and Facebook’s Seattle office was closed to employees until March 9.
Many more U.S. cases of the virus are likely to be announced in the coming days as testing ramps up from the slow start caused by the CDC’s faulty initial test kit. NIH infectious-disease expert Anthony Fauci told NBC News in an interview Thursday that the coronavirus outbreak has “now reached outbreak proportions and likely pandemic proportions.”
An interesting development that might give some U.S. stock investors some hope is that China’s Shanghai Composite index has recovered all its losses seen in January on the coronavirus and is back to its pre-virus levels. However, the Chinese stock market is not a particularly reliable indicator for U.S. stocks since the Chinese stock market is dominated by low-information retail investors and is thought by some to be propped in tough times by state-linked investment funds.
T-note market discounts more trouble ahead — The 10-year T-note yield on Thursday fell to a new record low of 0.87% and closed the day sharply lower by -14 bp at 0.91%. The 10-year T-note yield has now plunged by 101 bp from 1.92% at the end of 2019. The 10-year breakeven inflation expectations rate on Thursday fell by -8 bp to 1.41% although it remained 3 bp above last week’s 3-3/4 year low of 1.38%.
The Dec 2020 federal funds futures contract on Thursday fell by another -8.5 bp to a yield of 0.295%, reflecting expectations for another 83 bp of Fed easing (3.3 rate cuts) by year-end from the current target midpoint of 1.125%.
Bond yields also continue to fall overseas. The 10-year UK gilt yield on Thursday dropped to a new record low of 0.326% on expectations for the BOE to cut its base rate by -50 bp to 0.25% at or before its next policy meeting on March 26. The amount of global debt with negative yields on Thursday fell slightly to $14.3 trillion from Wednesday’s 5-month high of $14.6 trillion. The record was $17.0 trillion posted in August 2019, according to Bloomberg data.
OPEC tries to strong-arm Russia into a big production cut — OPEC members on Thursday agreed on a proposal to cut production in Q2 by an additional 1.5 million bpd, with 1.0 million of that cut coming from OPEC members and 500,000 bpd coming from non-OPEC members. Russia’s oil minister will be back in Vienna today to respond to the proposal. Saudi Arabia is threatening to leave Vienna with no extra production cut if Russia doesn’t agree to cut production. The market consensus is for a production cut of 750,000 bpd, which would be far from enough to prevent the global oil surplus from rising in response to the plunge in demand from the coronavirus.
Payrolls expected to show a solid increase as virus effects have yet to arrive — The consensus is for today’s Feb payroll report to show an increase of +175,000, down from Jan’s strong report of +225,000 but still a respectable figure in the face of the coronavirus outbreak. Expectations for today’s payroll report were bolstered by Wednesday’s news that Feb ADP employment rose by +183,000, stronger than market expectations of +170,000. The ADP report suggested that business hiring has not yet slumped in response to the coronavirus. However, the jobs figures lag the business cycle and an expected slump in hiring may not show up until the March and April jobs reports.
The consensus is for today’s Feb unemployment rate to be unchanged from Jan at 3.6%, which would be only 0.1 point above 50-year low of 3.5% posted on several occasions in 2019. The consensus is for Feb average hourly earnings to ease slightly to +3.0% y/y from Jan’s +3.1%.
U.S. trade deficit expected to narrow — The consensus is for today’s Jan trade deficit to narrow mildly to -$46.2 billion from Dec’s -$48.9 billion. The U.S. trade deficit in 2019 progressively narrowed after widening in 2018 and is mildly narrower than the 12-month average of -$51.4 billion. In Jan, exports were up +1.9% y/y while imports were down -3.0% y/y. Trade flows continue to be disrupted by tariffs and retaliatory tariffs, and soon by the coronavirus as well.
