Fed Cuts Rates to Combat Virus Fear Central bank lowers federal-funds rate range to 1% to 1.25% in its first between-meeting move since the financial crisis

(…) The central bank has typically reserved such moves for times when the economic outlook has quickly darkened, as in early 2001 and early 2008, when the U.S. economy was heading into recession. (…)

The rate cut was approved unanimously by the Fed’s rate-setting committee, which met by videoconference on Monday night. In a statement, officials held out the prospect of additional stimulus by pledging to “act as appropriate” to support the economy.

Fed officials moved to prevent a pullback in credit availability to households and businesses that could amplify any slowdown in U.S. growth, especially if steps to mitigate the spread of the virus—school and business closures, canceled public events and social behavior broadly speaking—curtail spending and depress hiring. (…)

Economists at Goldman Sachs see the U.S. avoiding a recession for now but have downgraded the U.S. growth forecast to an annualized rate of 0.9% in the first quarter and 0% in the second quarter.

Michael Feroli, chief U.S. economist at JPMorgan Chase, said Monday he saw a 50% chance the Fed would cut rates this year to zero, up from a 33% chance last week. (…)

Whatever its potency, this significant between-meeting cut means the FOMC sees non-trivial risks to the an economy that was, just last week, in reasonable shape. Both equity and bond markets tanked after the cut. The 10Y yield has been halved in 2 months and cut by a third in one week!

Goldman Sachs: Further Fed Cuts Are Likely, Even After 50bp Move, penciling in 25bp moves on March 18 and April 29 (versus April and June previously)

Greg Ip in the WSJ:

The good news is that the same factors that make monetary policy less potent make fiscal policy even more so. With investors rushing to buy government bonds and driving yields down, the U.S. and other rich governments can borrow all they need to fight the virus and recession risk without fear of driving up rates. (…)

Congress is working on a $7 billion to $8 billion package to combat the virus. The U.S. could easily borrow more: Congress authorized $65 billion in recovery spending after the 9/11 attacks, $100 billion after Hurricane Katrina in 2005, and $51 billion after Hurricane Sandy in 2012.

On Monday, Sen. Elizabeth Warren proposed $400 billion of stimulus—roughly 2% of GDP. Some service-sector workers might stay on the job even if they are infected, because they can’t afford to stay home. Ms. Warren proposes paying emergency sick leave to anyone with symptoms, or who has a dependent with symptoms, so they can stay home. That is a twofer: it offers protection against recession and epidemic at the same time.

• Trump Balks at Stimulus, Saying Economy Is Immune to Coronavirus

(…) Trump and his advisers, though, believe the economy isn’t under serious threat, that the government is capable of meeting challenges posed by the virus, and that an overreaction could make things worse.

“The country’s in great shape. The market’s in great shape. I’m focused on this,” Trump said Tuesday after a visit to the National Institutes of Health in Maryland.

Pence on Tuesday reiterated Trump’s view: “The president has said to us, the priority is the health and safety of the American people. We believe the strength of the American economy will take care of itself.”

And Larry Kudlow, Trump’s top economic adviser, agreed. “I don’t want to downplay it. This is a human tragedy, which it is. It’s not an economic tragedy for the U.S. and I still believe that,” he said.

Asked if he saw an economic crisis developing, after the Fed’s emergency rate cut failed to stop the market plunge, Kudlow on Tuesday said: “I don’t. I’ll be honest.” (…)

[Treasury Secretary Steven Mnuchin] added that the virus sell-off isn’t comparable to the financial crisis a decade ago. “We will get through this,” he told reporters Tuesday. Market swings are happening because “the markets struggle to assess new risks.” (…)

U.S. Light Vehicle Sales Hold Steady in February

The Autodata Corporation reported that sales of light vehicles during February eased 0.2% (+2.0% y/y) to 17.04 million (SAAR) from 17.07 million in January, revised from 17.05 million. During the last three months, sales averaged 17.00 million units. Sales have been easing since the 2016 sales peak of 17.55 million units. (…)

Imports’ share of the U.S. vehicle market rose last month to 22.9% and has been moving sideways for two years. Imports’ share of the passenger car market jumped to 28.1%, its highest level in four months. Imports share of the light truck market edged higher to 21.0% and remained up from the 12.0% low in January 2015.

