- U.S. Q4 GDP expected to decelerate slightly
- FOMC fine-tunes IOER and says T-bill purchase program will continue
- Hang Seng post-holiday falls by only -2.82%
- China PMIs expected to fall on early virus reaction
U.S. Q4 GDP expected to decelerate slightly — The market consensus is for today’s Q4 GDP to decelerate slightly to +2.0% (q/q annualized) from +2.1% in Q3, +2.3% in Q2, and +2.7% in Q1. On a calendar year basis, the consensus is for U.S. GDP in 2020 to slide to +1.8% from +2.3% in 2019 and +2.9% in 2018.
U.S. GDP growth is in the process of easing towards the Fed’s estimate of the long-term potential growth rate of +1.9% as the stimulus wears off from the massive 2018 tax cut. GDP growth has also been sliding due to the US/China trade war (which is transitioning to phase-two), U.S. trade tensions with other countries, and the recessions in the U.S. and European manufacturing sectors. Global GDP will now take a hit in Q1 due to the Chinese coronavirus.
FOMC fine-tunes IOER and says T-bill purchase program will continue — Yesterday’s outcome of the FOMC meeting was mostly in line with market expectations. The FOMC left its funds rate target range unchanged at 1.50%/1.75% and left the wording of its post-meeting statement largely unchanged.
Mr. Powell’s post-meeting comments were interpreted as slightly bullish when he said the FOMC is “not comfortable” with inflation persistently under 2%. Mr. Powell also said that the current stance of Fed policy is “appropriate,” although he said that if developments cause a “material reassessment of our outlook,” the FOMC will respond. Mr. Powell said, “There is likely to be some disruption to activity in China and globally” from the coronavirus and he said the virus is “very serious.”
The FOMC yesterday raised its IOER (interest on excess reserves) rate by 5 bp to 1.60%. The market had generally expected that technical move to encourage the funds rate to trade a little closer to the 1.625% mid-point of the Fed’s target range. The funds rate has recently been trading on a soft note due to the Fed’s massive repo injections and T-bill purchases. The Fed’s hike in the IOER rate had no implications for its future policy direction.
The FOMC reiterated its current guidance that its T-bill purchase program will continue into Q2. The Fed began its program of buying $60 billion of T-bills per month on October 1 in order to boost the supply of reserves available to banks and reduce the need for the Fed to supply liquidity through large repo operations. 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 seen during 2015-19.
The markets are generally expecting the FOMC to end its T-bill purchase program by June, i.e., at the end of Q2. The FOMC will likely end the program with some tapering in the last 2-3 months of the program so that the markets do not get cut off cold-turkey from the reserve injections.
A recent Bloomberg News survey found that 68% of economists surveyed believe that the Fed’s T-bill purchase program has lifted equity prices. The corollary is that the end of the T-bill purchase program could be bearish for stocks.
The outcome of yesterday’s FOMC meeting caused a mildly dovish shift in the federal funds futures market by 3-5 bp for the late-2020 and 2021 contracts. The futures market is expecting the funds rate to average 1.23% in December 2020, which would represent a -39.5 bp cut in the funds rate (i.e., 1.6 rate cuts) from the current target midpoint of 1.625%. The market is not fully expecting this year’s rate cut until September.
Hang Seng post-holiday falls by only -2.82% — The Hong Kong markets reopened on Wednesday after the Lunar New Year holiday. The Hang Seng index on Wednesday fell by -2.82%, bringing the net decline to -6.5% from the pre-virus date of Friday, Jan 17. Meanwhile, the iShares MSCI China ETF (which trades on the U.S. Nasdaq exchange and has $4.6 billion of assets) recovered by a combined +1.97% on Tuesday and Wednesday but is still down by a net -7.8% from the Jan 17 close, which is a mildly larger decline than the Hang Seng’s -6.5% decline.
The Chinese mainland stock markets will remain closed for the remainder of this week and will not open until Monday. The global markets will be closely watching the mainland Chinese stock markets on Monday when they reopen to see if domestic retail and institutional investors engage in heavy panic selling. The fact that Chinese stock instruments trading in the U.S. and Hong Kong have recovered somewhat in the last two days has raised some hopes that the worst of the sell-off might already be over.
However, the markets will pay close attention to the impact of the virus as long as it keeps spreading and causing economic damage. It took about eight months for the SARS pandemic in 2002/03 to be fully contained.
China PMIs expected to fall on early virus reaction — China’s national PMI reports, which are scheduled to be released Thursday night (ET), will be watched closely for business reaction to the virus crisis. However, the PMI reports are not likely to show the full reaction of businesses since the virus did not become a major issue until last week (i.e., the third week of January).
China’s manufacturing PMI in Nov-Dec finally edged above 50 to 50.2 after spending May-October 2019 below 50.0. Due to the virus crisis, tonight’s Jan manufacturing PMI is expected to fall by -0.2 points to 50.0 and is undoubtedly headed below 50 in February when the full impact of the virus hits. The consensus is for tonight’s Jan non-manufacturing PMI to fall -0.5 points to 53.0, adding to December’s -0.9 point drop to 53.5.
