Oh, bOh, boy. What in this strange week is important, and what not?
Wuhan. (Gesundheit.) Even if China’s extraordinary self-quarantine shutdown works, and in another two weeks the incidence of new infection begins to drop, the damage to China’s economy will be considerable. Current estimates shave 2020 GDP from 6% to 4%, but the harm will continue in two ways: China has already overextended stimulus, leaving an enormous heap of bad debt, soon to heap on heap, and second everyone outside China doing business with it will feel the pain.
That is the good news. Markets are trying by the hour to handicap the economic shortfall ahead, and at the moment are not pricing China-level contagion to make a global jump. China was slow to respond, but has mobilized in a way that few other nations can match, and may prevent a global leap.
If Wuhan does jump… then a worldwide China-style stoppage of travel will be necessary, including local, and nobody wants to think about Wuhan mortality in the many nations without good healthcare infrastructure.
At the moment we can see overbought stock markets caught wrong-footed. Bond markets define mortgage rates, and cash is racing to them all over the world for safety — first to government bonds, secondarily to mortgages. The US 10-year T-note in ten days has crashed from 1.82% to 1.53%. The cash race is global: in the same ten days, German 10s have fallen from minus-.17% to minus-.44%. US mortgages are disorderly, the lowest-fee ones just above 3.50% — and waves of refinance rate locks are likely to intercept further declines even if Treasury 10s go lower.
Two delicate observations about markets today. First, these bond yields are now in the same general place as the all-time lows in 2012, 2016, and the one day last September. It’s a poor idea to bet on breaking a triple bottom. However… if Wuhan jumps, there is no bottom. If Wuhan does NOT jump, as markets seem to assume today, the Treasury yield curve is again close to inverted and trading below the Fed’s overnight cost of money. The Fed’s target since its last cut in November has been a range of 1.50%-1.75%; the 2-year T-note is the best Fed-forecaster, trading at 1.37% today. If Treasurys move only a little lower the Fed will be forced to cut again, and should.
The second delicate matter: the most serious professionals in markets always try to separate channels of information, in this case separating pre-Wuhan from post-Wuhan. Next week we will get the usual first-week-of-month flood of fresh news from January — all pre-Wuhan, and as traders say, from Jurassic Park. Wuhan-affected US data will not appear until later February and the good stuff not until early March.
How were things here in the US, pre-Wuhan? 4th quarter GDP was stable, growing 2.1%, although consumer spending downshifted, and inflation continued to underperform at 1.6% core PCE. However, as a pre-Wuhan measure, here on the last day of January, data from the 4th quarter is fossilized. The freshest data today, just since December are unsettling, all slow-side: orders for durable goods and capital goods were weak, and after-inflation disposable income and spending were both slightly negative. This morning’s release of the Chicago Business Barometer survey for January, the traditional one-day precursor for the national ISM purchasing managers’ survey on Monday: a stone-drop to a 2015 low at 42.9 from 48.9 in December. 44 is a recession level. National results will not necessarily follow, but Chicago is not good news.
The US economy may have entered a slowdown just before Wuhan.
The rules of refinancing while watching all of this unfold: if you find a deal in which interest savings recapture closing costs within a year, or maybe 18 months, do it. Don’t bottom-fish. And don’t lock a rate unless prepared to take it no matter how low rates may go. The mortgage world will be at processing capacity by the end of next week, MBS desks on Wall Street will choke on the new locks — each of which is a presale of a new MBS — and typically push up mortgage rates to cut demand. Don’t watch the news until closed.
Which brings up another reason not to watch the news. Yes, that one, although the main event has concluded today. CNN can revert to asking Kobe Bryant’s family how they feel, and Fox can continue its four-year victory parade.
The US 10-year T-note in the last year. The abrupt rollover is mostly due to Wuhan, but an economic slowdown possibly in play:
US GDP through the end of 2019. Now, Jurassic Park. Given events in January, previous trends no longer apply:
We’ll get the national survey results on Monday morning, a good pre-Wuhan baseline. Hope that the nation is doing better than Chicago: