On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Research Analyst Brian Yadao discussed the latest economic and market developments amid the ongoing coronavirus outbreak.
Short-term economic impacts likely as outbreak broadens
The number of coronavirus cases worldwide surpassed 100,000 on March 6, in what Eitelman called a very significant broadening of the epidemic. With the virus largely contained in China, markets have been keying in on the spread of the virus across developed markets, he noted.
Increasing evidence of a significant ramp-up in the outbreak across the U.S.-particularly in the Seattle area-has commanded the attention of markets, Eitelman said, given the important role the nation plays in driving global markets and fundamentals. Europe has also experienced a sharp uptick in cases, with notable outbreaks affecting Italy and Spain in particular.
“In short, the coronavirus is becoming global in scope, which will likely cause a series of cascading short-term economic impacts,” he stated. Eitelman emphasized that he and the team of Russell Investments strategists do not claim to have any edge or unique ability to forecast the progression of the outbreak, and that leading medical experts have stated that such an exercise is effectively impossible.
Policymakers respond aggressively with monetary stimulus. Is fiscal stimulus next?
In general, monetary policymakers have been responding aggressively and proactively to the outbreak, as evidenced by the U.S. Federal Reserve’s (the Fed) emergency 50 basis-point rate cut on March 3, and the Bank of Canada’s half-percentage-point rate reduction a day later. The Bank of Japan, meanwhile, is responding by accelerating its purchase of exchange-traded funds (ETFs) in an attempt to stabilize asset prices, Eitelman said.
“The low inflations levels observed in the U.S. and across much of the developed world have allowed central banks to quickly step in and provide accommodation,” he remarked, adding that, in his opinion, these steps are positive ones. “While they don’t necessarily get to the root risks – i.e., short-term disruptions in economic activity and corporate cash flows – at the very least, I see the lower cost of capital as a positive,” Eitelman stated.
An even more important watchpoint for Eitelman and the team of Russell Investments strategists is what fiscal measures governments may take. In particular, the team is watching to see if the idea of bridge financing – floated by the Bank England – could be used as a mechanism by governments to hold businesses over during short-term periods of stress.
Potential impacts of coronavirus on U.S. Q1 GDP
As the virus becomes more pervasive across the U.S., Eitelman said that short-term negative impacts to economic growth are increasingly likely. “These impacts will potentially be most concentrated around the month of March, as more businesses close or shift their operations remotely,” he noted.
When individuals are no longer clustered in large economic centers, such as the downtowns and business districts of cities, disruptions become more likely for local retailers and restaurants, Eitelman said. The net effect of this may be real GDP (gross domestic product) growth that drops close to zero in the U.S. during the first quarter, he added.
What does the February jobs report say about the U.S. economy?
As of mid-morning Pacific time on March 6, markets hadn’t shown much of a response to the newly released U.S. employment report for February, which showed that the economy added 273,000 jobs last month. Why?
“The report is somewhat backward-looking, as the numbers were compiled before the coronavirus disruption really took root in the U.S.,” Eitelman said. “Markets are generally forward-looking vehicles that focus more on potential future downside risks than what’s already in the rearview mirror,” he added. At the very least, February’s strong numbers appear to be a positive signal that the U.S. economy entered the current period of coronavirus-fueled uncertainty on reasonably firm footing, Eitelman concluded.
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