Notes From Underground: Coronavirus Trumps Unemployment Data

Friday’s unemployment report was firm on job creation but soft on average hourly earnings. The work week remained unchanged. Further north, the Canadian jobs report was very robust as jobs increased by 34,500 versus an expected 16,000. The real strength was that all the jobs growth was full-time with hours worked experiencing a healthy gain of 0.5%. The unemployment rate dropped from 5.6% to 5.5%. And yet the Canadian dollar could not sustain a rally for more than five minutes.

The CANADIAN DOLLAR weakness is a reflection of the fear for global growth from the onset of the CORONAVIRUS. The failure of the Canadian in the face of the virus was confirmed further upon the release of the IVEY PMI, which rose from 51.9% to 57.3% with the predictive consensus 52.3%. When a weak currency cannot rally on robust data  there are other areas of concern.

The Coronavirus is pushing commodity prices lower as fear increases over a global DEMAND SHOCK as supply chains and consumers are disrupted by the quarantining of factories and workers in China. The problem for global financial markets is that the fear of a demand shock is creating a FEEDBACK LOOP of a problem for dollar funding markets. There has been a dynamic increase in dollar borrowing by emerging market corporations. If the global economy experiences a dramatic slowdown where will the funding of debt repayments come from?

The fear is leading to a bid for dollars before the onset of a shock from the Coronavirus. In Fed Chairman JEROME POWELL‘s press conference on January 29, Powell made four references to the potential impact of the Coronavirus. First, the virus is a serious issue of significant human suffering. Second, it’s likely to disrupt activity in China and maybe the world. Third, the Fed is carefully monitoring situation around virus. Lastly, the virus will clearly have near-term impact on China economy. Two weeks later the markets are signaling to the FED that the spread of the Coronavirus is definitely impacting the global economy as commodity prices extend losses.

More importantly, U.S. dollar pricing continues higher as the market tries to get ahead of any disruption. The ROUBLE, SOUTH AFRICAN RAND, BRAZILIAN REAL, CHINESE YUAN and plus the major commodity exporters of Canada, New Zealand and Australia have all seen their currencies weaken, which points to market fears about the Coronavirus.

If the market signals are valid it is time for the U.S. central bank to invoke the YRA FORMULA and announce a rate cut of 50 basis points with a stern warning that if the IMPACT FROM THE VIRUS IS SHORT LIVED THE CUT WOULD BE IMMEDIATELY RESCINDED. The FED should also announce some emergency SWAP LINES for nations confronting a dollar funding shortage (in addition to the existing lines with G-10 nations that are already in place). Again, these would be emergency measures subject to market conditions. The funding issue is genuine and the Fed needs to address this.

Pay attention as Powell testifies before Congress on Tuesday and Wednesday. The GOLD /CURRENCIES making new highs is indicative NOT OF INFLATION SCARCITY BUT OF CENTRAL BANKS LOSING CONTROL IN THE FACE OF A HEIGHTENED FEAR OF DEFLATION. It is the fear of deflation in a world saddled with record amounts of DEBT,  which the International Institute of Finance (IIF) has cited at more than $250 trillion.

This is what has frightened the Bernanke school of central bankers: deflation in a debt-plagued world. As Powell told me in June 2016 about how the ECB could guarantee their debt load, “THEY HAVE A PRINTING PRESS.” I fear that his response will go VIRAL.

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12 Responses to “Notes From Underground: Coronavirus Trumps Unemployment Data”

  1. ShockedToFindGambling Says:

    Yra, i was surprised that Gold miners were very weak on Friday, in what was a pretty deflationary day……..how do you explain it?

  2. Asherz Says:

    Yra- The markets have been treating the Coronavirus with a certain amount of complacency. It is using the SARS outbreak of 2003 as its touchstone. Then 8000 people were affected with 700 deaths and about $60 billion in damages and faded away. But there was another example of a pandemic a century ago, the Spanish Influenza. 500 million people were affected, one third of the world’s population with over 50 million deaths. A fraction of that would see monetary policy, ZIRP or the Yra formula not inoculating the markets.
    See the short video below on how China is trying to solve the problem with quarantine. Let’s hope an effective vaccine can help. This type of virus is totally unpredictable.

    https://nypost.com/2020/02/09/videos-appear-to-show-people-in-china-forcibly-dragged-off-to-quarantine/?utm_campaign=iosapp

  3. Yra Harris: Bernanke School of Central Bankers Fear Deflation in a Debt-Plagued World – Investing Matters Says:

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  4. Michael Temple Says:

    Yra
    While I agree with your sentiments, there ain’t no way Jerome is cutting at this time, not with stocks racing to new highs.

    Personally, I believe the CVirus is far far worse than the massaged numbers that China Inc blithely announces daily.
    Occam’s Razor applies….The simplest answer is usually the correct one.

    To wit, why quarantine/lockdown cities/regions totaling over 100MM+ people (although I have seen some estimates as high as 400MM, but I am not sure about that), if a “mere” 800ish have died so far.

