Markets increasingly price in a pandemic/global recession

Market movers today

Also today investors will keep an eye on the spreading of the coronavirus and the economic implications thereof. Yesterday, we hosted a conference call where we had invited Allan Randrup Thomsen (professor in virology at the University of Copenhagen) to discuss the coronavirus.

While we think the Fed should probably soon intervene (see Fed Monitor), today is probably not the day. Non-voting Bullard may be the first one to U-turn given his dovishness but given that he is not voting, he is less important. Fed's George is also speaking today but she is one of the most hawkish FOMC members and also not voting.

In the US, we get PCE data for January. We do not think PCE core inflation will show anything else than that the Fed continues to undershoot its 2% inflation targeting. Far more interesting is whether the weakness in private consumption we saw by the end of 2019 has continued into 2020 even before the coronavirus was a real issue.

In Sweden we have GDP data for Q4. In Norway February unemployment and in Denmark Danish Q4 GDP.

Selected market news

The market rut continued in the US section with major indices down around 4.5% during the session. The VIX index surged more than 12 index points yesterday. Stocks are also under immense pressure in Asia with Nikkei down more than 4% this morning. US Treasury yields continue to sky-dive and 2Y bonds are approaching 1% as the market is now pricing in more than three rate cuts of 25bp over the next 12 months. There is little doubt that market perception/pricing are putting a fast growing probability on a pandemic outbreak and a subsequent global recession That said, it is encouraging that the number of new cases in China continues to stay relatively low at 327 (423 yesterday). However, the number of cases in South Korea continues to rise and the number of countries confirming being affected also continues to rise including Nigeria with weak health systems.

The markets are now awaiting the economic response from policy makers. China including Hong Kong and Singapore are some of the countries that have eased fiscal policy and a monetary response from the Fed is strongly expected as soon as the next Fed meeting on 18 March. Hence, we are now waiting for the more reluctant Europeans both in respect of monetary and fiscal policy. Germany suggested this week to scrap the debt brake but that was to help municipalities and not coronavirus-related. Yesterday, we had a number of ECB speakers on the wires, most notably ECB president Lagarde's interview with the FT. In the interview she said that it was ‘monitoring the outbreak "very carefully" but it was not yet at the stage where it would have a lasting impact on inflation and, therefore, require a monetary policy response'. However, markets are telling the ECB a different story with e.g. 5y5y inflation expectations dropping to 1.15%, the lowest level since October last year. Markets are currently pricing in 10bp rate cut by September this year, which seems fair in the current situation. Whether the ECB will actually cut rates is another discussion.

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