Federal Reserve Chair Jerome Powell said that trade issues have abated, but he more or less suggested that the FOMC is ready to inject more liquidity into the markets if the economy worsens. In his semi-annual testimony to Congress on monetary policy, Powell said:
Some of the uncertainties around trade have diminished recently, but risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.
U.S. inflation (CPI) was released this week showing that nominal inflation was up 2.5% and the core reading (excluding food and energy) was up 2.3% in January. While those are not red-line inflationary numbers, the novel coronavirus might bring added problems as supply chains get interrupted and businesses begin to pay more for stockpiled items. It remains to be seen if hard commodity prices and energy prices remain subdued due to the coronavirus. If those start to heat back up, particularly if they heat up because of supply interruptions and periodic demand spikes, inflation could become a worry again and that might create a rising interest rate climate all over again.
The timing of the outbreak was also as bad as it could be considering that the United States and China signed their phase-one trade deal in January. Shipping, freight and port activity was supposed to start picking back up. That recovery has been affected. A decline in international shipping rates is being magnified by a drop in Chinese demand.
Ed Yardeni, of Yardeni Research, said in his latest outlook:
It’s too soon to tell whether the virus outbreak is starting to weigh on S&P 500 revenues and earnings… Nevertheless, industry analysts may have just started to cut their Q1-Q3 earnings estimates during the 2/6 week to reflect the possible negative consequences of the virus on the companies they follow. They seem to be doing their best to offset those cuts by boosting their Q4 estimates, by which time the virus problem should have passed, in their collective estimation.
Again, the end result of how much GDP will be hurt is still not known. The coronavirus has already surpassed SARS and other health scares. The U.S. stock market is trying to look through the current pitfalls to determine that the future is still bright and that the current concerns will go away soon.
Sadly, there is a fresh reminder that things may get worse before they get better in the number of reported cases and the number of deaths. Companies like Gilead Sciences Inc. (NASDAQ: GILD) and Moderna Inc. (NASDAQ: MRNA), and a slew of tiny virus/vaccine stocks, have all seen gains tied to working on vaccines. There was a stark reminder from Johnson & Johnson (NYSE: JNJ) about just how fast a “cure” will really take. Johnson & Johnson has initiated efforts to develop a vaccine against COVID-19 and is leveraging its AdVac and PER.C6 technologies, but the company noted that it would expect to be able to get a potential vaccine in Phase I clinical trials in 8 months to 12 months if not expedited.
Think about what has been detailed and referenced here in the economy. Smartphones and semiconductors, food prices, travel, retail trade, factory closures, workers not going to work, car sales and supplies taking a hit, commodity prices at risk. Think about bank profits and insurance losses, and think about what happens when and if “force majeure” starts to be declared for endless deliveries and pricing terms which had already been agreed to. It all adds up to a rather large yet undefined cost, and it will come at a price against global GDP in the first quarter of 2020 with the rest of the year in a “wait-and-see” mode.
Even with all these concerns brewing, the one word you haven’t yet seen is “recession.” It’s currently too soon to be calling for that and the cards were being set up for expansion in 2020 just three weeks ago.