Jay Powell warned disruptions in China could spill over to the rest of the world, but here is the big surprise.
Biggest Demand Shock Since 2009 Global Financial Crisis
February 11 (King World News) – Peter Boockvar: Under Armour is another company quantifying the impact of the disrupted supply chains in China in today’s earnings release.
“The company’s initial 2020 outlook currently includes an estimated negative impact of the coronavirus outbreak in China approximately $50 to $60mm in sales related to the first quarter of 2020. Given the significant level of uncertainty with this dynamic and evolving situation, full year results could be further materially impacted.”
While the stock market assumes no impact from the virus as we continue to chug higher, expect much more of this kind of talk as companies figure out the full effect. For many companies, these sales will not be made up. For perspective, with the SPX trading at 19x 2020 earnings, that assumes earnings growth of about 8%.
We shift to Jay Powell today where the bond market is pricing in a 100% chance of another cut by September and smaller odds of another thereafter. While this possibility gets many giddy on risk assets, I’ll argue that we don’t want another rate cut from here. We’ve been given the ‘insurance cuts’ so any cuts from here is to address a deeper economic slowdown where current historic valuations on some metrics would have a tougher time absorbing a further slowdown in earnings and cash flow growth. Either way, as seen around the world, we’ve reached the point where monetary stimulus on actual economic activity has become impotent and the Fed is at the point where their policy changes will be no different in its impact.
In Jay Powell’s prepared testimony, there was nothing unexpected. On the virus, “we are closely monitoring the emergence of the cornovirus, which could lead to disruptions in China that spill over to the rest of the global economy.” What he should watch too is the US stock market that could care less about the coronavirus.
The Big Surprise
With respect to their balance sheet, “As our bill purchases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations. We intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities.” So the Fed wants a minimum level of reserves totaling $1.5 Trillion. For perspective, the amount of commercial and industrial loans outstanding are $2.35 Trillion. Thus, at least $1.5 Trillion is a lot of money the Fed wants land locked at the Fed.
World Facing Biggest Demand Shock Since 2009
ALSO RELEASED: The World Is Facing The Biggest Demand Shock Since The 2009 Global Financial Crisis CLICK HERE TO READ.
Gerald Celente discusses China shutting down entire cities and industries and quarantining and rounding up people. To listen CLICK HERE OR ON THE IMAGE BELOW.
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