Travel to the U.S. to see largest decline since financial crisis

Foreign travel to the U.S. is slated to tumble over the next six months, according to the latest data from the U.S. Travel Association. The USTA’s three-month Leading Travel Index (LTI) projects international inbound travel will fall by 6% year-over-year, “as the coronavirus outbreak continues to roil the global economy,” the agency said in a release Tuesday. (Axios)

Goldman Sachs estimates 10% to 15% of U.S. GDP consists of services such as entertainment, restaurants, church services and public transportation that would suffer if people limit interaction and avoid large gatherings. Goldman also estimates the disease will knock roughly 3 percentage points off annualized growth in the next quarter, with these demand-side effects accounting for almost half.

Virus Update

China’s National Health Commission reported 38 more coronavirus fatalities as of the end of Tuesday, bringing the country’s total death toll to 2,981. All bar one of the latest deaths were in Hubei province. Total cases rose by 119 to 80,270, while 49,856 patients have been discharged.

South Korea on Wednesday confirmed 435 new cases of the coronavirus, down from 851 a day earlier, taking the country’s total infections to 5,621 – the world’s largest after China. It reported four new deaths as the country’s toll reached 32.

Iran confirmed cases pass 2,000, 70+ dead

2nd case confirmed in NYC, commuted to Manhattan, traveled to Miami. Oregon officials warn up to 500 cases may be in state already. 1st case confirmed in North Carolina. 2nd case confirmed in New Hampshire. Santa Clara confirms 11th case, 1st case reported in Berkeley, third case possibly identified in Fla.

9 new cases confirmed in Japan

Chile, Argentina report first cases

India reported a jump in infections as 15 Italian tourists and their driver tested positive, while at least six other locals contracted the virus from a person returning from Italy, according to Health Minister Harsh Vardhan. The tourists are in quarantine in Delhi. There are now 28 confirmed cases in India, up from six reported Tuesday.

The number of confirmed cases in Germany rose to 240 from 196, the Robert Koch Institute said. The state with the most reported infections is North Rhine-Westphalia. Saxony-Anhalt is now the only one of the 16 federal states without a confirmed case.

Earlier, Poland has its first confirmed case, while the number of confirmed cases in Sweden doubled to 30. Cases in neighboring Norway rose to 33.

About 1,150 high school students in central Israel will enter a two-week quarantine after one of their classmates tested positive for the coronavirus, Ynet said, citing the Health Ministry. The student contracted the illness in the course of his job at a toy shop, where his manager returned from a trip to Italy and worked for three days before testing positive, the local website reported.

Germans and Belgians are rethinking ski trips to Italy and Japanese are canceling visits to Bali. At stake is the $1.7 trillion in revenue that international tourism generated in 2018. UK case total hits 51.

Malaysia reported its biggest jump in infections with 14 new cases on Wednesday, taking its tally to 50. The new cases were confirmed to be within a single cluster. A 52-year-old Malaysian man traveled to Shanghai in the middle of January and developed symptoms only on Feb. 27, when he was tested and confirmed two days later. The illness spread to 16 people, mostly through meetings, including 5 that were second-generation infections. Malaysia is awaiting the results of 180 of their close contacts.

Health authorities confirmed Australia’s third locally transmitted case. The woman, in her 50s, works at a care home in Sydney and had been in contact with a number of elderly residents who are now under isolation. Test results are pending for two residents with respiratory symptoms.

Coronavirus: there are 2 types, Chinese researchers find, while authorities say faeces and urine can transmit the infection

The coronavirus has evolved into two major types, with differing transmission rates and geographical distribution, according to a study published in the National Science Review on Tuesday.

A group of Chinese scientists analysed 103 coronavirus genomes and identified mutations in 149 sites across the strains.

