This Week's Focus: Coronovirus, Oil and ECB

The stock market is plunging at the start of the week on fears of the coronavirus' economic impact and the drop in oil prices.  But, there is still little, if any, evidence that US economic growth is slowing.  And, the latest drop in oil prices is supply-related and thus of a different nature than the recent decline.  The ECB could ease on Thursday. 

Coronavirus
While the overall economic impact of the coronavirus in the US appears to be minor so far, the fear is that this will not be the case for long.   If and when this hit to the economy happens is difficult to say.  Companies are not standing still but making adjustments, which in the future could improve efficiency as well as make businesses less sensitive to the disease as well as to developments in China.  The Chinese currency remains below its weakest levels, suggesting the worst may be over there. 

Oil Prices
The current drop in oil prices is supply related, as it reflects a breakdown in the Saudi-Russian negotiations regarding an oil production cutback.  The drop should be viewed as different from the recent weakness in oil prices that reflected an expected slowdown in economic growth.  And, as such, it should be less of a negative (if not a positive) for the stock market, except for oil companies' shares.  It should be a positive to the overall market because the drop in oil prices is equivalent to a tax cut -- it should add about $100 Bn to consumer purchasing power.  But, there will be an offset in GDP from the hit to US domestic oil production.   Note that the Saudi-Russian split could change on a dime, if they respond to the latest price drop by agreeing to cut production.
  
Central Banks
The Fed's preemptive easing, and presumably the ECB's this week, means that strong economic data should now be a positive for stocks, while weak data a negative.  Future risks are again dominating Fed policy, so near-term strength will not necessarily stop further easing.  Importantly, strong underlying growth, with the Fed in easing mode, will reduce the odds of a coronavirus-precipitated recession -- the impact would reduce economic activity but not by enough to push its trajectory into negative territory.  This is a positive for stocks.

US Economic Performance So Far
US economic growth is turning out to have been strong in Q120.  The jump in Total Hours Worked in February brought them better in line with the Atlanta Fed model's latest projection of 3.1% for Q120 Real GDP Growth.  Some of the strength may have resulted from the mild winter weather.  To some extent this could be pulling ahead activity normally done in Q2.  But, even if is, the strength bolsters the economy's underlying momentum -- which should help it counter the virus assault. 

While many in the market dismissed the strong February Employment Report as pre-coronavirus, Unemployment Claims show little, if any, impact of the coronavirus on the labor market after the Employment Report's survey week.  Initial Claims were 216k in the latest week, keeping them within their recent range.  Continuing Claims were 1.729 Mn, staying below the 1.744 Mn December-January average. They remain important to monitor.

Besides Claims, the other important release this week is the February Consumer Price Index.  Consensus looks for a market-neutral 0.2% m/m Core CPI, keeping the y/y at 2.3%.  Virus-related risks are mixed.  Any price gouging on items being stockpiled by consumers could show up in the CPI.  But, consumer pullbacks on other goods and services could have prompted discounting.

 Presidential Race
The Presidential race will now likely take a backseat in terms of market importance.  With most Democratic contenders having dropped out and Biden looking to eventually be the candidate, the consequence of a Trump loss should not be viewed as market-unfriendly as when Sanders looked to be in the lead.