Investors Seem Optimistic—Is it Justified?
It remains to be seen, however, whether such optimism is justified. The coronavirus remains uncontrolled. Chinese officials point to a lowered trajectory of new infections, yet, at the same time, the World Health Organization warns of international exposure being perhaps just the tip of the iceberg. The number of infections now officially totals 40,000, although some believe the real total may be significantly higher. So far, there have been 908 reported deaths, more than during the SARS outbreak. Some economic activity in China is expected to resume this week as the extended New Year holiday ends. But how many will be returning to work is unclear, as fear of infection remains paramount. Just as unclear is the economic impact of lost productivity on first quarter GDP, both in China and globally.
Pre-Virus Economic Data Was Encouraging
Meanwhile, last week’s domestic economic data was encouraging, although it largely reflects activity generated before the virus outbreak. Nevertheless, the U.S. jobs market continues to surprise, as the economy created 225,000 new non-farm jobs, well above the consensus 165,000. There were likely some seasonal factors that inflated the total, including good weather, and temporary employment was weakened, but there was little else to criticize in the report. Also, last week, the ISM report on manufacturing activity in January rose into expansion territory for the first time since last July. And the composite index, including the far larger service sector, rose to its highest level since last March.
In Europe, the data was less encouraging, although it is somewhat stale. In Germany, the region’s largest economy, December industrial production and factory orders plunged at the sharpest pace in ten years. On Friday, Germany will release its fourth quarter GDP report. The consensus anticipates growth of 0.1 percent, but that expected outcome could be in jeopardy. Fourth quarter GDP for the full Eurozone is also scheduled for Friday with a similar anemic growth expectation.
Investors Keeping an Eye on Economic Data, New Hampshire and Earnings this Week
The economic calendar in the U.S. this week will provide an initial look at January activity, with reports on consumer prices, retail sales and industrial production scheduled, along with small business and consumer sentiment surveys. Voters in New Hampshire will go to the polls on Tuesday in the nation’s first primary, and Fed Chair Powell testifies before Congress.
Fourth quarter earnings season is now roughly two-thirds complete, and the picture remains likely that final aggregate results will exceed expectations enough to generate a modest year-over-year gain of 0.7 percent. That compares to an initially expected decline of more than 2 percent. One company reporting last week offered particular insight into the current situation in China. YUM China holdings operates over 8,000 KFC, Pizza Hut and Taco Bell stores as the largest western fast food company in the country. Management said it might experience a loss for the first quarter and possibly for the full year after closing roughly 30 percent of its stores due to the virus outbreak. Of the stores that remained open, traffic was 40-50 percent lower than the comparable Lunar New Year period last year. Among those companies expected to report this week are Cisco, Nvidia and Alibaba.
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The ISM Manufacturing Index (composite index) is a widely watched indicator of recent U.S. economic activity. Based on a survey of purchasing managers at more than 300 manufacturing firms by the Institute for Supply Management (ISM), the index monitors changes in production levels from month to month.
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- Chief Market Strategist, Ameriprise Financial
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