Coronavirus, Powell and US Economy -- This Week's Key Events

Three key items impacting the markets this week  will be /1/ news regarding the impact of the coronavirus on the post-holiday re-opening of businesses in China, /2/ Fed Chair Powell's Semi-Annual Monetary Policy Testimony, and /3/ US macroeconomic data. 

The most important will be news regarding Chinese business response to the virus.  While news reports have highlighted the risk to the global supply chain if Chinese production is severely impacted, there are a couple of reasons why the impact may not be as bad as feared.  The other two items should be market neutral to positive.  Powell will almost certainly repeat the message of the latest FOMC Statement and his post-meeting news conference.  This week's key US economic data are expected to underscore moderate growth with low inflation.

While there is little, if any, sign that the spread of the coronavirus has peaked, there are a couple of reasons that conceivably could prompt Chinese businesses to restart business after the Lunar holiday despite concern about the virus' spread.  One is economic in nature, the other political.   From an economic perspective, Chinese businesses may have to continue operations to generate income to service their high levels of debt.  To be sure, the Chinese central bank's injection of funds last week may be intended to allow banks to loan additional funds to get businesses through this period.  From a political perspective -- and possibly more importantly, the government could view employment of people as a way to prevent widespread civil protest and disorder. 

Fed Chair Powell's testimony to the House Financial Services Committee (Tuesday) and Senate Banking Committee (Wednesday) should adhere to the message found in the January FOMC Statement.  The testimony is meant to reflect the entire Board's views, which the Statement does.  The tone should be market friendly.  The Statement cited moderate economic growth and acknowledged below-target inflation.  The FOMC consensus views the current monetary policy stance as appropriate for the foreseeable future.  But, the risks are still more to the downside than upside.  In particular, Powell said the Fed is monitoring the coronavirus situation closely.  Powell also may mention, perhaps in response to a question, that the Fed is looking at whether it should change its target, such as to aim for a price level (thereby allowing for high inflation to offset earlier low inflation ).

This week's US economic data should not change the picture of moderate growth with low inflation.  Consensus looks for a decent 0.3% m/m increase in January Ex Auto Retail Sales.  And, it looks for a 0.2% m/m increase in the January Core CPI, with the y/y edging down to 2.2% from 2.3%.  Manufacturing Output, within the Industrial Production Report, is seen as 0.0% m/m.  But, the risk is for a slight decline, based on Total Hours Worked for the sector.

The Atlanta Fed model's latest estimate of 2.7% (q/q, saar) for Q120 Real GDP Growth should be viewed cautiously, however.  It seems too high relative to Total Hours Worked and the Unemployment Rate in January, both of which suggest a GDP growth rate closer to 2.0%.  So, the risk is for the model's forecast to come down as more data are released.