Main Themes: Share markets plunged and risk aversion among investors spiked after the World Health Organisation (WHO) called Covid-19 a pandemic.
Overnight, the UK delivered a double-barrelled policy response to fight the impact of the coronavirus – the government delivered a fiscal stimulus package and the central bank cut the key rate by 50 basis points.
Share Markets: The Dow Jones plunged 1465 points (or -5.9%) and the S&P 500 index dropped 141 points (or -4.9%). We can expect the ASX 200 index to follow suit and shed significant ground during trade today.
Interest Rates: The US treasury yield curve steepened in choppy trading. The 10-year yield rose 7 basis points to 0.87% as investors awaited guidance on a potential US stimulus package. The 2-year treasury yield ended a volatile session down 1 basis point at 0.52%. The yield on the 3-month treasury bill fell 6 basis points to 0.39% amid heightened expectations for further monetary easing.
Australian bond yields fell yesterday. The 10-year yield shed 12 basis points to 0.68% and the 3-year yield fell 9 basis points to 0.39%. The 90-day bank bill swap yield was unchanged at 0.56%.
Foreign Exchange: Currency trading has been volatile as investors react to news about the coronavirus and oil price swings. The US dollar index is trading slightly higher at 96.507. Safe havens currencies performed best.
The Australian dollar is currently weaker and trading near its lows of the session, at US$0.6486, falling from a high of US$0.6539.
Commodities: Oil resumed its decline overnight. Other commodity prices also fell in trade.
OPEC expects there will be no growth in global oil demand this year, slashing its forecasts as the virus hits the world economy. It also cut estimates for an increase in rival supplies by about 20% as lower prices hobble US shale drillers.
The battle for control of the global oil market also intensified as Saudi Arabia promised to raise production capacity and the U.A.E. plans to pump as much as possible next month.
COVID-19: The WHO stated what has seemed obvious to markets for weeks. The coronavirus outbreak is a global pandemic.
The US government's top infections disease official told a House hearing the disease is "10 times more lethal than the seasonal flu" and warned the country must take serious mitigation efforts now. US President Trump is weighing restrictions on non-essential travel from Europe. Worldwide cases neared 125,000 and deaths approached 4,600.
Australia’s Federal Government announced a travel ban on people coming into Australia from Italy, effective yesterday at 6pm.
Australia: The Federal Government is expected to announce full details of its stimulus package today.
Data yesterday showed that new home loans surged in January across both volumes and values. The uplift in home lending was broad based, but owner-occupiers led the increase, as they have done for much of the recent recovery. Lending in NSW and Victoria also led the rise in January. The number of loans to owner-occupiers (excluding refinancing) jumped 3.6% in January, after a gain of 3.1% in December. These back-to-back gains are the strongest since July 2015.
The volume of loans growth to purchase new dwellings was especially strong in January – up 14.1% in the month and up 48.4% on a year ago.
The value of all new home loans (excluding refinancing) surged 4.6% in January; for owner occupiers, the gain was 5.0% in January and for investors it was 3.6%.
Compared with the trough for loan values in May 2019, owner-occupier loans are 30.8% higher and investor loan values are 21.8% higher. The value of owner-occupier loans struck a new peak in January but the value of investor loans are still 43.4% away from the peak in April 2015.
Fears among households and businesses about the coronavirus and economic outlook could disrupt the upturn in housing lending, despite another rate cut from the Reserve Bank last week and another one likely to come by early April.
The Westpac-MI consumer sentiment survey showed that consumers were increasingly worried about the coronavirus’ impact in March. Consumer confidence fell 3.8% to 91.9, a five-year low.
Consumers were most concerned about the near-term outlook for the economy, but were less concerned about the long-term outlook. This suggests that households expect the impact of the coronavirus to be large, but relatively temporary.
United Kingdom: The UK Finance minister Rishi Sunak unveiled a 30 billion-pound stimulus package and the Bank of England cut its key rate by 50 basis points to 0.25% in coordinated action to get the British economy ready to fight the impact of coronavirus. The plan includes £7 billion to support businesses and individuals with a £5 billion emergency response fund. Also, the U.K. is planning £156.1 billion of bond sales in 2020-21.
Data released for January showed the UK economy unexpectedly stalling ahead of the coronavirus outbreak. Industrial production fell 0.1% over the month. GDP growth in January was flat.
United States: US President Trump will make an address later today to discuss his plan to cope with the epidemic, but said the country may not need stimulus if its spread can be stopped. House Democrats moved to unveil legislation including emergency paid sick leave, enhanced unemployment benefits and free coronavirus testing. However, the Senate is unlikely to vote before a week-long break. Steve Mnuchin signalled the Treasury will delay the April 15 tax deadline.
Core inflation picked up in February, showing that inflationary pressure was slowly returning over the month. The annual rate of core inflation picked up from 2.3% in January to 2.4% in February. The market consensus was for no change. Headline inflation declined slightly. Average hourly earnings growth rose to 0.6% from 0.5% in the previous month.
Today's key data and events:
NZ REINZ House Sales Feb y/y prev 3.2% (7am)
JN BSI Large Mfg Q1 prev -6.2% (10:50am)
JN Producer Prices Feb prev 0.2% (10:50am)
AU MI Cons. Inflation Expectations Mar prev 4.0% (11am)
UK RICS House Price Balance exp 20% prev 17% (11:01am)
EZ Industrial Production Jan exp 1.5% prev -1.5% (9pm)
EZ European Central Bank Meeting (11:45pm)
US Producer Prices Feb exp -0.1% prev 0.5% (11:30pm)
US Initial Jobless Claims Mar 7 exp 220k orev 216k (11:30am)
US Import & Export Prices Feb (11:30am)
US UoM Cons. Sentiment Mar P exp 95.0 prev 101.0 (1am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Besa Deda, Chief Economist Ph: 02-8254-3251