Forward Guidance: Virus Concerns Continuing to Overshadow Economic Data

Fundamental analysis of Forex market

The week ahead will be short on impactful economic indicators – but likely still long on concerns about the ongoing escalation in the new coronavirus outbreak outside of China. Financial markets don’t like uncertainty, and stock market indexes have been predictably volatile. As-expected, markets, and likely policymakers as well, are looking directly through backward looking economic indicators. The Fed and the Bank of Canada both responded to the meltdown in equity markets with 50 basis point interest rate cuts – the Fed’s move coming outside of their regularly scheduled announcement dates for the first time since 2008. US 10-year bond yields plunged to record lows and continued to move lower even after a report that showed a second consecutive strong gain in US employment in February. Canadian labour markets were also still solid in February, but concerns have clearly shifted to forward-looking coronavirus-related growth concerns, rendering backward-looking economic data reports largely irrelevant for now.

For what it’s worth, the situation in China itself appears to be improving, but the spread into Europe and the United States is threatening to disrupt services activity closer to home. Admittedly, spread to Canada itself has, reportedly, been more limited to-date – and even the number of cases in the United States is still relatively small. But the risk is clearly that the situation gets worse not better in the near-term, threatening to significantly disrupt near-term economic activity both via consumer’s fear-of-going-out and potentially more significant North American centered supply chain disruptions. Near-term economic growth forecasts continue to march lower.

US weekly initial jobless claims are among the more timely indicators out in the week ahead, but it is still probably too soon to see a significant increase in even temporary coronavirus-related layoffs. Other indicators of economic activity will take a firm backseat to the flow of news headlines until reports start to come in for periods more impacted by virus-related uncertainty. We look for Canadian housing starts to have remained relatively solid in February given earlier strong permit issuance. That data will also be decidedly ‘rear-view-mirror’ in nature. There is clearly increased risk in the near-term that growing fears of spread of the disease domestically could keep house hunters at home and slow housing markets more broadly in the near-term. But interest rates have also fallen dramatically, and there is, by all indications, a large stock of excess demand in areas like Vancouver and Toronto given housing reports from the local real-estate boards for February over the last week. It remains to be seen whether the lure of cheaper financing rates will be enough to overcome any coronavirus concerns for increasingly desperate homebuyers.

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