They found that one type, which they called the L type, was more prevalent than the other, the S type, meaning it was more infectious. They also found that the L type had evolved from the S type, and that the L type was far more widespread before January 7 and in Wuhan, ground zero of the outbreak.

Human actions soon after the outbreak was discovered in December may have changed the abundance of each type, the report said, citing the Chinese central and local governments’ drastic containment measures including lockdowns of cities, which it said may have curbed the spread of the L type.

The researchers said follow-up studies were needed to form a better understanding of the virus’ evolution and spread.

How bad will the coronavirus outbreak get in the U.S.? The many unknowns about the virus impede efforts to predict its trajectory, but early models suggest it could be a historic pandemic on the scale of the 1957 flu.

(…) The many unknowns about the virus impede efforts to predict its trajectory. Modeling new diseases is inherently uncertain, and scientists have at times overestimated the severity of epidemics, including in 2009, when the H1N1 flu turned out to be milder than expected, and in 2014, when the Ebola outbreak in West Africa killed far fewer people than projected early in that crisis.

But the coronavirus has already spread at surprising speed. Most cases are mild; about 16 percent of confirmed cases in China have resulted in serious illnesses. (…)

Infectious disease experts in recent days have said the coronavirus could create a pandemic on a similar scale to, or even surpassing, the 1957 influenza contagion. That pandemic was caused by a virus related to one found in birds that entered the human population somewhere in Southeast Asia and sickened a quarter billion people, killing more than a million, including 70,000 in the United States. The flu and the current outbreak are caused by different viruses. (…)

The relative mildness of the disease for most people has enhanced the ability of the virus to spread, as infected people continue to move about.

“In just two months, the novel coronavirus spread from a cluster in Wuhan, China to an impending global pandemic with cases in more than 60 countries. This is unprecedented. Never before has a new pathogen emerged and caused a global spread like this. And that’s scary. It’s new. It has the ability to cause enormous social and economic disruption,” said Tom Frieden, a former Centers for Disease Control and Prevention director, in a news briefing Monday in New York, where he is president and CEO of Resolve to Save Lives, part of Vital Strategies, a global health organization. (…)

Public health officials need to prepare for “disease burden roughly 10X severe flu season,” according to James Lawler, director of the Global Center for Health Security and a professor for the University of Nebraska Medical Center, in a presentation given to the American Hospital Association and obtained by The Washington Post. (…)

“I don’t think we’re going to be able to control it, the same as we’re not able to control flu,” said Jeffrey Shaman, a Columbia University epidemiologist. “The problem is, this is 10 times or maybe 20 times the burden of a typical seasonal flu. Maybe 40 times. That is daunting.” (…)

TESTING CONFIDENCE!

• Mr. Pence said that kits capable of testing about 1.5 million people will be shipped to hospitals before the end of the week.
• The Centres for Disease Control’s Nancy Messonnier, however, said that while the commercial tests would give local authorities “actionable results”, the findings still would have to confirmed by the CDC. The federal health agency will have the capacity to confirm the results of up to 75,000 tests by Friday, said Messonnier, director of the National Centre for Immunisation and Respiratory Diseases. Commercial tests will give local authorities “actionable results” to make public health decisions about so-called presumptive positive cases, but are not considered proof of infection, she said. (…)
• CDC may be a little more delayed because there are so [many] testing kits going out,” she said. While the administration is seeking to shore up public confidence by claiming it can ramp up testing quickly through the use of privately manufactured test kits, Messonnier’s comments showed that the process is not so straightforward.
• Early on in the global outbreak of the virus, the CDC developed its own diagnostic test, but has since acknowledged that they were faulty in some instances. The CDC is producing new tests that are more reliable, and has so far not adopted the test kit designed by the World Health Organisation that is being used by many countries.

As the U.S. ramps up testing in the next 2 weeks, it is inevitable that the number of infections will jump. Some experts argue that if the current 2.0-2.5 incremental infections per sick people holds, there is no reason that COVID-19 will not spread like flu. According to JAMA Network, 29 million Americans got ill from influenza as of Feb. 2020 with 16,000 deaths.

