One sign the coronavirus has dragged the economy to a scary precipice: We are, by the day, witnessing developments not seen since the depths of the financial crisis.
The Federal Reserve on Tuesday was responsible for two at once. The central bank cut its benchmark interest rate by a half-point for the first time since Oct. 8, 2008. The unanimous move was also the first since that crisis-era cut to come from an emergency, unscheduled meeting of monetary policymakers. It didn’t work.
After rallying on news of the cut — building on the approximately 5 percent surge stocks mounted the day before — investors soured as Fed Chair Jerome Powell fielded questions from reporters. The central bank chief signaled openness to another rate cut when the Fed meets in two weeks, but he also said monetary policy can’t address the core threat from the disease itself. “We do recognize a rate cut won’t reduce the rate of infection,” he said. “It won’t fix a broken supply chain. We get that. We don’t think we have all the answers.”
The major stock indexes shed about 3 percent on the day. And the yield on the 10-year Treasury bond, a closely watched hedge against an economic slump, dropped below 1 percent for the first time in its history as investors sought safety from the stock market turmoil. Traders further shrugged off the Fed's cut by signaling their expectations central bankers will add another when they meet later this month. “While we don’t think a cut is a done deal, it seems more likely than not that they will ease and that it will be 50 basis points. By the time of the March meeting, today’s cut will be old news,” Larry Meyer, a former Fed governor and founder of Washington-based research firm LH Meyer, writes in a note.
“There was a little bit of classic Powell miscalculation,” Neil Dutta, head of economics at RenMac Research, told me, speaking for a number of other Fed watchers. “Sometimes it’s important to state the obvious but also to know when not to state the obvious,” adding that Powell stepped on his own message by emphasizing the limits of the Fed’s toolbox.
The Fed was arguably boxed in. Traders had already priced in a cut, with growing expectations it would come this week. Failing to act could have further spooked them. Yet following through subjected the central bank to criticism it was knuckling under to pressure from financial markets and President Trump, who has intensified his typical jawboning of Powell as the health crisis has deepened.
The president doubled down on his attempts to muscle the Fed even after it announced the rate cut:
The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!— Donald J. Trump (@realDonaldTrump) March 3, 2020
And others said the rate cut wasted precious, dwindling ammunition to fight a downturn, a point former Treasury secretary Larry Summers expressed:
When you have limited ammunition you have to conserve it. The Fed has limited ammunition with interest rates so low. Interest rates don't cure the #coronovarius and interest rates don't repair supply chains.— Lawrence H. Summers (@LHSummers) March 3, 2020
The counterargument, from University of Oregon economist Tim Duy:
This is a straight up bad take. If you are going to zero, you won’t have (traditional) ammunition left no matter how quickly you get there. Better to go early and go big and err on the side of being ahead of the curve rather than behind. https://t.co/aUsRliHbBw— Tim Duy (@TimDuy) March 3, 2020
Many analysts came down somewhere in between. “It certainly didn’t hurt. Whether or not it did much help is to be determined,” Ken Matheny, an executive director at IHS Markit, tells me.
The twin imperatives for public officials now are “getting the disease under control and, even more importantly in the short run, convincing the public they are capable of getting the disease under control… There’s a lot of fear among the public and investors, that fear is growing, and nothing’s happened yet to calm it.”
To Matheny’s point, that rising anxiety is evident beyond the financial markets in the real economy itself.
Per my colleague Heather Long: “As the virus spreads, grocery store shelves are going empty in parts of the country, manufacturing supply chains are breaking down as parts aren’t arriving from Asia, and businesses and households are cancelling cruises, conferences and flights at a rapid rate.
The U.S. economy depends heavily on consumer spending, and there’s growing concern that could nosedive as people stay home and watch the stock market’s wild fluctuations. The Fed typically likes to wait to see hard data signaling economic fires, but the coronavirus is moving so quickly that the central bank felt it needed to act ahead of a widespread situation where workers and students are forced to stay home and the economy grinds to halt.”
