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Financial markets were rocked last week by worries about the spread of the coronavirus and the possible negative impacts of the outbreak on global growth. The Dow Jones Industrial Average and the Standard & Poor’s 500 indices have fallen at least 13% since all-time highs recorded in recent weeks, and equities are now in correction territory.
At the same time, uncertainty in the outlook has also created a rush to safety in the markets, with markets pushing bond prices higher and yields to record lows. The Federal Open Market Committee will be under increased pressure to lower interest rates further, and the probability of such as action at the March 19–20 meeting (or sooner) have risen substantially. In a statement issued on Friday afternoon, Chair Jerome Powell said that the Federal Reserve will “use our tools and act as appropriate to support the economy.” This suggests action sooner than later on rates.
Interestingly, much of the recent economic data support the view that manufacturing was stabilizing in January before the worries about the coronavirus outbreak.
For instance, new orders for core capital goods—a proxy of capital spending in the U.S. economy—increased 1.1% in January, with 0.9% growth seen over the past 12 months. Still, the data largely reflect the challenges seen over the past year, with new orders durable goods orders excluding transportation equipment essentially flat since January 2019.
The regional Federal Reserve Bank surveys were mostly higher in their February surveys, including the Dallas Fed’s release last week. Manufacturing activity in Texas eked out its first positive reading since September, and the Kansas City Fed reported rebounding new orders production and shipments, even as hiring remained weaker than desired.
Similarly, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters jumped to the highest point since March 2018, or nearly two years. While the coronavirus outbreak was mentioned by some of the respondents, the survey mostly took place before last week’s steep decline in financial markets. The Conference Board’s report also noted stronger consumer confidence, albeit with some lessened assessments of the job market.
Personal income jumped 0.6% in January, picking up strongly following the 0.1% gain seen in December. Over the past 12 months, personal income rose by a solid 4.0%. The savings rate rose to 7.9%, a nine-month high, but has trended lower over the past year. Nonetheless, personal spending slowed to 0.1% growth in January.
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