As of March 1, there were 22 confirmed and presumptive positive cases out of 472 tested Americans, a 4.7% rate (South Korea is at 4.2%). Testing over 100k people should more than 4k new cases in coming weeks, prompting various containment/mitigation measures from the authorities and significant preventive measures among the population which would seriously impact the service economy

Many experts are advising the U.S. government to move from preventive to mitigation actions immediately. It is possible, but not certain, that the arrival of warmer weather will slow this “emerging pandemic” but it will not go away until a virus is found and widely administered, unlikely before 2021.

Many see the recent declines in Chinese new cases as an indication of containment. However, China reported only 11 new cases outside the Hubei province on March 2. Such low number is highly questionable. Since Feb. 15, new cases in Mainland China ex-Hubei totalled 672 to 12,923. The world-ex-China: +8,137 to 8,904.

China is trying to restart its stalled economy by getting migrant workers back to their manufactures. News of rising cases would certainly not help.

Americans’ confidence will be tested in coming weeks. Their reactions to rising infection cases and containment measures will likely impact the economy. Goldman Sachs developed a GS Twitter sentiment index that is considerably more timely than other measures.

In contrast to the resilience of the Michigan measure in February, our Twitter sentiment index declined sharply in the last week of February, driven by a growing number of tweets expressing negative economic sentiment that mentioned the coronavirus.

Amazon Worker at Company Headquarters Tests Positive for Coronavirus

An Amazon.com Inc. employee who works in one of the buildings at the company’s Seattle headquarters tested positive for the coronavirus, a spokeswoman for the company said. (…)  Amazon has notified other workers who may have come into contact with the person. The e-commerce giant has about 55,000 Seattle employees. (…)

• Dirty banknotes may be spreading the coronavirus, World Health Organization suggests

• How long can the new coronavirus last on surfaces?

China’s central bank is taking steps to deep clean and even destroy its cash out of fears that the new coronavirus can survive on the surface of money and potentially spread, according to CNN.

But how long can the new coronavirus linger on surfaces, anyway? The short answer is, we don’t know. But if this new coronavirus resembles other human coronaviruses, such as its “cousins” that cause SARS and MERS, it can stay on surfaces —  such as metal, glass or plastic — for as long as nine days, according to a new study. (In comparison, flu viruses can last on surfaces for only about 48 hours.) (…) The authors also found that these coronaviruses can be effectively wiped away by household disinfectants.  (…)

It’s possible that a person can be infected with the virus by touching a contaminated surface or object, “then touching their own mouth, nose, or possibly their eyes,” according to the Centers for Disease Control and Prevention (CDC). “But this is not thought to be the main way the virus spreads.”

Trump’s baffling coronavirus vaccine event

As a private citizen and presidential candidate, Donald Trump was a proponent of vaccine skepticism — ignoring the scientific consensus on stuff like how vaccines don’t cause autism. As president, he is now surrounded by experts on the subject, including on Monday when he held a coronavirus roundtable with his task force and the heads of several pharmaceutical companies.

Yet despite the increasingly scary situation involving the disease and preparations having been underway for weeks, he still appears rather clueless on the subject.

At the event Monday, Trump peppered the drug companies with questions that were some variant of “How fast can you get it done?” But despite this having been a focal point in recent weeks, he still didn’t seem to process the fact that producing a vaccine means conducting months and months of trials before it can be deployed. (…)

At a White House briefing on Thursday [Last week], Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases laid out a detailed timetable for clinical testing and concluded, “So although this is the fastest we have ever gone from a sequence of a virus to a trial, it still would not be applicable to the epidemic unless we really wait about a year to a year and a half.” (…)

Trump pressed. “I mean, I like the sound of a couple of months better, I must be honest with you.” (…)

Asked by a reporter whether he’s comfortable with this taking longer than that, Trump again sounded as though he hadn’t heard everything the CEOs and experts had just told him.