The focus in Washington will now shift to what fiscal response, if any, the White House can muster in conjunction with Congress.
Congressional leaders are working to forge agreement on a $7.5 billion emergency spending bill to combat the spread of the virus. And the Trump administration is considering tapping a national disaster program to pay medical providers for the care of uninsured patients, the Wall Street Journal’s Stephanie Armour reports. Meanwhile, Trump has floated a payroll tax cut, via tweet.
But it’s not clear the administration will formally push a stimulus package to prop up the economy. From CNBC’s Eamon Javers:
There is a WH National Economic Council meeting today on the economic impact of the coronavirus. But don't expect this to be about new stimulus ideas: WH aides are not developing new policy options - they believe the economy is sound now and are skeptical of short term stimulus.— Eamon Javers (@EamonJavers) March 3, 2020
Treasury Secretary Steven Mnuchin, testifying Tuesday before the House Ways and Means Committee, said the U.S. enjoys a “very resilient economy,” per The Hill. Mnuchin suggested the president would favor investing in infrastructure if it pursues a stimulus measure, an idea that drew support from Rep. Richard Neal (D-Mass.), who leads the tax-writing committee.
Some advisers are leaning on the administration to move urgently. Politico reports ”former House Speaker Newt Gingrich is pushing the idea of a one-time tax credit for companies that bring manufacturing back to the U.S. from China. And [Mnuchin] said his agency would talk to independent bank regulators about easing rules for lenders. Mnuchin also said Treasury had set up a subtask force to examine how coronavirus is hitting small businesses."
“A payroll tax cut would be quite effective, because it's pretty rapid,” Dutta tells me, “or handing out checks to people in a certain income threshold. It's really about speed.”
- International travel to the U.S. is expected to drop: A major travel industry advocacy group, the U.S. Travel Association, said that it anticipates international inbound travel to the country will drop 6 percent between now and May, which it says would be the largest dip in global visitation since the financial crisis in 2007 and 2008," my colleague Hannah Sampson reports.
- South Korea announces massive stimulus: “South Korea announced nearly $10 billion in emergency funding to offset the economic hit of the coronavirus, as health officials said the country’s national tally of cases had risen by 516 to a total of 5,328, the highest outside China,” my colleague Min Joo Kim reports from Seoul.
- Global mortality rate rises: “The head of the World Health Organization said … that the global mortality rate for Covid-19, the disease caused by the new coronavirus, was 3.4 percent,” the Times reports. “Tedros Adhanom Ghebreyesus, the organization’s director general, said in a news conference in Geneva that Covid-19 is deadlier than the seasonal flu, but does not transmit as easily.”
- UPS and FedEx warn outbreak could hurt operations: “U.S. package delivery companies United Parcel Service Inc and FedEx Corp warned … that the coronavirus outbreak could disrupt shipment of goods in affected countries and possibly weigh on their first-quarter results,' Reuters's Ankit Ajmera and Sanjana Shivdas report.
- Google cancels annual conference: Add the search giant to the list of companies that are either canceling major events or reining in employees' travel, CNBC's Jennifer Elias reports. Google's I/O developer's conference is usually a prime opportunity for the company to unveil new features for its various products.
- Other conferences could be next. South by Southwest festival planners, and leaders in the host city of Austin, are considering whether to go ahead with the event this year, WSJ reports. It's one of many: “From Beijing to San Francisco to Geneva, the cancellations added up to millions of lost visits and tens of millions of dollars in lost revenue for local economies, a tally growing by the hour this week as conferences spanning everything from books and housewares to organic foods shut down.”
- NBA owner says a ban on fans could come: Marc Lasry, co-owner of the NBA’s Milwaukee Bucks, told CNBC …“that sporting events could possibly ban fans if the coronavirus outbreak worsens,” CNBC's Hannah Miller reports. The billionaire hedge fund manager hopes such a move is not necessary, but pointed out that European leagues have already instituted such bans.
