In an alternate world without the novel coronavirus, the global economy would be looking pretty good as last week brought a slew of positive data. Strong US ISM manufacturing data, which implies welcome pickup in activity post the Phase 1 trade deal, was followed up by a robust US jobs report that showed strong job creation and increased labor force participation. It would appear that the US consumer, the economy’s main engine, is doing well. Moreover, PMI data around the world, including China, printed solid results giving the global economy some breathing room against European data that confirms weak Q4 performance.
Unfortunately, incoming data doesn’t reflect the negative economic impact of the outbreak and the severe containment measures that include the quarantine of large areas, travel restrictions, and the temporary closure of flight routes. With China reportedly combining January data with February data, we won’t get numbers until March. Until then, we have to rely on economic models that suggest low-mortality, but highly infectious outbreaks (novel coronavirus) have a more severe impact than those with higher mortality but lower infection rates (SARS).
Further confusing the situation is the mixed signal received on the spread of the epidemic. The fall in daily “new confirmed cases” gives some optimism that things could be peaking. But, this optimism is tempered by the still high rate of “new suspected cases,” the reported lack of testing kits in Wuhan, and the possibility of a “managed” number. For us, the middle of February remains a key window to watch. If the measures taken by the Chinese government are effective, the infection rate should begin to taper off otherwise the probability for the more negative human welfare and economic scenarios will rise. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- Annegret Kramp-Karrenbauer (AKK) announced that she will step down as leader of the governing Christian Democratic Union (CDU), throwing open the question of who will succeed Angela Merkel.
- Expectations for a meeting of OPEC+ ministers have begun to fade. Russia, which has been pushing against Saudi Arabian efforts to cut production, reportedly has rejected the proposal from OPEC technocrats to reduce production by 600k barrels a day.
- The Norwegian krone (NOK) is outperforming other G10 currencies as its CPI reading came in much stronger than expected although it should be noted that much of the inflation strength came from food and drink, which makes CPI vulnerable to reversing next month. The NOK has been one of the currencies hardest hit by the coronavirus.
- The Chinese yuan has been supported on margin with positive signs from infection data. While the death toll has exceeded the SARS epidemic, there are some signs that the infection rate may be peaking. Additionally, reports that some factories have been given the greenlight to reopen as well as better-than-expected CPI data have also helped. However, the overall expectation remains for the currency to remain pressured.
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