Feb 28, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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1 big thing: Coronavirus becomes a recession threat

Illustration: Aïda Amer/Axios

In just a matter of weeks, top economists and investment bank analysts have gone from expecting the coronavirus outbreak to have minimal impact on the U.S. economy to warning that an outright recession may be on the horizon.

What's happening: The spread of confirmed coronavirus cases in Europe, the Middle East and the U.S., and the speed at which they are being discovered, has set the table for the outbreak to have a larger and much costlier impact.

Between the lines: The outbreak threatens U.S. consumer-oriented businesses like restaurants, bars and travel, which have held up the economy as business investment has turned negative and the manufacturing sector has fallen into recession, largely as a result of the U.S.-China trade war.

What they're saying: Business investment, which declined through the last three quarters of 2019, could be further hit, Constance Hunter, chief economist at KPMG, tells Axios.

  • "If the virus spreads within the U.S. in any meaningful way, that is going to have a negative impact."
  • "That's a component we think could lead to a negative GDP print in the first and possibly the second quarter."

Europe and Japan are particularly at risk, as both have generated only 1% growth over the past year and are very susceptible to falling into recession.

  • “We could see a significant impact on Europe, which has been weak to start with, and it’s just conceivable that it could throw the United States into a recession,” former Federal Reserve chair Janet Yellen said Wednesday at an event in Michigan.

Flashback: Just a few weeks ago, many economists thought the coronavirus would cause only a tenth of a percentage point decrease in U.S. growth this year.

  • But rosy projections were in short supply on Thursday as the Dow flirted with its largest single-day points drop in history.
  • The S&P 500 has fallen by 10% in just six trading sessions, the fastest correction in history from a record high, Deutsche Bank Securities chief economist Torsten Sløk said in a note to clients.

Where it stands: Goldman Sachs' chief U.S. equity strategist David Kostin warned Thursday that the firm now expects U.S. companies to "generate no earnings growth in 2020,” and that “a more severe pandemic could lead to a more prolonged disruption and a U.S. recession.”

  • Bank of America Securities cut its 2020 global growth forecast, and is now expecting the lowest reading since 2009.
  • Credit Suisse lowered its global growth projection to 2.2% — below the 2.5% growth rate the IMF set as the threshold for global recession.
2. Catch up quick

Sen. Richard Shelby (R-Ala.) signaled he may support Judy Shelton's nomination to the Fed board, joining Sen. Pat Toomey (R-Pa.) and leaving Sen. John Kennedy (R-La.) as the only undecided Republican on the Banking Committee. (Bloomberg)

Confirmed coronavirus case numbers are falling in mainland China, but rising in South Korea and Japan, and the first case was discovered in Nigeria. (Reuters)

DoorDash has filed for an IPO setting the food delivery company up to go public as soon as late spring. (WSJ)

The White House has directed government health officials and scientists to coordinate all statements and public appearances with the office of Vice President Mike Pence. (N.Y. Times)

3. Market overwhelmingly expects rate cut next month
Expand chart

Data: CME Group; Chart: Naema Ahmed/Axios

In one week, futures traders have gone from seeing virtually no chance of a rate cut at the Fed's next policy meeting to a more than three-quarters likelihood.

Why it matters: Economists aren't sure a rate cut would be effective at offsetting the damage from the coronavirus outbreak, and would put the Fed in a weaker position to bolster the economy should the U.S. fall into a recession.

  • But under chair Jerome Powell, the Fed has not gone against the market once in two years of policy meetings.

Details: Markets see significant likelihood the Fed cuts rates three times this year, and sees one rate cut each by the European Central Bank and Bank of England this year.

  • This is despite the Fed barely holding U.S. interest rates at a positive real level (above the rate of inflation), the ECB holding rates at -0.5%, and the BoE with rates at all-time lows.

Be smart: "With Fed rate cut probabilities for the March meeting now at 70% either Powell, [vice chair Richard Clarida or N.Y. Fed president John Williams] need to address the shift in market expectations," RSM chief economist Joe Brusuelas tells Axios in an email.

  • "If this is left unattended the Fed runs the risk of a major market upset around its March 17-18 meeting."

Yes, but: “The problem with doing monetary stimulus is that it will have limited impact on the effects of the virus,” Jens Peter Sorensen, chief analyst at Danske Bank, tells Bloomberg.

  • “The COVID-19 virus is keeping people from work, the supply chain is disrupted and tourists are not going to Italy. Monetary policy can do very little.”
4. Worse than the financial crisis

Guggenheim Partners global CIO Scott Minerd tells Axios the fallout from the coronavirus outbreak could be "worse than the financial crisis."

Why it matters: Minerd called out the "cognitive dissonance" in markets as stock prices hit new all-time highs in mid-February, saying in an open letter that he had never "seen anything as crazy as what’s going on right now."

The intrigue: As a member of the New York Fed's investor advisory committee, Minerd says he's been contacted by officials and is expecting a statement regarding "some sort of monetary coordination." This likely means the world's central banks are planning to provide interest rate cuts or additional stimulus.

  • The policy was advocated for recently by former Fed governor Kevin Warsh in a WSJ editorial.
  • Central banks already have more than $20 trillion worth of holdings on their balance sheets.

Unfortunately, Minerd is concerned that the market's demand for action from central banks is misplaced and there is little ammunition available to fight the problem.

  • "In 2008 we were dealing with a financial market shock," he told me last night after our appearance on CNN's "Erin Burnett OutFront."
  • "You can cut rates and that helps alleviate some of the problem. But with a shock like this, monetary policy is pretty impotent. Cutting rates 100 basis points isn't going to do anything."
5. Teladoc's coronavirus bump

Fears about the coronavirus haven't shattered every stock. Look at the telehealth firm Teladoc, Axios' Bob Herman writes.

Driving the news: Teladoc's stock price has soared 19% this week and is now valued at almost $10 billion, because apparently Wall Street believes we will only see doctors on our iPads or on the phone as we avoid the outside world.

Reality check: Teladoc is getting more people to use digital checkups, but the company is not remotely close to turning a profit.

  • Teladoc lost about $100 million in 2019, which was roughly the same loss as 2018.
  • Teladoc is still spending 20% of its revenue on advertising and marketing.
  • Teladoc has had major accounting problems.
  • And there are still concerns telehealth visits don't save money and instead are precursors to in-person clinic visits.
Dion Rabouin

Marian Croak is an executive, engineer and inventor who developed the widespread Voice over Internet Protocol calling system.

  • Croak holds more than 200 patents, including more than 100 related to VoIP, and pioneered the use of phone network services that make it easy for the public to donate to charitable organizations during crises.
  • She filed the patent for text-based donations to charity in 2005, revolutionizing the way people donate money to causes — technology that is used to this day.

Croak currently works as a VP of engineering at Google.