After a strong start to the year – with seemingly little to worry about – global stocks suffered a set back last week as the impact of the coronavirus began to take its toll. While most commentators, myself included, suspect the virus will be ultimately contained within months (judging by the SARS outbreak of 2003), there’s no denying the grim reality that the outbreak will likely get worse before it gets better. And the very measures required to contain the virus – such as travel restrictions – threaten to severely knock global growth in Q1. See my detailed noted on the virus here.
As it stands, the coronavirus appears more easily spread, though less lethal than SARS. There are already more cases of infection (14k) than there were with the whole SARS outbreak (8k), and we’re likely still only in the early days, with the World Health Organisation only last week declaring a global heath emergency. During the SARS outbreak, it took several more months from declaration of a WHO emergency until a stabilisation in the number of infected.
Note also China’s share of global GDP has doubled to around 20% since the SARS outbreak. On the positive side, the mortality rate so far appears much lower, at around 2% rather than 10% under SARS. Also, China is arguably much more open and doing more to contain the virus than was the case in 2003.
In other news, the Fed left rates comfortably on hold and appears happy to retain a fairly neutral interest rate outlook for the time being. My view is that the Fed will likely keep rates steady this year – assuming the unemployment rate does not start trending upward – though if anything, it’s more likely to cut than hike given subdued inflation.
With almost half of S&P 500 companies now having reported, the US Q4 earnings reporting season is also progressing well, though the earnings “beat rate” of 69% is slightly below the 5-year average of 72%. The tech sector remains a standout earnings performer.
As for the week ahead, expect more market concern over the economic impact of virus related travel and trade restrictions. US payrolls on Friday are likely to show a continued slowing in the underlying pace of jobs growth – to around 160k – as the US growth slows back to potential, as evident in the fact the unemployment rate should hold steady at its 50-year low of 3.5%.
The relative strength of the local share market has been a surprise so far this year, especially given the weaker economic and earnings outlook compared to, say, the United States. That likely reflects an expectation that the RBA has further room to cut rates than in other countries, and will use its remaining ammunition in coming months. For good or bad, low rates are encouraging investors to take on risk and chase returns in the stock market.
On balance local economic data has been fairly mixed so far this year, with stronger than expected December employment and November retail sales reports, and continued house and equity asset price gains. That said, Q4 CPI inflation remained frustratingly low. Business and consumer confidence also remain subdued – which have not been helped by the recent bush fires, and will almost certainly take a further knock due to the new coronavirus threat. Indeed, given the likely sharp drop in Chinese tourism (and potentially student numbers) ahead – which accounts for just under 1% of GDP – Q1 GDP growth now looks like being very weak, if not negative.
Indeed, given the already weak momentum in private spending, if the virus concern runs for several more months, there’s a non-negligible risk (30-40%) that Australia could suffer its first technical recession (two quarters of negative growth) in almost 30 years! In terms of data highlights this week, December retail sales on Thursday are likely to weaken again after surprise strength in November, likely owing to the new trend of spending up big online during the black Friday/cyber Monday sales.
All up, therefore, while the RBA seems unlikely to cut rates this week, it still seems very likely to cut rates to 0.25% by mid-year. Note also, however, it is looking more likely that the Federal Government will inject a dose of fiscal stimulus in the May Budget, now that its hopes of achieving a budget surplus have all but evaporated. I still see the $A heading lower and our share market eventually under performing global peers this year.
Have a Great Week!