“I don’t think they know what the time will be,” Trump said. “I’ve heard very quick numbers — a matter of months — and I’ve heard pretty much a year would be an outside number.”

Curbed by Coronavirus, China’s Truckers Can’t Wait to Get on the Road Again Millions of truck drivers are being kept off the road, hampering efforts to get the world’s factory moving again

(…) Mr. Zheng estimated that national trucking capacity was at a third of normal levels at the end of February. “They can’t leave, they’re just waiting for their local government to give them the green light.” (…) Transporting a shipping container 1,000 miles by road from Chongqing to Shanghai normally costs around $1,500; now, if you can find a truck, it will cost you $3,000, said Mr. Zheng. (…)

Trucking capacity in southern China has rebounded to 60%, according to shipping company A.P. Møller-Mærsk A/S. A new online system enabling truckers to apply for permits to clear checkpoints in some regions has removed one significant blockage. Even so, things won’t be back to normal for weeks, Mr. Zheng said. About half of China’s truckers have yet to return to work, according to people at local and international freight companies. (…)

Coronavirus could cause global medicine shortages as China’s factory closures hit supply chains

COMPOSITE PMIs

CHINA: Coronavirus outbreak leads to record drop in business activity

February PMI data signalled the first reduction in business activity across China’s service sector on record due to restrictions implemented to contain the recent coronavirus outbreak. Firms across all sectors reported on the damaging effect that the virus was having on the economy via company closures and travel restrictions, with total new orders also falling at a record pace. Restrictions around travel also impacted firms’ ability to source workers, leading a renewed fall in staff numbers. Consequently, backlogs of work rose at a substantial pace.

At the same time, business confidence slipped to a survey low in February. A number of panel members were more cautious with their forecasts due to a greater degree of market uncertainty arising from the coronavirus outbreak.

Adjusted for seasonal factors, including Chinese New Year, the headline Business Activity Index fell over 25 index points from 51.8 in January to 26.5 in February. This marked a sharp decline in business activity that was also the first recorded since the survey began over 14 years ago. The vast majority of panel members identified the outbreak of the coronavirus as the key driver of reduced activity, with firms facing extended company closures after the Chinese New Year and strict travel restrictions.

Consequently, total new business also fell substantially during February, with the pace of decline the fastest in the series history. Demand softened both at home and abroad, with new export work falling markedly amid reports of client cancellations and limited travel.

The coronavirus outbreak also impacted labour supply in February, as travel restrictions resulted in many firms being unable to fill roles. Although falling only modestly, the rate at which employment fell was the most severe since the survey began in late 2005.

A fall in the availability of workers and company closures led to a solid and accelerated increase in backlogs of work.

Reduced operational requirements and weaker demand for inputs underpinned a marked fall in operating expenses that was the quickest registered since data collection started over 14 years ago.

Average selling prices were meanwhile cut for the third month running, and at a faster rate. Though modest, the pace of discounting was in fact the steepest on record, with a number of firms lowering their charges as part of efforts to secure new orders.

Uncertainty relating to the coronavirus outbreak weighed on business confidence in February. Notably, the degree of optimism was only modest, having slipped to a survey low.

The Composite Output Index signalled the sharpest decline in total Chinese business activity on record in February, as company closures and travel restrictions were put in place due to the coronavirus outbreak.

Composite new orders and employment also fell at the quickest rates in the series history. A lack of available workers and reduced capacity meanwhile led to a sharp increase in the amount of backlogged work across Chinese firms. (…)

Eurozone growth reaches six-month high in February

The IHS Markit Eurozone PMI® Composite Output Index was unchanged on the earlier flash reading in February, recording a level of 51.6. That was an improvement on January’s 51.3 and signalled the strongest expansion of the euro area’s private sector economy in six months.

Slightly stronger growth was supported by a solid and firmer gain in service sector activity, alongside a weaker contraction of manufacturing production. Although goods producers recorded a fall in output for a thirteenth successive month, the degree to which production fell was the weakest since May 2019.

