Prior week summary
The major U.S. equity indices rebounded last week, moving higher and nearing or setting all-time highs as a perceived moderation in the Wuhan coronavirus outbreak and encouraging domestic economic data worked to buoy investor sentiment. According to China, the new virus is responsible for over 40,000 infections and 900 fatalities on the mainland with the majority of cases originating from the Hubei province, the epicenter of the outbreak. In an attempt to control the spread of the virus, China has kept the Hubei province locked down and delayed the reopening of many manufacturing plants across the country. On Thursday, China announced that it will halve tariffs on $75 billion of U.S. goods as it grapples with the virus, but U.S. Secretary of the Treasury, Steven Mnuchin, said that he expects that China will still be able to deliver on purchase commitments made in the phase-one trade agreement. The Federal Reserve Board warned that the virus presents a “new risk” to the global economic outlook on Friday saying, “Because of the size of the Chinese economy, significant distress in China could spill over to U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices.”
In a busy week for economic releases, the results were largely positive. The ISM Manufacturing Index moved into expansionary territory for the first time in six months, posting a level of 50.9, well above the 48.5 expectation. While the rebound in the manufacturing sector is a welcome development, many have cautioned that the January figures do not capture the impact of the coronavirus, and the index may slip back into contractionary territory in February. Both the ISM Non-Manufacturing Index and construction spending updates also topped consensus expectations later in the week further improving sentiment. All eyes were on the employment situation this week, however, as both the ADP employment measure and the January non-farm payroll report smashed expectations. According to the non-farm payroll report, the U.S. economy added 225,000 jobs in January, significantly higher than the 165,000 expectation, and much improved over the December figure that saw 147,000 job additions. Additionally, average hourly earnings increased 3.1% year over year and the unemployment rate moved higher to 3.6%, largely due to increased participation in the labor force.
The look forward
Market participants are looking forward to the release of updated figures on the Consumer Price Index, retail sales, industrial production, and a consumer confidence measure, among others. Federal Reserve Chairman Jerome Powell heads to Capitol Hill where he will testify before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday.
Market implied policy path (Overnight indexed swap rates)
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