Market volatility has increased with the incoming economic data showing a significant disruption from the coronavirus outbreak, especially in China.
China represents a key component for many global supply chains and the impact of the virus disruption is now showing up in the global business surveys.
|MSCI Emerging Markets||-2.0||-2.6||6.2|
|10-year U.S. Treasury||1.47||1.92||2.68|
|30-year U.S. Treasury||1.91||2.39||3.01|
Source: Janney ISG, Bloomberg. Data as of 2/21/19.
However, despite the uncertainty caused by the outbreak, we continue to expect a sharp rebound in economic activity once the virus subsides, similar to historical examples. Meanwhile, we remain encouraged by the underlying economic fundamentals.
The U.S. economic data remains consistent with further economic growth, driven by a healthy consumer, low inflation, and low interest rates. While China is now experiencing a significant economic disruption, we expect growth to rebound sharply once the virus subsides, supported by the significant economic stimulus that they are applying in response to the outbreak.
U.S. Economic Developments and Analysis
The economic releases last week showed improvement in the leading indicator, elevated consumer confidence, and encouraging housing market indicators.
The Conference Board’s Leading Economic Index (LEI) rebounded in January by the most since October 2017, coming in significantly better than the consensus estimate. Eight of its 10 components made positive contributions, led by jobless claims, building permits, and stock prices. This suggests economic growth should improve as we move through 2020.
While initial jobless claims picked up 4,000 last week to 210,000, the four-week average fell to 209,000, the lowest level since last April, and near the lowest it’s been since 1969. A tight job market is boosting consumer confidence and supports a positive outlook for consumer spending growth this year.
Indeed, the Bloomberg economic expectations survey for February showed a net 15% of consumers, the highest share since October 2018, were optimistic about the economy’s direction. Separately, the Consumer Comfort Index edged down last week but is hovering near its highest level since October 2000.
Housing is a big beneficiary of a healthy consumer, pent-up millennial demand, and low interest rates. While January housing starts saw the first decline in four months, they were better than consensus and starts in the prior two months were revised up. The three-month average of starts, which smooths volatility, hit its highest level since January 2007, as building activity continued to trend upward.
In addition, building permits, a harbinger of starts to come, jumped 9.2%, the most since June 2017, to a 1.551 million unit annual rate, the highest level since March 2007, and well above consensus. Single-family permits rose 6.4%, the most since September 2012, while multifamily climbed an even stronger 14.6%. All four regions posted gains, led by a 34.6% surge in the Northeast.
Not surprisingly, builder confidence remains strong. The NAHB Housing Market Index (a homebuilder survey) remains near its highest level since mid-1999, supporting a positive outlook for housing starts. Current home sales and prospective homebuyer traffic were near their best levels since July 1999, while expected home sales were close to their best level since June 2005. The report noted that housing demand has been fueled by the strong labor market, a pickup in wage growth, and low mortgage rates.
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