— Biden romps on Super Tuesday: “Joe Biden powered to a dominating sweep of the South and surprisingly strong showings in New England and the Upper Midwest on Tuesday night, as he sought to seize control of the Democratic presidential race and overtake Sen. Bernie Sanders as the delegate leader,” my colleagues Matt Viser and Chelsea Janes report.
“Sanders was holding on to a lead in California, the state with the biggest delegate haul of the Super Tuesday primaries, as votes were slowly counted there. But Biden’s victories in Texas and eight other states threatened to at minimum erase the lopsided delegate advantage Sanders hoped to gain from the day’s voting. The results set up a more vigorous fight ahead that presents the party with divergent choices, between a pragmatist vowing a return to normalcy and a populist promising a revolution.”
- Sanders's victories so far: He easily won his home state, Vermont, and carried Colorado and Utah.
How Biden did it: “Exit polls across a dozen Super Tuesday states show [he] won strong support from black voters, consolidated support among moderate and somewhat liberal Democrats along with a swing from late-deciding voters on his way to victories in eight states,” my colleagues Brittany Renee Mayes, Leslie Shapiro, Kevin Schaul, Kevin Uhrmacher, Emily Guskin, Scott Clement and Dan Keating report.
- Black voters: “In almost all states where there were enough black voters to accurately poll, Biden dominated. He was supported by roughly 7 in 10 black voters in Alabama and Virginia and about 6 in 10 in North Carolina and Texas. The outlier: Massachusetts. There, black voters made up about 1 in 10 voters, and Biden edged out Sanders by only single digits.”
- Late deciders: “Exit polls showed Biden won roughly 6 in 10 primary voters who decided in the last few days in Virginia, Tennessee and Alabama, and won about half of this group in Maine, Texas and Minnesota. Sanders won no more than 3 in 10 late deciders in any state except his home state of Vermont, where Sanders and Biden ran about even.”
Here's where things currently stand: (We may not get the complete picture for a couple of days)
— Bloomberg's ROI needs serious work: “Bloomberg set out to test whether a candidate can overwhelm his rivals with limited campaigning and unlimited spending. On the first day he actually appeared on a ballot, the answer was clearly no, and in coming days he will probably face growing pressure to step aside,” my colleague Michael Scherer reports.
“It’s hard to overstate the importance the Bloomberg campaign had placed on Super Tuesday. His campaign’s fundamental theory was that he could ignore the first four contests and instead blanket the March 3 states with enough ads to leave his rivals behind … Bloomberg’s spending accounted for the vast majority of the money shelled out by the candidates in Super Tuesday states — about $18 million in Virginia, $8 million in Alabama and $17 million in North Carolina — yet he handily lost all three to Biden on Tuesday. Polling in other prizes, like California and Colorado, was not promising for him either."
The cold hard math:
Bloomberg won nine delegates Tuesday after spending more than $236.6 million in Super Tuesday states. That’s $26.3 million per delegate, according to @SooRinKimm— Rick Klein (@rickklein) March 4, 2020
— Warren finishes *third* in her home state: “Sen. Elizabeth Warren, who last summer rose to the top of polls in several presidential primary states … reached the nadir of her bid for the White House: a third-place finish in her home state, Massachusetts,” the New York Times's Reid J. Epstein reports.
“The result represented her worst-case scenario. Warren had already finished in third place or worse in the early nominating states of Iowa, New Hampshire, Nevada and South Carolina. That left her on the sidelines after Sanders and Biden picked up momentum and dominated the 16 Super Tuesday contests, which included delegate-rich states like California, Texas and North Carolina, as well as Democratic strongholds like Massachusetts.”
