Economic forecasts vary BC (Before Coronavirus) and after | China trade hearing today
In today's updates:
* CDC warns it expects virus to spread in U.S. and to 'get ready'
Markets: European stocks and oil prices fell sharply as the coronavirus epidemic continued to spread, while U.S. stock futures pointed to further losses on Wall Street. European stocks have fallen more than 8% over the past four sessions. Asian markets registered modest drops — the MSCI Asia Pacific Index slipped 1.3% while Japan’s Topix index closed 0.8% lower. Nearly 6.3% and an estimated $1.7 trillion in value has been wiped off the S&P 500 over the last two days.
• South Korea: 1,261 cases, 12 deaths
Starbuck’s to offer Beyond Meat breakfast sandwich in Canada. A plant-based breakfast sandwich from Beyond Meat will be offered at 1,200 Canadian Starbucks locations on March 3, the company announced today. This marks the first time the company will sell a plant-based patty in any of its markets around the world. The offering will be topped with cheddar cheese and egg, the company said. The Beyond Meat sandwich will be topped with cheddar cheese and egg on an artisanal bun,. It comes as the company aggressively works to build out its food business, which currently makes up at least 20% of revenue at company-operated stores, as well as a surge in popularity for alternative proteins.
— Coronavirus update:
- Health officials warn that spread of coronavirus in U.S. appears inevitable. "Americans should brace for the likelihood that the coronavirus will spread to communities in the United States, the Centers for Disease Control and Prevention warned Tuesday. "'It's not so much of a question of if this will happen in this country any more but a question of when this will happen,' said Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases. She said that public health officials have no idea whether spread of the disease to the United States would be mild or severe, but that Americans should be ready for a significant disruption to their daily lives. "'We are asking the American public to prepare for the expectation that this might be bad,' Dr. Messonnier said." She said that cities and towns should plan for “social distancing measures,” like dividing school classes into smaller groups of students or closing schools altogether. Meetings and conferences may have to be canceled, she said. Businesses should arrange for employees to work from home. In the U.S., there have been 14 confirmed locally diagnosed cases, with an additional three cases among the Americans who returned from China aboard U.S.-chartered flights and 40 from the Diamond Princess cruise ship in Asia.
- France reported the first death of a French citizen from the epidemic as cases spread rapidly across Europe, with Spain confirming eight new cases in the past 24 hours and new infections reported in France, Croatia, Austria and Switzerland. Although China announced a decline in new confirmed cases today, numbers soared in South Korea to over 1,200 ( 284 additional cases), with more expected in the coming days as the state attempts to test 200,000 people. China reported 406 additional cases reported this morning, along with 52 deaths. All but five of the new cases and all of the new deaths were in Hubei province.
- Kuwait put its ports on lockdown today, meaning their ports will not receive foreign vessels arriving from or departing for China, Hong Kong, South Korea, Singapore, Japan, Iraq, Thailand and Italy. Kuwaiti-flagged vessels have also been ordered to coordinate with local harbormasters and the ministry of health. China is the largest importer of Kuwaiti crude oil, followed by South Korea and Japan.
- Port of Los Angeles is projecting a 25% decline in container volumes this month, the Wall Street Journal reports (link), in a stark sign of how the outbreak in China has upended global trade flows. Port Executive Director Gene Seroka says container lines have canceled 40 sailings into the largest U.S. gateway for seaborne imports between Feb. 11 and April 1, and that the fall in cargo volume is accelerating. For Los Angeles, the article details, that would amount to about 87,000 fewer loaded container imports in this month, “and the drop will likely cascade across other ports through April as factories and logistics operations in China struggle to resume shipping flows.” Cargo operators are already bracing for what Seroka says could be a “big pendulum swing” as operations recover and pent-up demand reaches the ports.
- EU's economics commissioner Paolo Gentiloni warned the coronavirus outbreak represents a growing "downside" risk to Europe's economy. Speaking to journalists this morning, the Italian commissioner said it remained "too soon to qualify the impact" of the outbreak for the global and European economy.
Some economic forecasters fear that the knock-on effects of China’s slowdown and increasing travel restrictions could hit the global economy hard — just as consumers were regaining confidence.
Bottom line: While analysts and policymakers are finding it hard to quantify the economic impact of the virus, many are pricing in a slowdown in world growth, though it's still unclear how far that will extend. Some analysts are already starting to use “BC” to talk about the U.S. and world economy “Before Coronavirus (BC).”
- The head of the International Monetary Fund cautioned countries against overreacting to the coronavirus threat and urged governments to take “well-targeted and proportionate measures” to avoid hurting their economies. IMF Managing Director Kristalina Georgieva said the fund, which is the global lender of last resort, was downgrading global-growth projections because of the virus and trying to establish whether the economic impact would come primarily in the first quarter.
- Federal Reserve officials are keeping calm. Disruptions from the outbreak in China “could spill over to the rest of the global economy,” Vice Chairman Richard Clarida said in a speech Tuesday. “But it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.” Dallas Fed President Robert Kaplan agreed: “We are a number of weeks away from being able to make the judgment” about whether a rate change is needed.
Comments: U.S. Fed officials are making clear they are not about to rush to make a decision on whether there needs to be a cut in the target range for the Fed funds rate in the wake of the coronavirus situation. While the COVID-19 situation will have a noticeable impact on China, which could spill into the global economy, Clarida insisted he is not ready to act, noting the U.S. economy is currently in “a good place.” The Fed will make its decisions on a meeting-by-meeting basis, he observed, reiterating an oft-used Fed statement that monetary policy is not on a preset course. “Of course, if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly,” he said. Traders are betting that the Fed will cut rates sooner rather than later. CME FedWatch tool says 32% chance in March of a 25-basis-point trim, and only a 35% chance for a steady rate decision in April; 49% expect a quarter-point cut in April with 15% expecting a 50-basis-point reduction, and near certainty that benchmark rates will be lower by the summer.
