How Low Can We Go?
Well that was quite the week wasn’t it? It reminds us of the quote, “There are decades where nothing happens; and there are weeks where decades happen.” Last week certainly qualifies as the latter. With stocks crashing from all-time highs to correction territory—and threatening bear market country— some respite from the volatility seems due, but will it be lasting? The uncertainty around the virus and its eventual course will continue to hang over the market, and the economy, and that’s likely to keep yield levels from bouncing much from the extreme lows we hit on a daily basis. Also, with 7yr Treasury maturities and less yielding under 1%, the market is forcing the Fed’s hand. In that regard we’ll likely begin hearing comments from Fed officials this week that a likely 50bps cut is on the way for the March 18 meeting, if not sooner if the drumbeat of stock losses continues. The economic numbers so far haven't hinted at the coming slowdown, and the numbers this week are not likely to forecast a slowdown either, but the market is convinced with supply chains in a mess and more countries self-isolating that a slowdown is coming, at least for the next quarter of two. The question remains will it be contained there or spread into the third quarter and beyond?
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||1.46%|
|6 Mo LIBOR||1.40%|
|12 Mo LIBOR||1.38%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Mar 2||ISM Manufacturing Index||Feb||50.5||50.5||50.9|
|Mar 4||ADP Employment Change||Feb||170k||170k||291k|
|Mar 4||ISM Non-Manufacturing Index||Feb||55.0||54.9||55.5|
|Mar 5||Nonfarm Productivity||4Q F||1.4%||1.3%||1.4%|
|Mar 5||Factory Orders||Jan||-0.2%||-0.1%||1.8%|
|Mar 6||Trade Balance||Jan||-$48.5b||-$46.4b||-$48.9b|
|Mar 6||Change in Nonfarm Payrolls||Feb||175k||175k||225k|
|Mar 6||Unemployment Rate||Feb||3.5%||3.6%||3.6%|
|Mar 6||Avg. Hourly Earnings YoY||Feb||3.0%||3.0%||3.1%|
Top 5 Events for the Week
March 2-6, 2020
1. Coronavirus Developments – All Week
2. Fed Speak – All Week
3. February Employment Report – Friday
4. February ISM’s – Monday/Wednesday
5. January Factory Orders & Trade Balance – Thurs./Fri.
1. Coronavirus Developments - All Week
Last week cracked the veneer that the U.S. could escape unscathed from the spreading coronavirus and with cases starting to spring-up stateside it seems we are on the cusp of an outbreak rather than luckily missing it. That means, once again, coronavirus developments will drive trading more than any single economic release. With stocks crashing from all-time highs to correction territory—and threatening bear market country— some respite from the volatility seems due, but will it be lasting? The uncertainty around the virus and its eventual course will continue to hang over the market, and the economy, and that’s likely to keep yield levels from bouncing much from the extreme lows we reach on a near daily basis. Also, with 7yr maturities and less yielding under 1%, the market is forcing the Fed’s hand.
2. Fed Speak – All Week
Fed funds futures are pricing in 148% odds that a rate cut comes at the March meeting, implying that the cut will be more than 25bps, and with Treasury yields under 1% for maturities out to seven years the market is forcing the Fed’s hand to move sooner and bigger rather than smaller and later. With that being the case, several Fed officials will have the opportunity this week to begin offering the Fed’s current position on monetary policy expectations. To date, comments have struck a stay-the-course tone but that will change this week. Eight different Fed members will be speaking and with that heavy slate they’ll have the opportunity to begin the shift towards signaling an ease at the March meeting. The question now is how much do they cut? We think 50bps cut is most likely.
3. February Employment Report – Friday
The February jobs report is expected to reflect some slowing in job gains but still not the material drop-off that is likely coming in March. The headline number is expected to show 175,000 new jobs versus 225,000 in January. Private sector jobs are expected to increase 155,000 versus 206,000 in the prior month. The unemployment rate is remain at 3.6% for a second straight month. Meanwhile, wage gains are expected to improve to 0.3% from January’s 0.2%. YoY wage gains, however, are expected to tick down to 3.0% after a brief uptick to 3.1% the prior month. In summary, if the report comes as expected, or better, it will be ignored for the coming slowdown; however, if the report misses, it will support bids in Treasuries as March is likely to reflect a real drop-off in hiring from the spreading virus.
4. February ISM Survey’s – Monday/Wednesday
Along with this week’s jobs report, the pair of ISM reports will give us another early tell on February activity with the manufacturing sector expected to sit right at neutral while the services sector continues expanding. The ISM Manufacturing Report is due later this morning and is expected to print at 50.5 versus 50.9 in January. The ISM Non-Manufacturing Index follows on Thursday and as the services sector constitutes nearly 90% of the economy it’s been stronger than the manufacturing side which has benefited the overall economic numbers. For February, the services index is expected to be 54.9 versus 55.5 the prior month. The index has averaged 55.4 over the past year so a modest decrease is expected from the yearly average but still above 50 indicating continued health in the services sector while the manufacturing sector struggles. Again, any strength is likely to be discounted while a downside miss will boost Treasury bids as it comes before the expected March slowdown.
The January trade balance is expected to narrow slightly to -$46.4 billion versus -$48.9 billion in December. The trade deficit has ranged from a twelve-month wide of -$54.8 billion last May to a narrow -$43.7 billion in November. The deficit was -$53.6 billion a year ago, so with all the trade-related headlines and tariffs, the deficit is expected to have narrowed by $5 billion over the last year but much of that comes from a reduction in imports rather than an increase in exports which signals some softening in consumer spending. Meanwhile, Factory Orders are expected to slip –0.1% versus a 1.8% increase in December.
Thomas R. Fitzgerald
Director, Strategy & Research