Equity markets were in the red again last week on renewed concerns of the coronavirus outbreak. The number of confirmed cases is now at 17,485 with 362 of those fatal. The World Health Organization (WHO) declared the outbreak a public health emergency on Thursday although it stated that travel restrictions were unnecessary. The next day, US Health and Human Services secretary Azar announced a quarantine on foreign nationals traveling to the US if they pose a risk to transmitting the virus, especially if they have been in China. The Hubei province is the epicenter of cases and China is restricting travel and quarantining confirmed cases in an attempt to reduce further exposure. The outbreak is disrupting the normal flow of business, dragging down growth expectations and equity markets. Emerging Markets were the hardest hit last week, down over 5%.
Away from headlines, US corporate earnings continued with beats outnumbering misses 3 to 1. New home sales fell short of estimates although still near current expansion highs. The HPI reported an increase of 2.6% for housing prices year-over-year. Consumer confidence and sentiment both posted moderate gains in January. The first reading of Q4 GDP for 2019 was in line with 2.1% consensus estimates. Employment costs continued to rise in Q4 at 2.7% year-over-year. None of the moderate positivity assuaged the headline worries of the coronavirus. This week will feature releases on PMI and ISM manufacturing indices, construction spending, and the ADP employment report.
The Fed followed expectations by leaving interest rates unchanged for now, citing low inflation with core PCE at 1.6%. Fed chair Powell noted current policy is well positioned to support the 11th-year expansion with an outlook of moderate economic growth. Market participants aren’t entirely convinced, and there is a growing preponderance for a rate cut as early as June with a second cut by December. The futures market accurately predicted the Fed’s pivot from tightening to easing in 2019. We’ll know soon enough if the futures market will again lead the Fed this year despite its expectations and rhetoric.
We are one month into 2020 and all major equity indices are negative. The coronavirus was certainly a disruptor but there are other events that can further exacerbate uncertainty later this year. The UK formally left the European Union, successfully entering the “transition period” where both sides will negotiate economic and political terms. The successful UK exit may empower other populist parties in Europe to split away from the EU, in one form or another. In Asia, Hong Kong protestors have hampered economic growth, also throwing uncertainty into the China trade talks with the US over a hopeful Phase Two deal; this is in addition to the disruption from the coronavirus which has affected China the most. Lastly, the US faces a presidential election year with a great polarity between the two-party candidates; one can expect large market shifts as the likelihood for election (or re-election) shifts expectations and targets of future policy changes.
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