Powell Testimony before the Congress
The head of the Fed held speech before the Congress on Tuesday. He said that the economy is “in good place”, but the outbreak of coronavirus and questions about long-term stability do not allow to relax (probably hinting at worrying level of fiscal discipline of the government).
Powell said that there is no reason not to expect continued expansion and interest rate range between 1.50% and 1.75% is comfortable for the economy. I think that by saying this he implicitly denied that the outbreak of coronavirus is a valid reason to revise policy settings in the near future. Nevertheless, the head of the Fed believes that the “echo” of the epidemic will reach the United States (in the sense of economic damage), but it is too early to determine whether it requires a response from the central bank.
Stock buybacks have been out of investors’ sight for a while; however, it is worth to track the changes in the stock demand being created by corporates themselves. In the recent past stock buybacks have been strong enough to pull the stock market up. Despite the downward trend in weekly announced buybacks (up to a minimum of two years), the volume of completed buybacks so far have continued to increase and exceeds the volume of the same period of last year by almost a third:
Announced share repurchase volume: weekly volume (green), three-month amount (syn.), $mn.
Actual volume: four-week average, $mn.
As can be seen from the pace of buybacks corporations are still offering a lot of support for the market. This is also a solid signal that contains selling pressure. However, as the volume of announced buybacks is declining one of the demand factors is expected to run out of ammo soon and thus priced in gradually as a weakness.
Two charts to keep tab on:
Cases in China
Cases Outside of China
Whatever panic is raised, the number of people infected in China is on the decline, while outside of China, there has been a slight increase in the rate of infection. Nevertheless, the epicenter outside of China is the Diamond Princess cruise ship, the quarantine of which was extremely easy to organize – just do not let passengers go ashore. China government decided not to include asymptomatic cases in the confirmed cases, now classifying them as “positive cases”.
This wasn’t part of the WHO recommendations and caused some bewilderment as it basically looks like an attempt to lower the count of infected. But I would not attach much importance to this, since it is reasonable to assume that asymptomatic cases are less contagious, i.e. which do not require immediate treatment, i.e. to spend resources (bed, medications, equipment like ECMO etc.) which are quite limited especially at the epicenter. We are not on the stage of the outbreak where China’s desire to start to rig the data looks reasonable. Therefore, to assess the outlook for risk aversion in the markets, we continue to focus on official China data, i.e. the two charts above.
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