The Economic Impact of Coronavirus Remains Uncertain
The dollar surged higher as the demand for liquidity and safety remained unabated. The DXY dollar index gained 4 percent last week alone and is higher by 8 percent in the past two weeks. WTI crude oil fell $9.30 a barrel, or 29 percent.
The Fed Acts Quickly to Improve Liquidity; Congress Looks to Bring $2 Trillion in Aid
The Federal Reserve activated facilities to improve liquidity in the market for short-term corporate funding. As it did during the financial crisis, the Fed last week launched a lending facility to buy commercial paper, a market where spreads have widened sharply amid the surge in demand for credit. In a related move, it also launched a facility to provide loans to the 24 primary dealers to ensure their ability to finance their securities positions. It also launched a lending facility to ensure sufficient liquidity among money market mutual funds.
All of these actions followed the Fed’s full one percent reduction in the overnight rate at the start of the week, and the launch of a program to buy bonds in the Treasury and mortgage-backed securities markets. Importantly, Congress is also working on a bill to provide reportedly $2 trillion in economic aid in response to the economic impact of the virus. The Senate is expected to vote on the bill on Monday, followed shortly after by the House, with enactment expected by mid-week. However, partisan negotiations were still underway late on Sunday.
It is estimated that roughly one-fourth of the U.S. population is now subject to various stay-at-home directives in an effort to slow the spread of the virus, and the number of documented infections continues to rise sharply, with 30,000 now estimated as of Sunday, March 22. Worldwide, the number of infections is estimated to exceed 300,000.
Investors Prepare for More Bad News, But Things Will Get Better and We Will Persevere
Increasingly, the flow of economic data is beginning to reflect the impact of the virus. Nowhere is that more likely than in this week’s report of new jobless claims on Thursday. Much was made of last week’s increase of 70,000 to a two-year high of 281,000. That will seem rather modest if this week’s Bloomberg consensus estimate of 1.5 million is even close to accurate. Also, on this week’s calendar are the March flash reports on manufacturing and service activity, with the former estimated to have slipped into contraction. February new home sales, durable goods orders, personal income and spending are also scheduled.
It remains too early to say with any confidence that we have seen the bottom in stocks. Despite stock prices being down almost one-third from the peak, the economic impact of the virus remains too uncertain to quantify. Estimates of the expected decline in second quarter GDP are being revised lower and estimates of expected unemployment are being revised higher. And despite the central bank provision of a variety of funding programs, liquidity remains at a premium, causing persistent pricing distortions. In the weeks immediately ahead, the news on both the healthcare front and economic front is certain to get worse. We should be prepared for that. And orders to remain at home will undoubtedly become increasingly tiresome.
Eventually, however, things will get better. The spread of the virus will eventually begin to level off. Slowly the economy will come back to life. And stock and bond markets should begin to return to normal. No one can say with certainty how long this will take. But with perseverance, we will get through this.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Individual securities referenced are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell.
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- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
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