Economic and political backdrop
Some encouraging data on a stabilisation in coronavirus (officially designated last Wednesday as COVID-19) infections helped spur gains in equity markets for much of last week, before a jump in reported cases on Thursday appeared to cause a pullback. Investors also seemed reassured by Federal Reserve Chair Jerome Powell’s congressional testimony on Tuesday and Wednesday, in which he indicated the policymakers were “closely monitoring” the spread of the virus.
While Powell also remarked it was “just too early to say” how the global economy would be affected, a consensus seemed to grow that the Fed would cut rates in the coming months. By Friday, according to CME Group data, investors were pricing in a high (82%) chance of a federal funds rate cut in 2020, with approximately an almost even (46%) chance of two cuts or more. However, the Fed’s announcement on Thursday that it was shrinking the size of its purchases of Treasury bills to support the repo market for short-term lending, seemed to derail the day’s rally.
The focus on the virus may have taken the spotlight off some other important and potentially negative developments on the US-China trade front. Last Monday, the Department of Justice (DOJ) indicted four members of the Chinese military for their alleged role in stealing data from credit reporting firm Equifax in 2017. On Thursday, the DOJ announced a racketeering investigation into Chinese telecom giant Huawei Technologies for allegedly engaging in stealing intellectual property from US firms.
Last week’s economic signals were mixed, particularly on the labour market. On Tuesday, the Labour Department reported that job openings had fallen sharply in December, reaching their lowest level in two years. However, weekly jobless claims, reported Thursday, remained near multi-decade lows. Friday brought news that retail sales had expanded a respectable 0.3% in January, but industrial production had declined for the second consecutive month. The shutdown of Boeing’s 737 MAX airliner production and the impact of coronavirus on supply chains are leading many economists to push back their expectations for a recovery in the US manufacturing sector.
The S&P 500 returned 1.6% (5.2% YTD). Stocks recorded a second week of solid gains as investors seemed to grow more confident about the containment of the coronavirus. The gains brought the large-cap indexes and the Nasdaq Composite to record highs, with the latter receiving an extra boost from the continued strong performance of technology stocks. Trading volumes trailed off considerably early in the week, however, hitting year-to-date lows last Monday. The small real estate sector outperformed within the S&P 500, helped by strong gains in the shares of cellular tower operators. Consumer staples shares lagged.
Fixed income markets
Pandemic fears may have played a role in pushing the US 30-year Treasury bond yield to a record-low 2.06% at an auction on Thursday, but the 10-year Treasury yield ended the week roughly unchanged at 1.59%.
The investment-grade corporate bond market saw balanced buying and selling activity, although the energy sector experienced volatility, largely due to concerns about the impact of the coronavirus on global oil demand. The price of a barrel of Brent ended last week at US$57.3.
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