Prior week summary
Global equity indices plummeted last week, sending the three major U.S. equity indices into correction territory, as the worsening COVID-19 outbreak dominated headlines and stoked fear among market participants about the new virus’ potential to disrupt the global economy. The Dow Jones Industrial Average closed nearly 3,000 points lower from the week prior and the 10-year U.S. Treasury yield fell to its lowest level in history on Friday to 1.13%. Global cases of COVID-19 increased at a rapid pace over the week with the outbreaks in Italy, South Korea, and Iran receiving considerable media attention. As of Sunday evening, the global infection count sits just under 90,000 with total fatalities rising above 3,000. Cases in Italy gained significant attention throughout the week as the country reported nearly 1,500 new cases and over 30 additional deaths. The rise in cases internationally soured investment sentiment globally and has increased bets that the Federal Reserve will cut the target range. The Fed Funds futures market is now pricing in four rate cuts by the end of 2020, up from two rate cuts priced in at the start of the week, with the first cut expected to take place at the conclusion of the FOMC’s next meeting on March 18. Federal Reserve Chairman Jerome Powell released a statement on Friday afternoon signaling that the Federal Reserve is poised to act if the situation gets worse saying, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” The United States reported 52 cases since last Sunday and two deaths, the first in the U.S. Two cases, one in California and one in Washington state, suggested community spread of the virus, infections occurring in patients with no travel history to known infected areas and no known contact with existing COVID-19 patients. Speaking after reports of the first COVID-19 death in Washington state, CDC spokesperson Dr. Nancy Messonnier said, “We will continue to respond to COVID-19 in an aggressive way to contain and blunt the threat of this virus. While we still hope for the best, we continue to prepare for this virus to become widespread in the United States.”
The economic data releases were mixed for the week. New home sales in January soared above analyst expectations, rising 7.9% month over month. According to the second estimate of fourth-quarter GDP, the U.S. economy expanded at a 2.1% annualized pace, in line with both consensus expectations and the first estimate. The Chicago PMI posted a reading of 49.0 for January, remaining in correction territory but significantly above December’s 42.9 reading.
The look forward
Market participants are looking forward to a busy week of economic data releases with updated figures on the ISM Manufacturing Index, ISM Non-Manufacturing Index, construction spending, factory orders, and the February non-farm payroll report topping the bill.
Market implied policy path (Overnight indexed swap rates)
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