How Coronavirus Hits Global Economy And Affects Monetary Policy

With uncertainties weighing on the global economy, long gold at dip. 

Latest update: China said the number of coronavirus cases climbed above 70,000 as the province at the epicentre of the outbreak reported 1,933 new cases, slightly higher than a day earlier. The head of a Wuhan hospital said a turning point has been reached as new cases fell over the weekend, but the outlook was more cautionary outside of China. The head of the US National Institute of Allergy and Infectious Diseases said the outbreak is on the verge of a global pandemic if containment steps fail to show more success.

Deaths were reported in France and Taiwan over the weekend, bringing the number of fatalities outside mainland to five. The US evacuated some passengers from a cruise ship in Japan, where 355 people have the coronavirus.

Watch the eurozone PMI for any possible signal

Growth in much of the eurozone economy has been sluggish in recent years. Now, the export-dependent bloc has to deal with the economic fallout from the deadly coronavirus. On Friday, IHS Markit will release composite purchasing managers’ indices — that combine manufacturing and services activity — for the eurozone and its two biggest economies, France and Germany. These will provide a snapshot as to how the region’s companies are faring and could offer an early clue as to how severe the impact will be. 

January’s reading for the eurozone hit a five-month high, suggesting an upturn in the bloc’s fortunes, but February’s survey will give a much better picture of any fallout from China’s shutdown. With inflation stubbornly low and growth still particularly weak in Germany, the European Central Bank cut rates and restarted its controversial bond-buying programme last year. However, opinion is divided as to whether this monetary loosening will have much of a positive effect, particularly given how much stimulus the ECB has already injected. Industrial production data last Wednesday offered little comfort. It showed a 2.1% fall in the eurozone in December, and a 4.1% drop for 2019.

Worries over the spread of coronavirus have boosted the dollar, a safe haven for investors during uncertainty over the global outlook. The dollar index, which measures the greenback against a group of other currencies, was up 0.2% in the same period, bringing its gains over the past month to 1.8%.

The double hit of the coronavirus and disappointing economic data sent the euro to its weakest level in almost three years last week. Meanwhile, IHS Markit will also publish a PMI for the UK on Friday. While economic growth has also been lackluster, partly driven by uncertainty over its exit from the EU, the UK enjoyed an unexpectedly strong bounce in its PMI in January following the landslide election victory by Boris Johnson’s Conservative party.

Will Fed remain on hold throughout 2020? 

On Wednesday, minutes from the Federal Reserve’s latest policy-setting meeting will be released. In January, the US central bank stood firm and left its main policy rate unchanged at a range of 1.5 to 1.75%. Chairman Jay Powell underscored at the time that the US economy remained “in a good place” and that officials had not altered their plans to leave interest rates where they were until the end of the year. 

Still, market participants took certain comments to be dovish, sending Treasuries rallying. Investors seized on Powell’s disclosure that the Fed is “not satisfied” with inflation running so persistently below its 2% target given the length of the current US expansion. Moreover, Powell’s warning about the potential impact of the coronavirus outbreak on economic growth further reinforced investors’ perception that the Fed might find itself cutting interest rates once again in 2020.

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