— U.S./China trade policy update:
- House hearing today on China trade. The House Ways and Means Committee today will hear from farmers, the president of MIT and a former USTR official on the U.S./China trading relationship. Ways and Means Chairman Richard Neal (D-Mass.) said the hearing will focus on issues not included in the Phase 1 deal with China. “The Trump Administration’s trade negotiations with China don’t include ANY discussions on worker protections, environmental policy, or human rights. These are priority issues to me,” Neal wrote on Twitter.
- China has taken the first steps toward implementing a partial trade deal (Phase 1) between the world’s two largest economies. U.S. officials on Tuesday said Chinese leaders lifted import restrictions on U.S. poultry and poultry products and pet food, along with other actions (link to release). Those provisions were part of a 90-page written agreement signed in January.
In food, China has promised to buy $32 billion in additional agriculture products over 2020 and 2021, using 2017 as the comparison point. This will be spread across several product categories including oilseeds, animal protein, seafood, cereals, cotton and other commodities, including alfalfa, fruits and vegetables, dairy, dietary supplements, pet food, processed foods, tree nuts, and wine.
- World trade volumes last year fell for the first time in a decade, highlighting slowing growth in Europe, Asia and parts of the Americas, as well as the effects of President Trump's trade fights. There had been expectations for a slight rebound in 2020 though the outlook is murky now due to the coronavirus outbreak.
— USDA sees continued tame grocery store food price inflation ahead. Food at home (grocery store) prices are seen increasing from 0.5% to 1.5% in 2020, in line with the 2019 increase of 0.9% and a forecast that would continue the trend of grocery store prices rising less than 1% that has been in place since 2016; 2015 was the last time that grocery prices rose more than 1% with an increase of 1.2%. Still, the result remains well below the 20-year average of 2%.
USDA also recalculated the 20-year averages for food items to include the 2019 data, with nine categories seeing a decrease in their averages (beef and veal, fish and seafood, eggs, dairy products, fats and oils, fruits and vegetables, fresh fruits and vegetables, fresh fruits, and other foods) while four saw increases (food away from home, pork, fresh vegetables, and sugars and sweets).
Food away from home (restaurant) prices have continued to see strong increases as they contain several other cost factors not included in grocery store prices such labor and rental prices with food making up only a small percentage of total restaurant costs.
— Other items of note:
- Tackling EU's ag and food policy, USDA Sec. Sonny Perdue inked an op-ed article for why Brussels should change its mind on issues like the U.S.’ use of genetically modified crops and animal growth hormones. Link to Perdue's op-ed.
- Bayer CEO stepping aside. Bayer Chairman Werner Wenning announced he will exit the company, citing progress in handling the legal issues facing the company over its Roundup herbicide. “We have made and continue to make progress in handling the legal issues in the U.S.,” Winning said. “That is why now is a good time to hand over to my successor.” Wenning will be succeeded in the role by Norbert Winkeljohann after the company’s annual shareholder meeting April 28.
- USDA names new leader of Food Safety & Inspection Service (FSIS). USDA announced that Paul Kiecker will serve as the administrator of the Food Safety and Inspection Service (FSIS), taking over from Carmen Rottenberg who is leaving the post after leading the agency since August of 2017 and having served more than 20 years in the federal government. Kiecker has served in FSIS for more than 30 years and was named Deputy Administrator for FSIS in May of 2018 and served as the Acting Administrator until January of 2019. He joined FSIS as a food inspector in 1988.
- Border shooting case. The Supreme Court ruled that U.S. Border Patrol agents can't be held liable for damages for shooting people on the Mexico side of the U.S. border.
— Markets. The Dow on Tuesday declined 879.44 points, 3.15%, at 27,081.36 — the blue-chip benchmark’s worst two-day percentage decline in two years. The Nasdaq declined 255.67 points, 2.77%, at 8.965.61. The S&P 500 was down 97.68 points, 3.03%, at 3,128.21.
Perspective on China and U.S. equities comes from a Robin Brooks tweet: “The three most sustained sell-offs in S&P 500 in the last 5 years are all associated with China: (i) surprise RMB deval in Aug 2015; (ii) intensification of the US-China trade dispute in Oct 2018; (iii) COVID-19 now. A testament to how important China is to the rest of the world.” Brooks is Managing Director and Chief Economist at the Institute of International Finance.
Treasury yields hit record low. The yield on the benchmark 10-year U.S. Treasury note fell to an all-time low. After hovering between 1.5% and 2% for months, the 10-year yield was pushed sharply lower by reports the coronavirus was spreading outside China. Treasury yields are a key economic gauge, and also help determine borrowing costs for consumers, businesses, and state and local governments. Impact: Plummeting bond yields have savaged bank stocks, with investors expecting lenders to struggle to eke out profits if rates stay lower.
U.S. crude-oil prices tumbled below $50 a barrel as the coronavirus outbreak is generating concerns regarding energy demand ahead.
Mexico’s economy shrank by 0.1% last year, the first annual contraction in a decade. Revised figures also showed that GDP fell by 0.1% in the last quarter of 2019 versus the third quarter. GDP last shrank (by 5.3%) in 2009 during the global financial crisis. Nonetheless, President Andrés Manuel López Obrador, who has promised annual growth of 4%, says he is confident that the economy will rebound.