Coronavirus Tests Limits of Central Bank Firepower

YOUR BEST NEWS ! Investors are looking to the Federal Reserve and its peers as markets swoon and infections rise. They’re short on ammunition.

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Newsletter: How Much Longer for the Longest Expansion on Record?

YOUR BEST NEWS!

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Stock indexes around the world entered correction territory Friday in the wake of a sharp fall on Wall Street, amid deepening worries that the economic fallout from the global spread of the coronavirus may be more severe than previously expected. Jeff Sparshott here with the latest.

Risks and Reactions

A U.S. coronavirus outbreak would trigger temporary but widespread disruptions of people’s lives and business activity, posing a new risk to the nation’s longest economic expansion on record. Public-health officials have told Americans to expect the virus to spread in the U.S. That could lead to school closures, public-event cancellations and business disruptions across industries from restaurants and tourism to manufacturing. The U.S. economy is already feeling an impact. Some U.S. manufacturers have been unable to obtain components, hotels and resorts are seeing a drop off in international tourism and retailers are worried about having adequate inventory to meet U.S. demand, Eric Morath and Harriet Torry report.

The extent of the economic damage—and whether it could trigger a recession—is difficult for economists to project and depends on whether an outbreak is limited to a city or two, or becomes more widespread—and how the public reacts. Economists, however, expect a swift U.S. recovery from any downturn as companies work to meet pent-up demand from consumers after the health threat subsides.

WHAT TO WATCH TODAY

U.S. personal income for January is expected to rise 0.4% and consumer spending to rise 0.2% from a month earlier. (8:30 a.m. ET)

The personal consumption expenditure price index for January, excluding food and energy, is expected to rise 0.2% from a month earlier and 1.7% from a year earlier. (8:30 a.m. ET)

U.S. advance trade in goods for January is out at 8:30 a.m. ET.

Canada’s gross domestic product for the fourth quarter is out at 8:30 a.m. ET.

St. Louis Fed President James Bullard speaks on the economy and monetary policy at 9:15 a.m. ET.

The Chicago purchasing managers index for February is expected to rise to 46.0 from 42.9 a month earlier. (9:45 a.m. ET)

The University of Michigan’s consumer sentiment index for February is expected to tick down to 100.8 from a preliminary reading of 100.9. (10 a.m. ET)

The Baker Hughes rig count is out at 1 p.m. ET.

China’s official manufacturing index for February is out at 8 p.m. ET.

Follow the WSJ’s latest coronavirus coverage here.

TOP STORIES

The 2% Economy

Before the coronavirus started affecting the economy, it was looking a little meh. Revised figures out Thursday showed U.S. growth advancing at a respectable 2.1% clip in the fourth quarter of 2019, though underlying details were mushy: Business investment contracted and consumer spending decelerated. Oxford Economics economist Gregory Daco notes the most recent three quarters mark the economy’s worst performance since the 2016 slump.

On the bright side: A key measure of U.S. business investment rose in January, a sign businesses were more willing to spend in early 2020. New orders for nondefense capital goods excluding aircraft—a closely watched proxy for business investment—increased 1.1% in January from the previous month. The rise came during a month when the U.S. and China signed an initial trade deal, marking a truce in a protracted trade spat, Amara Omeokwe and Sarah Chaney report.

Unfortunately, the coronavirus has overshadowed any good feelings engendered by the U.S.-China truce. “Despite an encouraging advance in core durable goods shipments in January, we anticipate a very soft real GDP advance in Q1 around 0.4%. The second quarter is also likely to remain lacklustre at 1.3% with average growth for 2020 unlikely to surpass 1.5%,” Mr. Daco said.

Too Soon

Federal Reserve officials have been consistent in their message: It’s too soon to say if the coronavirus will hurt the economy enough to warrant a rate cut. Chicago Fed President Charles Evans was the latest. “We’re monitoring very closely and if we see something that does require an adjustment, I’m confident we would give that all the consideration it needs,” he said Thursday.

Even though that’s the message, markets aren’t listening. Federal-funds futures, which traders use to bet on the path of central-bank policy, showed Thursday afternoon that investors thought there was a 72% chance the Fed will lower its key policy rate by a quarter-percentage point at its March 17-18 meeting, according to CME Group data. Investors also saw an 83% chance the Fed will cut rates by at least 0.50 percentage point by the end of its July meeting and a 46% chance it will cut rates 0.75 percentage point by that time, Sam Goldfarb reports.

Containment

South Korea injected more than $13 billion in emergency funds to stoke economic activity sapped by the fast-spreading coronavirus. South Korea, the hardest-hit country apart from China, said it had 2,022 confirmed coronavirus patients as of Friday morning. The tally has nearly doubled in just two days, Dasl Yoon and Chun Han Wong report.

China reported its lowest daily rise in new cases since it locked down the city where the epidemic started. The National Health Commission said it logged 327 new infections across China on Thursday, the lowest daily total since Jan. 23, when officials imposed an unprecedented quarantine over the whole of Wuhan, a city of 11 million people. The trend has bolstered Beijing’s optimism that its use of extraordinary quarantine measures is helping to contain the disease.

Speed Bump

The auto industry is preparing for supply-chain problems from the coronavirus outbreak in China to soon hit vehicle production in the world’s healthiest car market: the U.S. Automotive suppliers are warning car companies they could run out of certain parts used in North American factories in coming weeks, with particular concern over potential shortages of electronic components, Mike Colias reports.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Is there a silver lining to the coronavirus-related selloff in stocks and plunge in Treasury yields? “The yield, or interest rate paid, on the 10-year Treasury note fell to an all-time low of 1.33% Tuesday…. Well, because government debt is cheaper than ever, then ‘countercyclical fiscal policy’— borrowing and spending to offset the demand contraction—is a unique bargain. Even at higher rates, that would be the policy to pursue, but at such low rates, it’s a no-brainer. It’s the old crisis-begets-opportunity play, but at bargain-basement rates,” Center on Budget and Policy Priorities senior fellow Jared Bernstein writes in the Washington Post.

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