News that COVID-19 was spreading globally and weak US PMI data drove US equities down more than 1%, drove the US 30-year Treasury rate to a record low, and knocked the USD off its perch as it showed broadly based weakness. This saw the NZD recover almost half a cent off its year-to-date low.
The COVID-19 virus remained a key market focus and showed worrying signs of spreading globally, with a surge in cases with no clear link to China. A jump in cases was reported in the Middle East, South Korea and Italy, while Japan is seeing outbreaks in several unconnected areas. News over the weekend will not have helped sentiment as we begin the new week, with the number of cases surging to over 600 in South Korea and over 130 in Italy. Extraordinary containment measures are being implemented, which will increase the hit to the global economy. The WHO isn’t ready to call the virus outbreak as a pandemic yet but the challenge of containing the virus is growing more daunting. The WHO Director General said that "The window of opportunity is still there, but the window of opportunity is narrowing.
Despite the global spread of the virus, the number of new cases in China continues to increase at a slower rate, reflecting the extreme measures of containment imposed. In one of the first signs of the economic impact this has caused, China car sales fell by 92% in the first half of February. This coming weekend, PMI data for China will be released and they are likely to show a significant plunge. After a Politburo meeting on Friday, China’s top leaders signalled easier fiscal and monetary policy to help revive the economy, while urging local governments to shift towards restoring business operations and actively helping migrants return to work.
While news of the increasing global spread of the virus triggered a fall in risk sentiment, US data also made their mark on financial markets. The Markit PMI US composite, an indicator usually ignored by the market given the preferred ISM indicators, fell by nearly 4 points to 49.6. This was the lowest level in over six years and driven by the services sector, questioning the insulation of the US economy from the impact of COVID-19. Surprisingly, the euro area PMIs rose in February, defying expectations of falling. Furthermore, the UK manufacturing PMI was stronger than expected, while the services PMI was in line.
The data was a wake-up call for the US equity market, hitherto complacent about the impact of the virus. US equities fell, with the S&P500 down by over 1% and the Nasdaq index down by a greater 1.8%. The US 30-year Treasury yield fell to a record low of just over 1.88%, before closing the week at 1.915%. The 10-year rate closed down 4bps to 1.47% after falling to as low as 1.435%, breaking previous support at 1.50%. The Fed Funds curve now prices in nearly two full rate cuts this year and the risk of another cut next year.
Central bank officials from the Fed and ECB continued to downplay the impact of the coronavirus. The Fed’s Clarida, Bullard and Bostic were singing from the same songsheet, indicating that the virus represented a temporary shock that didn’t require a monetary policy response. ECB chief economist Lane downplayed the view that further rate cuts would be required. While recognising the uncertainty and downside risk caused by the virus, he added that the base case is a V-shaped economic impact.
The weak US PMI data and the contrast with the stronger PMI data elsewhere saw the USD finally knocked off its perch, with the various USD indices down in the order of 0.4-0.6%. Within a few hours, EUR regained all of it prior losses for the week, closing around 1.0850. After the NZ close, the NZD made a new year-to-date low of 0.6303, but the turnaround in the USD saw a sharp rise to close the week around 0.6350. The AUD followed a similar pattern, rising from an 11-year low of 0.6586 to close the week near 0.6625. While NZD/AUD was flat at 0.9580, the NZD was slightly lower on the other crosses. The rise in NZD/USD and AUD/USD will likely represent dead cat bounces if the global economic impact of the virus spreads and risk sentiment falls further.
NZ rates were 4-5bps lower across the government bond and swaps curves, reflecting the push lower from global forces. At a speaking event on Friday, Governor Orr reiterated the Bank’s view from the recent Monetary Policy Statement. He said that there was no reason to change assumptions yet about the impact of COVID-19. On monetary policy he reiterated that the Bank was “quite happy where we are for the time being”, adding that the Bank was in “no rush to go lower” on rates.
The market has taken a cautious view, with a full 25bps rate curve now priced into the OIS curve before the end of the year. This saw the 2-year swap rate close at a fresh low for the year of 1.045%.
In the day ahead, NZ retail sales data for Q4 are released, which don’t hold that much interest given their untimeliness. Germany’s IFO survey will give another read on the early impact of the coronavirus. News on the spreading of COVID-19 will dominant the attention of the market as the new week begins.