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February Monthly Dashboard: Coronavirus is a wildcard for the economy and financial markets

  • January current scorecard
  • January future scorecard

Monthly Review (Page 3)

Even as the coronavirus (COVID-19) outbreak dominated headlines and hit financial markets worldwide, U.S. economic data came in broadly positive. Job growth in January was well above the 2019 average of 175,000 while more workers reentered the labor force to take advantage of solid job demand and rising wages. Housing activity was strong with above-trend household formations, low (and falling) mortgage rates, and the good job market. Even the manufacturing sector showed signs of modest expansion for the first time in six months, although the impacts from COVID-19 won’t be seen until the February data at the earliest. A flight to safety pushed long-term interest rates down sharply in reaction to COVID-19, causing a renewed inversion of the yield curve. The Fed stood pat in January but has said it is keeping a close watch on the effects of the virus on the economy – the odds of Fed easing have risen. U.S. stock indices fell sharply in late February as COVID-19 infections spread and fears of a global economic slowdown increased.

Outlook (Page 4)

While trade tensions have eased, the coronavirus (COVID-19) outbreak has increased risks for the global economy and has upset trade flows. The resulting flight to safety has lowered long-term rates and caused another modest/partial yield curve inversion. This, in turn, has prompted renewed focus on further Fed easing this year. If COVID-19 follows the pattern from previous epidemics (e.g. SARS in 2003) the effects on economic growth, interest rates, and financial markets should be resolved within a few more months as infections decline and economic activity resumes. Our baseline forecast assumes little impact on economic growth over the course of the year (slower in the first half and faster in the second), with interest rates recovering most or all of their decline by year-end (although with a risk of even lower rates in the near term). This is still a fluid situation, however, and there is a risk that COVID-19 could be wider-reaching or longer-lasting than previous pandemics and have a more meaningful drag on global growth. If this occurs, the resulting slowdown in U.S. growth and further flight-to-safety flows (lowering long-term Treasury yields still more) would likely cause additional Fed easing.

Go deeper with the full February dashboard linked below.

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