Stocks saw the worst weekly drop since 2008 last week, driven by the Chinese economic disruption and global uncertainty caused by the coronavirus outbreak.
This is resulting in a significant reduction to first-quarter economic growth, centered on China and closely associated countries. While the coronavirus outbreak remains critical for the near-term outlook with significant uncertainty associated with it, we would stress the following points.
|MSCI Emerging Markets||-7.2||-9.7||-1.5|
|10-year U.S. Treasury||1.15||1.92||2.68|
|30-year U.S. Treasury||1.68||2.39||3.01|
Source: Janney ISG, Bloomberg. Data as of 2/28/19.
The underlying U.S. economy remains sturdy, supported by a healthy consumer (discussed below). China’s economic readings are showing early signs of improvement and the outbreak appears to be tapering there (after severe measures to accomplish this).
China is also providing significant economic stimulus to its economy and should continue to do so. This should ultimately lead to a strong rebound in its economic activity.
This economic shock is occurring during a period of recently lowered global interest rates and reduced trade tensions, which were leading to improvements in the global economic backdrop. Global central banks are also signaling additional interest rate cuts, while low inflation is giving them significant leeway for easy monetary policy. Pent-up demand is building with activity being postponed, especially manufacturing related. Consequently, we expect economic activity to rebound quickly once the coronavirus uncertainty lifts.
U.S. Economic Developments and Analysis
The economic releases last week continued to show a healthy economy, which underpins our position that the U.S. economy can withstand the coronavirus outbreak.
While last week’s readings on consumer confidence were gathered before the steep market sell-off, they remained consistent with a healthy, optimistic consumer. The Conference Board’s Consumer Confidence Index reached a six-month high in February. While confidence peaked in Q4 2018, it remains elevated, hovering near its highest level since 2000. Consistent with the Conference Board’s reading, The University of Michigan Consumer Sentiment Index saw its sixth consecutive gain in February. Sentiment was at its highest level since March 2018, and close to the highest in 16 years. Both current conditions and expectations improved.
While both of these consumer sentiment readings were taken before the steep market sell-off and negative coronavirus developments outside of China, these levels of confidence are historically consistent with above-trend economic growth. However, if virus fears and market weakness persist, they could weigh on future consumer sentiment readings.
The housing market continues to benefit from a healthy, confident consumer. New home sales jumped 7.9% in January, the most since last June, to a 764,000-unit annual rate, the highest level since July 2007. On a y/y basis, new home sales were up 18.6%, near its fastest pace in two years. While new homes account for only about 10% of total home sales, they are an important harbinger of housing market activity, closely tracking building permits and housing starts, which have also turned up (along with builder confidence). In addition, the most recent leg-down in long-term interest rates last week (record lows for the 10-year and 30-year Treasury yields) should lead to further strong housing market activity.
The consumer spending and personal income report also remained consistent with a healthy consumer and low inflation. Personal income shot up 0.6% in January, the most in more than a year, and above the consensus of 0.4%. Disposable personal income (DPI) also rose 0.6%. Personal consumption expenditures (PCE) rose only 0.2% at the start of 2020. The modest increase was led by spending on new vehicles and food services and accommodation. Meanwhile, consumers saved more, with the personal saving rate rising to 7.9%, its highest level since last April, consistent with continued moderate economic growth.
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