HIGHLIGHTS OF THE WEEK
- The Fed viewed the spread of COVID-19 as having a ‘material’ impact on the economic outlook and made an emergency intermeeting rate cut of 50 basis points to proactively support the economy. A few other central banks also cut rates.
- Economic data confirmed that prior to the recent increase in infections, the U.S. economy was on decent footing. Importantly, there are no signs of pressure (yet) on the employment front, with payrolls up a massive 273k in February. Nonetheless, some cracks are appearing under the armor, with concerns about the spread of the virus still a key theme.
- Monetary and fiscal measures have done little to assuage investor fears, with risk assets and bond yields ending lower again this week. The 10-year Treasury yield fell below 1% and plumbed new depths as the flight to safety continued.
Economics In The Time Of COVID-19
Concerns about the spread of COVID-19 continued to take center stage this week. In anticipation of deteriorating economic conditions, G7 finance ministers and central bankers held a conference call on Tuesday and issued a joint statement where they pledged to use “all appropriate policy tools” to combat the risks posed by the outbreak. The statement aimed to provide confidence, but fell short of outlining specific measures or coordinated action.
The Fed however, wasted no time in acting on its pledge, making a large emergency rate cut of 50 basis points soon after. This was the first intermeeting cut since 2008. The Fed cannot cure the virus with lower rates, but is doing its part in proactively supporting the economy by using the main tool at its disposal.
The Fed is not alone. Even prior to its cut, the central banks of Malaysia and Australia reached for the scissors, while the Bank of Canada followed in the Fed’s footsteps, cutting by 50 basis points at its mid-week meeting. More central banks are expected to follow suit. On the fiscal side, President Trump signed an $8.3 billion emergency funding package to aid the fight against COVID-19. In addition, the IMF and World Bank are also making available $50 and $12 billion respectively in emergency funding to countries harmed by the outbreak.
Economic data, while plentiful, generally took a back seat and had a bit of a stale feeling in light of rapidly-evolving circumstances related to the spread of the virus. The data confirms that prior to the most recent ramp up in infections, the U.S. economy was on decent footing. The ISM manufacturing index came in below expectations in February, but still managed to hold above the 50-point threshold. Meanwhile, the U.S. ISM non-manufacturing index improved, gathering speed for the third month in a row. More importantly, the payrolls report showed that the positive labor market picture remained intact last month. The economy gained a massive 273k jobs, the unemployment rate ticked down to 3.5% and wage growth remained well above inflation (Chart 1). The higher frequency ‘weekly jobless claims’ data also showed no signs of stress, yet.
Despite the resilience on display in the data, cracks are starting to appear under the armor. Concerns about the spread of the virus were strongly voiced in the comments section of the ISM surveys, and were clearly on display in the Beige Book. This is an added signal that activity is likely to see a deterioration in the months ahead. What’s more, the monetary and fiscal measures to date have done little to assuage investor fears, with risk assets and bond yields again ending lower this week. Notably, the 10-year Treasury yield fell below 1% for the first time in history and plumbed new depths as the flight to safety continued (Chart 2).
Where we go from here will undoubtedly depend on the spread of the virus. The recent developments build the case that the U.S. will not escape unscathed, with experience from other countries suggesting that the disruption to economic activity is likely to last at least into the second quarter.
Admir Kolaj, Economist | 416-944-6318
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