— Investors appear encouraged by Biden's victory. CNBC's Thomas Frank: “U.S. stock index futures pointed to a sharply higher open on Wednesday as early results on Super Tuesday showed former Vice President Joe Biden notching key wins and reassuring investors of his place amid the top candidates in the Democratic pool. As of 7 a.m. ET on Wednesday, Dow Jones Industrial Average futures were up 655 points and indicated a rise of 631 points at the open. S&P 500 and Nasdaq 100 futures also pointed to solid opening gains. Still, the implied open could change as markets remain volatile.”
PredictIt now gives Biden strong odds of capturing the nomination:
— Coronavirus won't change tariffs on China: “[Mnuchin] said the United States was not considering lowering tariffs on goods from China in response to the fast-spreading coronavirus, but would look at all options as the situation evolved,” Reuters's Andrea Shalal and Lucia Mutikani report.
“'We’re not considering that at the moment, but as this progresses … we’ll look at all the options that we think are important to help particularly SMEs and particular areas of the economy that are impacted by this,' Mnuchin told a hearing of the House Ways and Means Committee. He said a task force at the U.S. Treasury was looking at the situation of SMEs, or small- and medium-sized businesses hit by the outbreak, and could present specific recommendations to help those businesses.”
— Chinese official signals fight over journalists is just beginning: “China has accused the Trump administration of having ‘naked double standards’ and indulging in ‘hegemonic bullying,’ promising retaliation after the State Department introduced new rules that will force 60 Chinese journalists to leave the United States this month,” my colleague Anna Fifield reports.
“After fighting a tit-for-tat trade war, Beijing and Washington now appear to be using the same tactics over press freedom — with journalists caught in the crossfire.”
— Mnuchin directs IRS to boost audits on wealthy: “ The IRS would ramp up audits on higher-income taxpayers with funding proposed for fiscal 2021, Treasury Secretary Steven Mnuchin said,” Politico's Aaron Lorenzo reports.
“The agency has been under pressure over the increasing share of audits on lower-income taxpayers, while its audit rate has plunged for those at the upper end of the income scale … Rep. Judy Chu (D-Calif.) said 30 percent of taxpayers at the top of the income scale were audited about a decade ago but just 7 percent of them faced audits in 2018. Meanwhile, those at the low end, particularly taxpayers who claim the Earned Income Tax Credit, now account for 39 percent of all audits, she said.”
— Supreme Court looks likely to weaken CFPB: “Supreme Court looked likely to weaken the Consumer Financial Protection Bureau, but leave it standing, as the justices heard oral arguments … in a major business regulation case,” CNBC's Tucker Higgins reports.
“The case concerned whether the regulatory agency established in the wake of the 2008 financial crisis was structured unconstitutionally by giving too much power to its director. The justices sparred … over whether that removal provision placed an unconstitutional burden on the president’s ability to exercise his executive power and, if so, whether the provision could be severed from the rest of the legislation while leaving the CFPB otherwise in place.” A decision is expected by the end of June.
- All eyes on Roberts: “Chief Justice John Roberts, viewed as the swing justice in the case, largely avoided the question of severability and suggested that for-cause removal wasn’t that high a bar to meet.”
And leans toward siding with SEC to recover fraudulent profits: Justices “appeared inclined to back the Securities and Exchange Commission’s power to use federal courts to force defendants to surrender profits obtained through fraud as part of enforcement of investor-protection laws,” Reuters's Andrew Chung and Lawrence Hurley report.
“The nine justices heard an appeal by California couple Charles Liu and Xin Wang contesting a 2016 civil action brought against them by the SEC in federal court. They were ordered to disgorge almost $27 million, the amount they raised from foreign investors for a cancer-treatment center that was never built. Conservative and liberal justices were skeptical of the couple’s bid to strip the SEC of its disgorgement power in federal courts, although some suggested that limits should be imposed.”