At the country level, all nations saw some expansion during the month with Ireland comfortably recording the strongest growth. Growth rates remained solid in France and Spain, with both registering better performances than in January. In contrast, ongoing weakness in manufacturing sectors meant that only marginal gains in overall activity were seen in Germany and Italy.

Levels of new business received by euro area private sector companies increased for a third month in succession. Growth, however, remained modest, undermined by an ongoing contraction in exports. Indeed, latest data showed a seventeenth successive monthly fall in new work from abroad.

In line with the trend since November 2014, staffing levels continued to rise. However, the latest rate of growth was modest, and unchanged since the previous month. Moreover, whilst gains in employment were seen across the region, rates of growth varied, ranging from a negligible rise in Germany to marked gains in France.

With capacity increasing, firms were able to successfully keep on top of their workloads, as evidenced by a twelfth successive monthly fall in backlogs of work outstanding.

Meanwhile, prices data indicated another solid rise of average input costs. Inflation was again mainly driven by rising employment expenses in the services economy as manufacturers registered another reduction in their input costs.

Firms did, however, struggle to pass on increased prices to their clients. Although output charges continued to rise, they again did so only modestly.

Business confidence regarding future activity was a little lower than January’s 16-month high during February. There were reports from across the region of worries over the impact on business from an escalation of the Covid-19 outbreak. German companies remained the least optimistic, whilst those in Ireland were the most confident.

The IHS Markit Eurozone PMI® Services Business Activity Index improved to 52.6 during February, up from 52.5 in the previous month. Growth has now been registered for over six-and-a-half years, although the latest expansion remained slower than the average for this period. Similar rates of expansion were seen across the region, with the exception of Ireland were activity rose at a considerable pace that was the sharpest for over two years.

Incoming new business increased solidly in February, with the rate of growth little-changed for a third month running. However, gains in new work were driven by domestic demand as export sales declined at the greatest rate for five months.

Service providers continued to take on additional staff during February, although the rate of growth slipped since the previous month. The extra capacity nonetheless helped firms to keep on top of their workloads, with the latest data showing little change in work outstanding.

On the price front, input cost inflation eased since January though continued to noticeably outstrip that of output charges, which increased modestly during February.

Finally, business confidence was stable, easing only slightly on January’s nine-month peak.

Chris Williamson, Chief Business Economist at IHS Markit:

The eurozone economy showed resilience to disruptions arising from the coronavirus outbreak in February, but dig deeper into the data and there are signs that problems lie ahead.

(…) exports of both goods and services are now falling at an increased rate due to virus-related downturns in demand, and increasingly widespread delivery delays threaten future production. In the service sector, growing numbers of companies are reporting lost business due to the virus spread, notably in sectors such as hotels, travel, transport and tourism but also even in areas such as financial services. (…)

While the PMI data so far for the first quarter are signalling a 0.1-0.2% increase in GDP, there are clear downside risks and a likely weakening of the economy in March.

EARNINGS WATCH

The S&P 500’s Q1 earnings estimates have fallen 2.7% since Jan. 31, bringing the expected Y/Y growth rate to 2.7% from 5.4% on Jan. 31. This 2.7 percentage point decline in the first quarter growth estimate exceeds the typical 2.3 percentage point decline seen between the start of the quarter and the start of earnings season, and there is still one month left before the Q1 earnings season begins.

The more up-to-date number for Q1’20 earnings growth is +2.3% (yesterday). So far, per the table above, analysts have mainly cut on cyclicals. If and when Americans’ confidence drops and they start cocooning, services will get hit.

At today’s pre-opening of 3060, the Rule of 20 P/E is 20.9 (regular P/E 18.6). GS traders explain the recent high volatility by the fact that most of the volume is coming from retail and quant momentum traders and that, in reality, liquidity for large trades is very limited. Momentum trading cares little about confidence on central banks, politicians, health authorities and viruses behaving in the most appropriate manner…

The 200-dma is at 3045 and still rising, unlike most other world indices.