A medical personnel member takes samples of person at a “drive-thru” coronavirus testing lab set up at Somerville Hospital in Somerville, Massachusetts on March 18, 2020.
Joseph Prezioso | AFP | Getty Images
Markets face more violent swings in the coming week as investors watch out for a rising number of coronavirus cases and new data that could show how the virus is slamming the U.S. economy.
The past week crushed stock investors, with the Dow Jones Industrial Average posting a 17.3% decline, its worst week since October 2008. But the stressed-out credit markets were at the vortex of pain with a standstill in corporate paper and spreads widening in all areas, from corporates to mortgages.
As economists looked for an even sharper economic downturn from the impact of social distancing, the Federal Reserve in the past week continued to fire away with new programs and liquidity to grease the wheels of nervous markets. By Friday, the dollar stopped its surge, and the Treasury market was a little calmer, with the benchmark 10-year yields sliding under 1% after a wild ride higher earlier in the week.
“The Fed is buying about $70 billion in off-the-run Treasurys today. That brings their total purchases this week to $300 billion,” Incapital chief market strategist Patrick Leary said Friday. “$160 billion was the highest we saw in any week during the financial crisis.”
In the week ahead, fresh data on manufacturing and the service sector is due Tuesday when Markit releases its flash Purchasing Manager Indexes.
Consumer sentiment data will be important when it is released Friday, but the big tell for the economy will be weekly unemployment claims on Thursday, which are expected to show the impact of massive layoffs at restaurants, stores and other businesses that were forced to close or reduce activity to prevent the spread of the virus.
Claims rose by 33% in the past week to 281,000, an unprecedented jump outside of times of natural disasters. Some strategists say the claims could easily jump to 1 million or more.
“We’re going to start to see the magnitude of the coronavirus impact on the economy. We already started to see some of it in the weekly claims, and now we’re going to get a clearer picture,” said Michael Arone, chief investment strategist at State Street Global Advisors. Arone said he’s watching the PMI data. “This data is going to inform us how bad it could get, give us some guidance, some rough rules of the road. Right now, it’s sell first, ask questions later.”
Economists increasingly expect a very sharp but quick recession, starting now. Goldman Sachs economists expect a shocking 24% contraction in second-quarter gross domestic product after a 6% decline in the first quarter. The economists expect unemployment to shoot up to 9% from 3.5%, but they see a rebound with growth at 12% in the third quarter.
“I expect that we’ll see abnormal volatility in markets until we begin to see that infection curve flatten, or we see some type of health remedy, vaccine or some solution. I don’t think we’re going to see that in the next few weeks at least,” said Arone.
More Fed Artillery
Leary and others believe there is more room for the Fed to expand its arsenal, and that could include corporate debt purchases. Investment grade corporate debt funds and exchange-traded funds saw record outflows of nearly $44 billion in the last week, according to Bank of America.
The Fed has already slashed interest rates to zero, added $1 trillion in daily repo operations, and created facilities to help commercial paper, money markets and municipal debt. The dollar has rocketed higher since March 9, and the Fed expanded swap lines with other central banks, which helped stop the dollar’s run on Friday.
With the dollar the world’s reserve currency, companies, investors, banks and other institutions worldwide are looking to raise cash and they want it in greenbacks, the safest, most liquid currency. That rapid move to cash put a strain on the foreign exchange market, and sent the dollar higher and other currencies sharply lower.
“I think the market is going to be looking for indications that there’s some sort of stabilization, or maybe even a hint of stabilization and that policymakers are taking the right action. I think we’re not yet at that cathartic moment of peak pessimism,” said Ben Randol, foreign exchange strategist at Bank of America. “I’m watching what’s going to happen over the weekend because some pretty big numbers [of new virus cases] could come out, not just in the U.S. but in other countries.”
Strategists say it would not be surprising to see more Fed policy moves in the week ahead, and a big fiscal stimulus package is expected to come up in Congress on Monday, to ease the impact of job losses on individuals and help companies weather the downturn.
John Briggs, head of strategy at NatWest Markets, said the bond market responded to the Fed’s actions to make more dollars available, seeming to slow the sale of Treasurys by those parties looking to raise cash. “Things are settling into ranges Friday afternoon, because we can’t take it anymore,” he said.
“The amount of policy thrown at this market was staggering. … Liquidity infinity is what I’m calling it,” he said. “By the weekend, the whole country is literally going to be shut. You have claims at state unemployment offices skyrocketing. What’s the good news over the weekend? That they’re going to pass this bill? That’s already in the price.”
Week ahead calendar (Times ET)
8:30 a.m. Chicago Fed National Activity Index
9:45 a.m. Markit Manufacturing PMI flash
9:45 am. Markit Services PMI flash
10 a.m. New home sales
8:30 a.m. Durable goods
9 a.m. Housing price index
8:30 a.m. Jobless claims
8:30 a.m. Q4 GDP [final]
8:30 a.m. Advanced economic indicators
8:30 a.m. Personal income/spending
8:30 a.m. PCE price index
10 a.m. Consumer sentiment
RBA warns of big hit to the economy from pandemic – MarketWatch
SYDNEY–The Reserve Bank of Australia left interest rates unchanged Tuesday and affirmed its current targeting of bond yields while warning the economy will be hit hard by the corona pandemic in the second quarter.