— Bankers raise eyebrows asking for looser regulations amid coronavirus: “The country’s biggest banks are asking federal officials for long-sought regulatory relief as part of the government’s efforts to contain the economic fallout from the coronavirus, requests that experts lambasted as opportunistic and unnecessary,” my colleague Renae Merle reports.
“The Bank Policy Institute — a lobbying group for big banks including Bank of America, JPMorgan Chase, Wells Fargo and Citigroup — is recommending, among other things, that the Federal Reserve lower capital requirements and ease the periodic ‘stress tests’ banks take to prove they can survive another economic crisis … The recommendations are ‘transparently opportunistic,’ said Jeremy Kress, an assistant law professor at the University of Michigan School of Business. For years, the banking industry resisted calls for higher capital requirements that could have been used as a buffer, or a rainy-day fund, during economic turmoil, he said. Those buffers could have been turned off now to give the industry more flexibility to make loans during the current economic uncertainty, Kress said.”
— Growing numbers of struggling cities: “The proportion of American cities expecting general-fund revenue to drop more than 3 percent when the books close on the 2019 fiscal year increased to 27 percent from 17 percent in fiscal 2018, when adjusted for inflation. That is one of the findings from a Wall Street Journal analysis of data collected from 478 U.S. municipalities by the National League of Cities, an advocacy group,” the WSJ's Heather Gillers reports.
“American cities are generally doing better than rural communities, buoyed by the U.S. expansion. Yet the boom in such metropolitan areas as Denver, Salt Lake City and Nashville, Tenn., masked fiscal weakness in cities tied to manufacturing and other shrinking industries. Fallout from the coronavirus disease on the U.S. economy and city budgets is another potential setback. In the past week, New York City has held daily meetings of pension advisers, and California put out a warning to prospective municipal bond investors.”
— Mallinckrodt faces federal suit over alleged Medicaid fraud: “The United States sued a unit of the drugmaker Mallinckrodt Plc … accusing it of defrauding Medicaid out of hundreds of millions of dollars as a result of ‘meteoric’ price increases for its biggest-selling drug, Acthar Gel,” Reuters's Jonathan Stempel reports.
“Joining a civil whistleblower lawsuit filed in Boston federal court, the government said Mallinckrodt ARD LLC violated the federal False Claims Act by withholding Medicaid rebates related to Acthar, which now costs nearly $40,000 per vial … Mallinckrodt had sued the U.S. Department of Health and Human Services last May over the calculation of Acthar rebates, and said the judge there has barred any enforcement action while the case was pending.”
— Nordstrom shares dive: Nordstrom said “it is changing its leadership structure to retire its co-presidency, and naming Erik Nordstrom as its sole CEO,” CNBC's Lauren Thomas reports.
“It announced the changes as it reported fourth-quarter earnings and sales that missed analysts’ estimates, sending shares tumbling. Its stock initially cratered more than 10 percent in after-hours trading following the release. Shares were recently down about 8 percent. Nordstrom also said it will be shrinking its board to 10 directors from 11, and establishing a new 10-year limit for members.”
— The good and bad news about the coronavirus. New cases appear to have topped out in China, via Pantheon Macroeconomics chief economist Ian Shepherdson:
If you're feeling despondent about #Covid_19 the latest data from China ex-Hubei province are very encouraging. If you believe the numbers, it can be beaten. #CoronaVirusUpdate pic.twitter.com/bbJBPfJJkN— Ian Shepherdson (@IanShepherdson) March 3, 2020
But they're rising geometrically in other countries, via Bloomberg data journalist Hannah Recht:
- Zoom Video, Dollar Tree, Campbell Soup and American Eagle are among the notable companies their earnings
- The House Financial Services Subcommittee on Housing, Community Development and Insurance holds a hearing on discrimination in the auto insurance industry
- Costco, Kroger, Toro and H&R Block are among the notable companies their earnings
- The Senate Banking Committee holds a hearing entitled, “threats posed by state-owned and state-supported enterprises to public transportation”