Stock Market Bounce?

The stock market is still contending with the uncertainties regarding the spread and impact of the coronavirus.  But, there are reasons to hope the market will begin to stabilize this week:  /1/ The major indices held their support levels on Friday, /2/ Fed Chair Powell corrected the mistake of several officials by reiterating the Fed's readiness to ease if needed, and /3/ maybe the worst of the coronavirus impact on Chinese production may be behind us.  The results of Super Tuesday primary elections may be a hurdle, however.

The Fed
The Fed will have an opportunity to ease at the March 17-18 FOMC meeting.   A sooner move, if not a coordinated rate cut with other central banks, as suggested by former Fed Governor Walsh, can't be ruled out.

There is precedence for an inter-meeting Fed rate cut in response to a plunge in the stock market stemming from an outside development.  During September-November 1998, the Fed cut the funds rate by 25 BPs 3 times after the market lost more than 10% over August and September as a result of the Southeast Asia financial crisis.   Stocks turned around in October (after the 2nd cut) and rose for almost another two years, making up the entire August-September loss by December 1998.

To be sure, a 25 BP rate cut could be dismissed as too little too late, given how far Treasury yields have fallen.  Or it could be viewed as ineffective when the problem is supply-side and not demand-side related.  It would nonetheless signal that the Fed is there as backup if needed -- correcting the mistake some Fed officials made just before the sell-off.  This message should help calm the markets. 

China
The Chinese Manufacturing Surveys, the NBS Mfg PMI and Caxin, released over the weekend, plunged to a record lows in February.  They clearly reflect the impact of the coronavirus (and maybe the Chinese New Year?).  However, these survey results are not a surprise and should be reflected in stock prices already.  Instead, what is intriguing is the strengthening of the Chinese currency over the past several days.  This may be noise or something other than a reflection of the state of the Chinese economy, but it at least raises the possibility that the worst is behind us.

Signs that Chinese economic activity has begun to recover from the impact of the virus are probably the most important fundamental news that would help stocks stabilize.  Hard data, such as coal and electricity usage in China, will likely be more important than official pronouncements.

US Politics
Bernie Sander's success so far is a market negative, given his left-wing views.  It may have had an oversized market impact since his chance of being nominated has been being talked up so much by news analysts.  The market impact of this week's Super Tuesday elections could depend on how many delegates he acquires.  If it looks like he is not a shoe-in  after Tuesday, the stock market should react positively.  If Sanders still looks to be the front-runner, stocks may pull back.

This Week's Key US Economic Data
After Powell's promise, weaker US economic data will become a positive for the stock market -- as they won't stand in the way of Fed easing -- while stronger data could be a negative or dismissed as too early to reflect the coronavirus.   The consensus expectations are for some softening in this week's key US economic data, although what prints could be a different matter as the evidence is mixed in some cases.

1.  The February Mfg ISM (due Monday) is expected to dip to 50.2 from 50.9 in January.  The evidence from other surveys is mixed, although none is reliable.  Phil Fed and Chicago PM suggest an increase, but the Markit Mfg PMI suggests a decline.

2.  February Non-Mfg ISM (due Wednesday) will likely be important, after the sub-50 print of the Markit Flash Services PMI.  However, the Markit Services PMI and the Non-Mfg ISM moved in the same direction in only 4 of the past 12 months.  Consensus looks for a decline to 54.5 from 55.5 in January.

3.  February Payrolls are seen slowing to +175k m/m from +225k in January.  The estimate is consistent with the Claims data, which point to a slowdown.  It equals the 2019 average, but is slower than the +211k prior 3-month average.  Any print within this range should be viewed as strong.  A print below this range should be considered weak, above very strong.

      a.  There is a risk that Census Workers will boost the Payroll figure.  There were 20k Census Workers in February, but it is not clear whether some were counted as employed in January.  The bulk of the Census hiring is expected to begin in March.  The markets will likely subtract Census Workers in evaluating the Payroll figure.

      b.  Calendar considerations support the consensus estimate of a high 0.3% m/m Average Hourly Earnings.  The y/y would fall to 3.0% from 3.1%, however, showing that wage inflation remains contained.