Rates are Range-Bound as China Ramps Up Efforts to Stimulate Economy

 

China steps up efforts to bolster economy. . As coronavirus-related deaths passed 2,000 and confirmed cases neared 75,000, Chinese officials announced new measures to support its economy which is reeling from a virus-induced slowdown. Beijing is reportedly considering cash infusions or mergers for the airline industry which is suffering from a plunge in air travel. These latest moves follow a rate cut by the Peoples Bank of China earlier this week, intended to spur medium-term lending for banks. Corporates like Apple, Adidas, and Puma have seen sharp declines in orders and production. Despite the grim outlook, economists continue to downplay the long-term effects of the virus and forecast 4% global GDP growth for Q1. These reports have positively impacted the equity market as investors take on a risk-on outlook to push the MSCI Asia Pacific Index up 0.3%, and the European Stoxx 600 Index is up 0.6%, heading toward a record close. The US 10-year Treasury yield is little-changed on the day at 1.56%.

 

 

IMF sees rebound in global growth. The International Monetary Fund said that global growth appears to be bottoming out despite risks of a further spread of the coronavirus. “After a marked slowdown last year, global economic activity is expected to moderately strengthen in 2020,” the IMF said in a surveillance note released today. “Monetary and fiscal policy actions were instrumental in supporting activity, thus avoiding a deeper downturn.”

 

U.S. homebuilding remains robust. U.S. housing permits soared to the highest level in 13 years in January, even as new construction dipped slightly. Building permits for privately-owned housing units climbed to a seasonally-adjusted annual rate of 1.55 million. The higher pace of permitting suggests that builders are aiming to ramp up construction activity in the months to come.

 

Today’s FOMC minutes may shed light on potential of further rate cuts. This afternoon, the Federal Open Market Committee will release the minutes from its January policy meeting during which policymakers unanimously voted to keep their target range for the federal funds rate unchanged at 1.50% – 1.75%. The minutes are not expected to reveal Fed officials’ views of the economic impact of the coronavirus as the meeting took place three weeks ago before the outbreak intensified. In his recent Congressional testimony, Fed Chair Jerome Powell said the U.S. economy remains in a “very good place.” Powell also indicated that the Fed would not stimulate the economy through explicit quantitative easing but would continue to purchase Treasurys to increase the supply of bank reserves. The NY Fed recently announced that it will shrink its repo operations more than expected, and the minutes could shed more color on the central bank’s plans to shrink its balance sheet. Economists will also be looking for indications of how the FOMC plans to address inflation which remains stubbornly-below its long-term target. Among the measures likely considered by Fed officials are switching to an average inflation target or adopting guidance that signals the central bank would be open allowing inflation to overshoot its target.

 

 

Day ahead. Though housing starts data for January was expected to decline by over 200,000 from the month before, the data proved new home construction remains robust due to low mortgage rates and a thriving labor market. With new starts reported at 1567k, new home applications are at the highest level since 2007. The Bureau of Labor Statistics also released PPI information, with data reported higher-than-expected at 0.5%. The FOMC will release the minutes from their previous meeting three weeks ago. Atlanta Fed President Raphael Bostic, Cleveland Fed President Loretta Mester, Minneapolis Fed President Neel Kashkari, Dallas Fed President Robert Kaplan, and and Richmond Fed President Thomas Barkin will all speak today.