Rates Fall as Concerns Over Economic Impact of the Coronavirus Deepen

 

Rates fall and stocks retreat on fears of economic fallout from coronavirus. Global stock markets retreated from record highs and government bond yields declined after Apple warned that it would miss Q1 sales forecasts, citing production and sales disruptions due to the coronavirus outbreak. Also weighing on sentiment was a larger-than-expected drop in a closely-watched barometer of German investor confidence, heightening worries that the manufacturing recession in Germany’s largest economy is deepening. Yields fell across the curve and the expectation as investors priced in the possibility of a September rate cut. Ten-year U.S. Treasury yields are 4 bp lower on the day at a two-week low of 1.55%.

 

China cuts rates to cushion impact of the coronavirus. The People’s Bank of China cut the rate it charges commercial banks for medium-term loans in an effort to cushion the world’s second-largest economy from the epidemic. The PBOC lowered its one-year lending rate by 10 bp to 3.15%–the lowest level since 2017. Since the outbreak worsened last month, China’s central bank and government have announced small rate cuts and various other targeted measures to calm financial markets. Analysts expect that the central bank will announce a reduction in the loan prime rate, which is the basis for pricing corporate and household loans, on Thursday.

 

 

New York factory index rises to the highest level since May. Manufacturing activity in the New York region accelerated to the highest level since May as orders and shipments jumped. The New York Fed said that its general business conditions index advanced to 12.9 from 4.8 in January, while a gauge of orders—an indicator of future factory activity, surged to the highest level since September 2017.

 

The euro sinks to three-year lows as German investor confidence plunges. Economic sentiment in Germany fell sharply in February according to a new survey released by the Centre for European Economic Research (ZEW). The ZEW Indicator of economic sentiment dropped 18 points to 8.7 points on worries that the coronavirus outbreak may disrupt global trade. “Expectations regarding the development of the export-intensive sectors of the economy have dropped particularly sharply,” said ZEW President Achim Wambach. Expectations for the next six months also fell, suggesting that confidence is fading that Europe’s largest economy can stem a manufacturing recession that has lasted more than a year. The euro was down 0.2% against the dollar, and the 10-year German bund declined 1 bp to -0.12%.

 

 

Day ahead. The National Association of Home Builders will report the housing market index for February, which is expected to remain unchanged at 75. Minneapolis Fed President Neel Kashkari will speak this afternoon. Shortly after, the Treasury will release data on the flows of financial instruments in and out of the US, including securities, bonds, and equities.