Face Masks, Stock Markets, And The Fed

By admin_45 in Blog

Three “Data” items to discuss today, all related to the Wuhan coronavirus:

#1: Amazon’s US sellers are charging a bundle for overnight delivery of 3M “N95” face masks – the sort one might purchase to avoid contracting the virus – because of overwhelming demand:

• If you’re willing to wait until mid-February, a box of 10 costs $40.
• But if you want guaranteed delivery by Wednesday, January 29th via Prime, the same box costs $100.

#2: While the virus may be causing shortages of face masks, recent market volatility (including today) is not yet really spooking US retail investors. We use Google Trend analysis of domestic searches for “dow jones” as a proxy for mom-and-pop investor interest in stocks. When they grow worried about market volatility, they always google that phrase.

Here is the Google Trend data for the last 30 days (lower last week than previous weeks despite the selloff):

And just for the last 7 days (today’s searches were higher than last week, but hardly a blow out).

Why these 2 points matter:

• Consumer confidence is a fragile thing, easy to break and hard to reassemble.
• Given the recent slowdown in the US manufacturing/industrial economy, it is critical that American consumers keep spending in order to sustain economic growth in 2020.
• While the Amazon mask example is simply anecdotal, Americans do pay attention to the stock market as a leading indicator of their job security and financial well-being. So far, so good on this count.

#3: Updating our discussion of Fed policy from Sunday night, yesterday’s coronavirus-inspired stock selloff pushed market expectations of a 2020 rate cut (or two) even higher:

• Fed Funds Futures expect, sensibly, that the central bank will take a wait-and-see approach in assessing the economic fallout from this global health scare.
  
  The odds of a Q1 2020 rate cut remain low, at just 12% (although higher than Friday’s close of 4%).
• The odds that the Fed will have to cut rates in Q2, however, are increasing.
  
  On Friday, the probability of a rate cut by the June FOMC meeting was 28%; today that climbed to 36%.
• Go out to Q3 and Q4 2020, and Fed Funds Futures are now giving a rate cut much better than 50/50 odds.
  
  For September’s meeting, the odds that rates would be lower than today were 52% on Friday but 62% today. By December’s meeting the probability of lower rates than today now stand at 76%, up from 68% on Friday.
• 2-year Treasury yields confirm the Futures markets’ take: those closed at 1.445% today, below the current 1.5% low end of Fed Funds.

The upshot to this last point: recent focus on the repo market/size of the Fed balance sheet will no longer be the big topic at Wednesday’s Fed Chair press conference; the coronavirus and its effect on the US/global economy will clearly take center stage. Recent stock volatility would likely have been more pronounced if markets weren’t also convinced that the “Fed Put” covers the possible impact of the Wuhan coronavirus. How Chair Powell walks through that issue on Wednesday will be critical to investor confidence as we wrap up the month.