Equity markets shrugged off coronavirus concerns until Thursday when China reported a large bump in confirmed cases after an apparent tapering. There are now 71,811 confirmed cases and 1,775 confirmed deaths from the latest outbreak, now named Covid-19. All eyes are on China to see how Covid-19 will affect economic growth for the emerging market giant. Chinese state-sponsored media posits GDP growth remaining above 5% for Q1 2020 and still hitting 6% for the year. In a region of the world where information is less than forthright, there’s still the possibility of surprises surrounding Covid-19 and its impact on the global economy. Despite the surprises, all broad equity indices were positive for the week.
Fed Chair Powell’s testimonies last week reiterated a current policy that is appropriate to sustain the current economic expansion. Despite a plurality of market participants that waver between one to two rate cuts this year, Powell downplayed these expectations, arguing for action only if a sharp tightening in financial conditions begins to show up in the data. He noted the risks posed by the coronavirus on US businesses. Powell expects inflation closer to two percent but forewarns that low productivity growth and a low interest rate environment are here to stay.
An unequivocal reminder of the low interest rate environment is the $13.2 trillion of negative-yielding bonds outside the US, a number that peaked at $16.8 trillion last year. This translates to over 41% of bonds outside the US having a negative yield (instead of earning interest, investors are paying interest). Although US bond market yields remain positive, they are driven lower as international investors shift to the US in search of higher, positive yields than available at home. The 10-year US Treasury yield now sits at 1.59%, a far cry from the high of 3.24% in November 2018.
Core CPI reflects subdued inflation, remaining at 2.3% year-over-year. Jobs openings continued their yearlong trend downward though the number of openings is still high after a record year in 2018. Retail sales posted moderate gains for January. Consumer sentiment also showed a slight pickup for February. US corporate earnings beats outnumber misses by about three to one.
This week will feature releases on housing starts, existing home sales, PPI, and the Fed business outlook survey.
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S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.
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Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.
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