Market movers today
Final February PMI manufacturing figures in a number of European countries and the US ISM manufacturing index is also on the agenda today. The numbers will be scrutinised for any coronavirus impact.
The EU and UK are set to start their trade negotiations today. Judging from the already-published negotiating objectives, a rocky path lies ahead. We believe tensions will increase over coming months ahead of the first deadlines in June.
Selected market news
On Friday we got the long-awaited response from the Fed after several FOMC members earlier in the week saw ‘no urgency’ to cut rates. Powell published a short press release, which said: ‘The coronavirus poses evolving risks to economic activity. We will use our tools and act as appropriate to support the economy’. The question is now whether it will be a 25bp or a 50bp cut on 18 March and whether the Fed could act before the scheduled meeting maybe even in a global coordinated policy effort. Market pricing indicates a 50/50 probability between a 25 and a 50bp cut. We expect a March and April cut of 25bp.
The market now has its eyes on European policy makers. The ECB still acts very much like the Fed did before the release from Powell. Lagarde said last week that the outbreak would have no lasting effect on inflation and would not require a monetary policy response. Yesterday, Bundesbank’s Weidmann said that the crisis is primarily a supply shock, and that he could even imagine higher prices due to the supply shock. Even though Weidmann is a notorious hawk and do not necessarily represent the consensus of the ECB, his rhetoric will not help market sentiment. In all fairness, remember that ECB economist Philip Lane last week said that easing measures must be pre-emptive. On Friday the market priced a 50/50 probability of an ECB 10bp rate cut next week. We believe that the probability of an ECB rate cut will go up today after the Powell press release and the negative news over the weekend. Bank of Japan injected emergency funds to banks this morning.
First, we had the record drop in the Chinese manufacturing and service PMIs to 35.7 and 29.6, respectively. Secondly, we saw a jump in the number of new infected in Italy by 50% to 1,964 persons. The number of infected also continues to rise in South Korea. Japan issued ‘do-not-travel’ warning for parts of Italy and South Korea and the US had it first death. Importantly, China ‘only’ had 343 new infected.
US equities reacted positively to the Powell news and the positive sentiment has been carried over to Asia. Even oil has recovered some of the losses from Friday and the Brent future is back above USD50 a barrel. The US curve 2s10s has steepened indicating less risk of a US recession. Whether the positive sentiment can be sustained will depend on both virus news and whether especially the ECB somehow confirms market expectations. The Italian government announced over the weekend a EUR3.6bn (equivalent to 0.2% of GDP) support package to sectors affected by the coronavirus. The economic minister said he expected that the EU will endorse the package. The economic minister also said that the EU Finance ministers would discuss an action plan at the Eurogroup meeting on 16 March. BTPs underperformed on Friday and are expected to remain under pressure as long as the ECB does nothing and the number of infected continues to rise in Italy.
