Coronavirus Continues to Impact Economy

March 4, 2020

 

Overview: Investors once again were almost entirely focused on the coronavirus over the past week. Increased concerns about its spread caused investors to shift to safer assets, and mortgage rates reached record-low levels.

As the number of reported cases of the coronavirus around the world rises, the list of school closings, work interruptions, and event cancellations grows. This slows economic activity, which is positive for mortgage rates. The uncertainty about how much further the virus will spread has also caused investors to reduce the level of risk in their portfolios. Increased investment in mortgage-backed securities (MBS) has helped lower mortgage rates even more.

 

On Tuesday, the Federal Reserve cut short-term rates by 50 basis points to help offset the economic impact of the coronavirus. This was the first rate cut to take place between regularly scheduled meetings since the financial crisis in 2008. Longer term Treasury yields and mortgage rates, which are influenced by a wide range of factors, benefited from the cut to a smaller degree.

 

While economic reports have caused little reaction in recent weeks, they have shown few signs of weakening so far. The services sector accounts for more than two-thirds of economic activity in the U.S., and the latest reading for the Institute for Supply Management (ISM) Services Index unexpectedly posted a significant increase to 57.3, the highest level in a year. Readings above 50 indicate an expansion in the sector.

 

Week Ahead

Looking ahead, the coronavirus will remain the primary focus for investors. The monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, news about the U.S. elections could have an influence.

 

ISM Services Index

 

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