HIGHLIGHTS OF THE WEEK
- COVID-19 continues to pose challenges for China’s economy as well as global manufacturing supply chains. Factories have been slow to open as quarantines keep workers at home.
- While the situation on the ground appears to be improving, global supply chains are starting to feel the impact. Some multinationals have already warned sales would be hit in the first quarter.
- The Fed remains alert to the risks to U.S. growth posed by the virus and will act if necessary. However, it expects the shock to be temporary. On the plus side, past rate cuts are feeding through to gains in the housing sector.
All Eyes On COVID-19
Another busy week comes to a close, with markets hanging on to every development, rumored or not, from the COVID-19 outbreak in China. The S&P500 hit a record high on Wednesday, but promptly retreated on Thursday upon news that many multinationals (i.e. Adidas, Puma, P&G) warned that COVID-19 might impact sales in the first quarter. At the time of writing, the S&P500 stood 1% lower than where it was at the start of the week.
COVID-19 continues to depress China’s economy. Recent reports indicate that factories have been slow to open as quarantines continue to keep workers stuck in their homes. The Chinese authorities have issued guidelines to local officials to help get people back to work, but this would have to be done carefully so as not to undermine containment efforts.
It appears that the virus is slowly being brought under control. As of now, 76,775 people have been infected with COVID-19, and 2,247 have died. The number new cases have come down significantly over the past few days, and the number of recoveries has steadily risen since the start of the month (Chart 1).
Despite the good signs, global manufacturing supply chains are beginning to feel the effects of the virus. Foxconn, Samsung, and various car manufacturers have all faced supply chain disruptions. Companies have also looked to continue production by bypassing China. Samsung, for example, has moved parts of its manufacturing process for its newest Galaxy phone from China to Vietnam. The longer China takes to contain the virus, the more likely it is that manufacturers will explore other locations.
The Federal Reserve is closely watching how the impact of COVID-19 is felt by global economies. In the first Federal Open Market Committee meeting of the year, participants saw tentative signs of stabilization in global growth, but they judged the outbreak to be a key uncertainty in their outlook. If the virus has a greater and more meaningful impact on growth, the Fed may provide more monetary support this year.
If the virus is contained, and Chinese factories are back to normal production soon, we expect the Fed to stand pat in 2020, as it watches the effects of past interest rate cuts move through the economy. Indeed, we have already seen this in the housing market, which finished 2019 on solid footing, and is showing signs of continued momentum in 2020. Although housing starts declined in January by 3.6% month-over-month, it was coming off of a strong December and it was significantly stronger than market expectations of -11.2% (Chart 2). Part of this was likely due to warmer weather, but it is also a testament to the underlying strength in the property sector.
Like housing starts, existing home sales also contracted in January, also coming off a solid December. On the other hand, permits rose strongly in January. With labor markets healthy, mortgage rates low, and a large number of millennials still to move into homeownership, we could continue to see strength in the housing market this year.
Sri Thanabalasingam, Senior Economist | 416-413-3117
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