Virus could hit GDP, change Fed policy

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As investors begin to look more deeply at COVID-19, attention has now focused on what this could mean for economic growth and monetary policy.

“We know more each day about the impact of the coronavirus on the China economy, which is increasingly negative for the 2020 first-quarter GDP growth,” said Steven Skancke, chief economic advisor at wealth management firm Keel Point. “While the human tragedy affects many, the economic impact has an even broader reach into communities, homes and peoples’ well-being. Curtailment of jobs, incomes and delivery of goods and services is becoming increasingly personal.”

Fueling the spike in market uncertainty, he said, is the recent news of virus outbreaks in South Korea, Iran and the heart of Europe’s manufacturing centers.

“The economic impact in China, Asia, Europe and the U.S. is difficult to assess. Some manufacturing is shifted forward to the next two to three quarters GDP growth as we have seen in past pandemics," Skancke said. "Similarly a significant share of services will also be delayed as the demand continues to exist. … In developed countries employees continue to be paid when businesses and government offices are shuttered short-term, so there is a drag on corporate earnings and funds available for future fiscal services."

He said the big challenge for investors is to sort out the effect of all the impacts, not an easy task when the situation continues to evolve.

“It’s impossible to contain the fear contagion and economic disruption is likely to get worse before it gets better,” said Hank Smith, co-CIO at the Haverford Trust Co. “Market volatility is not an unexpected reaction to these unusual headlines and may lead to a correction in equity markets — this is a very typical pullback in an ongoing bull market.”

Smith said he expects the economic disruption caused by the coronavirus will be felt into the second quarter, but that an equity rebound was in the cards for the future.

“We anticipate that by this time next year coronavirus will no longer be the global health emergency it is today,” Smith said. “The equity markets, which are now trading flat for the year, will rebound well before the economic data does.”

Skancke said the current market uncertainty and strain on the global economy was also changing the views on what the Federal Reserve might do at its March 17-18 monetary policy meeting.

“If the coronavirus issues aren’t settled down by mid-March, the [Federal Open Market Committee] would be compelled to act by cutting the fed funds as a signal of it standing ready to do what it takes to inoculate the U.S. and global economies from a further contagion,” Skancke said.

COVID-19 along with heightened geopolitical tensions could drive the world to the brink of a global recession this year, said Nigel Green, founder and CEO of deVere Group.

“Investors have largely been caught off-guard by the serious and far-reaching economic consequence of the coronavirus,” Green said. “This, despite major multinational organizations already lowering their profit guidances, and many more likely to do so in coming weeks. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too.”

He added, trade tensions were also a factor fostering investor uncertainty.

“It doesn’t end there [with COVID-19]. Investors also need to consider the impact of the U.S. presidential election, the tensions between Iran and the U.S. and how oil prices will be hit if these intensify, and perhaps most significantly there’s the simmering trade war between the U.S. and China — the world’s two largest economies,” Green said.

New home sales surged in Jan.
Sales of new single‐family houses rose to seasonally adjusted annual rate of 764,000 in January, according to the U.S. Census Bureau and the Department of Housing and Urban Development.

Economists surveyed by IFR Markets had expected a rate of 715.000.

The rate was 7.9% above the revised December reading of 708,000 and 18.6% above the January 2019 estimate of 644,000.

“The surge in new home sales to the highest level since July 2007 was driven by continued solid job gains, low mortgage rates and elevated levels of consumer confidence,” said Scott Anderson, chief economist at Bank of the West. “There were gains in three of the four regions with the exception of the South.”

The median sales price of new houses sold in January was $348,200 and the average sales price was $402,300.

The seasonally adjusted estimate of new houses for sale at the end of January was 324,000, a supply of 5.1 months at the current sales rate.

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