The RBA’s official cash rate was left at a record low 0.25%, the bank said. The three-year bond yield target was also kept at 0.25%.
“There is considerable uncertainty about the near-term outlook for the Australian economy…a very large economic contraction is expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years,” RBA Governor Philip Lowe said in a statement.
Interest rates are set to remain low for a long period, he added.
“The board is committed to doing what it can to support jobs, incomes and businesses as Australia deals with the coronavirus,” Mr. Lowe said.
“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2%-3% target band,” he added.
The RBA deployed alternative policy measures in March for the first time as the coronavirus pandemic forced social distancing on the population, shut firms and closed borders to international traffic.
When compared with other major economies, Australia has managed to limit the number of deaths from the coronavirus, but it has been hard hit nonetheless with tourism and education exports flattened while consumer spending has weakened.
Federal and state governments have responded to the pandemic with massive fiscal stimulus but despite the outlays, Australia is set to sink into its first recession since the early 1990s, economists have warned.
Data earlier Tuesday showed job advertisements fell by 10.3% in March, the biggest fall since the global financial crisis.
Still, consumer confidence was up with the ANZ attributing the rise to government measures to support incomes and keep workers on payrolls.
Write to James Glynn at email@example.com
Quebec hatches plans to bolster economy as Legault eyes postpandemic world – The Globe and Mail
Quebec is hatching plans to bolster the resiliency of its economy as it eyes a postpandemic world where countries are expected to become more protectionist and the province will need to be more self-sufficient.
Premier François Legault’s government on Monday announced a $100-million program that companies can tap to pay workers being trained as well as those training them as they prepare for a return of economic activity. Companies are eligible to apply for the program until September 30.
“This is the ideal time to do training,” Mr. Legault told reporters in Quebec City, adding many business need to be ready for a significant reorganization of work. “Things will change a lot over coming months.”
Labour Minister Jean Boulet said companies could develop employee skills while being subsidized for their wages, which would “increase their competitiveness. We want companies to be able to prepare to relaunch and avoid any job losses as much as possible.”
As much of the rest of Canada has focused on immediate responses, Quebec has in recent days been talking more about its future once the health crisis subsides. Mr. Legault’s government says it has begun working on plans to increase the province’s self-sufficiency in health care and food, to make sure it has enough locally made medical equipment, medication and other supplies needed to weather a future crisis.
More broadly, Quebec has begun a detailed analysis of its trade balance in an attempt to prepare for a new economic reality once the peak of the global coronavirus pandemic has passed. The Premier is even evoking the possibility of using the province’s plentiful hydro power to warm indoor greenhouses in the winter and grow fruit and vegetables all year round instead of importing them.
“We want to be able to produce more locally,” Mr. Legault said Friday. “We’ll need to think about the entire food chain to ensure that if there were another crisis that we’d be autonomous.”
Quebec’s determination to cement its defences and boost its future economic prospects has already been likened by some commentators to a similar nationalism effort in the 1960s that ushered in the Quiet Revolution.
Not since that time has former Premier Jean Lesage’s campaign slogan “Maître chez nous” (Masters in our own house) become as pertinent as a societal objective, Quebecor media columnist Michel Girard said.
The government is also thinking about the demand side of the equation, trying to stimulate Quebeckers’ appetite for locally-made products in order to cut their reliance on goods made outside its borders.
On Sunday Quebec announced a new non-profit project called Le Panier Bleu (blue basket), which is at the moment a website-accessed inventory of thousands of Quebec companies that provide locally-made products and services. The project is being led by several retail-sector veterans, including former Lowe’s Canada chief executive officer Sylvain Prud’homme.
With three million visits in less than 24 since the website went live and 1,170 businesses listed, the initiative is proving the propensity of Quebeckers to support their own, said Charles de Brabant, executive director of McGill University’s Bensadoun School of Retail Management. He compared the effort to the online marketplace created by China’s Alibaba Group, which has proven to be a major employment generator in that country since its launch in 1999.
For weeks, Quebec has led the country in the number of confirmed COVID-19 cases, with 533 people hospitalized and 121 deaths as of Monday. It has also put in place among the continent’s strictest social-distancing measures, extending a shutdown of non-essential businesses to May 4.
About 80 Quebec companies have expressed an ability and willingness to manufacture protective equipment and at least one will be tapped to make masks permanently, said Quebec Economy Minister Pierre Fitzgibbon. The government is also working with pharmaceutical companies in the provinces to make sure Quebeckers’ medication needs can also be met by local producers, he said.
Quebec currently has a $20-billion annual trade deficit, meaning it imports more goods than it exports. The Premier says the gap will probably grow, accelerated by current events, meaning the province has to realign its economy internally.
Quebec’s chief exports by dollar value are aircraft and aircraft engines, aluminum and iron ores. Among its biggest imports are crude oil, light trucks and sport utility vehicles. The United States is by far its biggest trading partner.
“You can imagine that some of our exports will face a bit more protectionism in coming years,” Mr. Legault said. “We’re going to need to figure out how we can help our local entrepreneurs make products that we are currently importing in order to keep our trade balance as even as we can.”
Quebec estimates it has spent $18-billion to fight the pandemic, which includes financial aide for business and the cost of buying medical equipment. The number represents between 4 and 5 per cent of its gross domestic product.
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