    Answer…You don’t do that, unless the numbers are STAGGERINGLY higher.

    Yet, PBOC and Fed PPT simply won’t allow stock markets even to have a normal sell off to work off ridiculously overbought/extended markets. It seems to be part of the battle against the CVirus

    It may not be incorrect to say that the CVirus impact on China Inc is similar in scope to the Great Recession following the Lehman/AIG
    implosions. In fact, industrial production in China is largely ZERO in wide wide swathes of the country. ZERO!!

    So, yes, such a situation demands extraordinary financial actions to
    save the Chinese system. Yet, no amount of money or assistance
    can make the gears of commerce restart if the country remains locked down.

    As for Jerome, how can he possibly invoke the Yra Insurance cut when markets are drinking the Kool Aid and ignoring the industrial
    perils of breaking and broken supply chains to come as China Inc
    can no longer provide the vital supplies to an integrated world production line.

    Sadly, I think the Fed is NOT going to do a thing, despite the strengthening USD and the relentless drop in UST yields, to go along with the flattening/inverting yield curve.

    Instead, Jerome will wait until the markets finally have a “come to Jesus” moment and go plotz. Then, when it comes to the attention of the Tweeter in Chief, because the economic and stock woes will hurt/damage his 2020 chances, that is when your emergency cuts
    will be enacted.

    As for now, simply look at the overnight S&P….

    Up 4 points, not down 4 and certainly not down 20 or 40.

    Markets are convinced that China has this under control and/or the
    impact on global commerce is nothing to worry about, especially
    as they seem to believe that any such disturbance, if it comes, will
    trigger the instant remedy of rate cuts that will obviate the need to sell stocks in the first place.

    Not saying it is logical. But, I know no other explanation for the astonishing strength in stocks in the face of plummeting commodities, plummeting Treasury yields, and a persistently strong USD.

    In short, NO RATE CUTS until Stocks get Whacked. And, as discussed, I am loathe to say when such a whacking will occur.

    Tesla is a good example, I think. Despite the fundamentals, the stock has soared beyond even the most ardent bull’s expectations this year, nearly quadrupling from its 2019 lows when talk of possible
    bankruptcy was legitimately in the air.

    Today, it is valued at over $130 BN and is still tremendously technically overbought/overextended.

    Same applies to S&P and certainly to the FANGs, which can do no wrong.

    Apple’s China supply chain is halted and may remain so for some time. At the same time, China represents 25% of Apple’s global sales.

    Yet, anybody who has sold out his/her Apple shares or dared to have shorted it looks like a FOOL.

    So, no, Jerome won’t and can’t cut unless/until stocks hit a big air pocket….I would think that a true confession from China of the huge magnitude of the CVirus might trigger such a reaction.

    But, it is part of Xi’s battle plan not to let the truth come out and panic folks. Better to lie about the deaths and simply pump in trillions now.

    Only if/when they lose hold of that narrative and RISK OFF sets in will Jerome/Fed make a move.

    For now, the US stock market patient isn’t allowing the doctor to apply the proper remedy while it is racing to the moon without a care
    in the world.

    Who, me worry?

  5. P. Chapuis Says:

    I’m leaning towards Michael’s scenario, not till there’s a big drop in equities we will see a reaction from the Fed.
    Alan Greenspan in “The Age of Turbulence” makes multiple references to Shumpeter’s Creative Destruction theory over and over again.
    I’m wondering if creative destruction applies to the Federal Reserve as well?
    Sure, they have a printing press, but can they buy everything?
    Where is the tipping point when the dollar implodes?

    We need more information on this Cvirus. I’m interested to know who, if anyone, has successfully fought it off

  6. yraharris Says:

    Pierre—-you should read the pieces by John Authers at Bloomberg on Schumpeter and Minsky —it is a great review of two powerful economists—great and interesting in reflection on Dudley’s piece last week which was pathetic in its analysis—waiting for Authers to respond to Dudley

  7. david Says:

    • “U.S. Treasuries are on track to begin the week just above Friday’s closing levels. Companies in China were expected to resume operations today, but many businesses will remain closed for another two weeks as the country’s officials grapple with the continuing spread of the coronavirus, which has resulted in almost 30,000 confirmed cases and nearly 1,000 deaths. Supply chain disruptions caused Chinese food prices to increase at their fastest pace in 12 years in January. ” briefing.com

    The most curious part of that to me is the last – “Chinese food prices increase at their fastest pace in 12 years. ” WIsh they had provided more on that. Why wouldn’t see this in futures of beans, hogs, cattle and corn? They are all down pretty good this year; except maybe corn which is flatish

    thanks

    • david Says:

      I guess there could be localized food price increases in China and not necessarily affect US futures prices. Perhaps they should deserve a bid
      ?

  8. Trading Perspectives from Yra - February 10, 2020 - The Cedar Portfolio Says:

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  9. Chicken Says:

    Gotta hand it to him, Bernie Sanders is a wild and crazy guy! 🙂

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