Aside from the human cost involved with 80 deaths now reported and +2,700 infected, the market is asking how bad can this get. There are more questions than answers as the market weighs potential outcomes. This is a typical reaction to large-scale negative headline with the potential for wide-reaching consequences. What does this mean for European manufacturing? What is the overall impact on consumer spending and growth in an already fragile Asian economy? The sectors likely to be hit hardest are transportation, commodities and food and beverage. Additionally, oil and iron ore prices have dipped. This should be a short-term boost for consumers as lower gas prices lead to more spending power and longer-term lower global inflation.
Fed rate decision Wednesday, but they won’t have enough information to address Corona virus spread as it has yet to play out in real economic data. That said, Powell will be asked to discuss the range of outcomes and the potential tools in place if the situation worsens. The market is not expecting a change in rates while the Fed maintains its wait-and-see stance on the balance of all things impacting growth and inflation outlooks. There is a higher likelihood of rates being cut if conditions persists, which has led to a flight to quality pushing the 10yr through 1.65%, a 3-month low.
Beyond the virus, there are big earning announcements this week, with more than 20% of the S&P 500 presenting Q4 results. Other things to watch include: ongoing trade talks between US and Europe, continued Brexit conversations and President Trump signing of the USMCA.
MTD Returns as of EOD Friday 1/24/20
US Barclays Agg +1.30%, 2.13% yield (-17 bps), -6 bps excess returns
US Barclays Corp +1.81%, 2.66% yield (-17 bps), -10 bps excess returns
S&P 500 +2.00%
OIL (WTI) $54.20, -11.45%
*Excess returns are returns achieved above and beyond the return of similar duration US Treasuries
We saw the continuation of higher yields this week as inflation concerns, positive vaccine news, and a faster recovery remain at the forefront of fixed income markets.
The flash move for Treasuries this week shows the jitters of fixed income investors, worried of the impact of stimulus and potential inflation.