As the COVID-19 virus is spreading in Europe and has landed in the US, the financial markets have reacted quite forcefully and as such called for G7 central bank and officials to act as a circuit breaker. COVID-19 is set to continue being the overall theme in markets as we wait for a stabilisation. The Federal Reserve moved ahead of the curve by cutting the target range by 50bp before the ordinary March meeting (range now 1.00-1.25%). The situation remains fluid and we believe the situation will deteriorate before it becomes better. We expect the Federal Reserve to cut the target range by a further 50bp during the spring but the timing and size are difficult to forecast. Starting tomorrow, the Fed will be in a blackout period, when it is not allowed to talk monetary policy see Fed Monitor – We expect easing of a further 50bp during the spring , 3 March). The Bank of Canada also cut its policy rates by 50bp. The ECB is faced with a difficult choice at its policy meeting next week, as it has limited room for manoeuvre, with policy rates already at -50bp and an asset purchase programme still running at EUR20bn per month. We believe the ECB will resist the market pricing (which points to a full 10bp rate cut priced) and not cut the deposit rate and opt for liquidity measures instead. Admittedly, it is a close call (see ECB Preview – A cut is not the cure for COVID-19 , 6 March). The Bank of England does not meet until 26 March. However, with other major central banks in easing mode, we plan to remain vigilant in case they decide to cut between scheduled meetings.
The spreading of the COVID-19 virus has dented the global growth outlook. COVID-19 is spreading into new regions, turning the economic outlook into a U-shaped recovery rather than a V-shaped one. We have lowered our growth outlook for 2020 globally (see The Coronavirus Crisis: U-shaped rather than L-shaped global recovery , 4 March). We expect to slow global growth well into Q2, before giving way to a recovery in H2 as virus concerns abate. See our recording of our conference call after G7 , 4 March.
Joe Biden did very well on Super Tuesday and is once again the favourite to win the Democratic nomination, according to prediction markets, with his position strengthened when Michael Bloomberg dropped out and pledged his supported to Biden. Another 365 delegates are up for grabs this coming Tuesday.
Euro area data next week are somewhat outdated, as they all predate COVID-19 spreading. However, with data coming in, it will give us a clear indication of how these metrics ended Q1 and to what degree they will be able to withstand a slowdown. Our updated euro area growth tracker points to an upbeat picture of the economy but, in our view, this is likely to change in coming months, once data on the economic repercussions of the coronavirus outbreak ticks in (see Euro Area Macro Monitor – Calm before the storm , 5 March).
Pressures are mounting on the Bank of Japan as the yen is surging and COVID-19 infections are accelerating there again. According to sources, further activation of already existing loan programmes to secure sufficient liquidity to businesses affected by COVID-19 are being discussed within the BoJ. This week we have seen record purchases of ETFs.
In China it is still all about COVID-19 and policy responses. Next week sees the CPI indication of whether the inflationary or deflationary impact is the biggest. We expect a small decline from 5.4% to 5.2% but this is partly an effect of the fading impact of African swine fever.