The Economist - USA (2020-02-08)

The EconomistFebruary 8th 2020 Finance & economics 65

2 ing forbearance on various fronts. Shang-
hai was due to raise companies’ social-se-
curity contributions on April 1st. That has
been delayed by three months, saving
firms an estimated 10bn yuan. In Beijing
officials have encouraged landlords to cut
their commercial tenants’ rents, in ex-
change for subsidies. And regulators have
called on banks nationwide to roll over
loans to companies that would otherwise
lack the cash buffers to survive.
Even as the death toll mounts, some of-
ficials are already thinking about the eco-
nomic distortions that have arisen in the
course of the battle against the epidemic.
Hospitals face shortages of masks, gowns
and gloves. At the government’s urging,
producers have increased output. But as
Liu Shangxi, an adviser to the finance min-
istry, has noted, they will suffer from se-
vere overcapacity after the crisis passes.
The government should thus be ready, he
argues, to compensate them.
Such proposals are a far cry from the
bold plans that Hubei’s leaders laid out
only a few weeks ago. Yet the priority these
days is not to gee up growth but to ensure
that society remains stable as the quaran-
tines drag on. China’s grim new reality is
that everything, even economic policy, re-
volves around beating the virus. 7

Under the weather

Source:DatastreamfromRefinitiv *WTI

Jan11thFirstdeath

fromcoronavirus

announced

Shanghai

MSCI Asia

MSCI World

S&P 500

-10 -8 -6 -4 -2 0 2

Stockmarkets, % change, Jan 11th-Feb 5th 2020

120

110

100

90

80

2019 2020

Nov Dec Jan Feb

Commodityprices,Nov1st2019=100

Oil*

Ironore

Copper

South Korean won

Chinese yuan

Taiwan dollar

0-0.5-1.0-1.5-2.0-2.5

Currencies, % decrease against the dollar

Jan 11th-Feb 5th 2020

120

110

100

90

80

2019 2020

Nov Dec Jan Feb

Shareprices,Nov1st2019=100

HonHai

Precision

Industry

China

Southern

Airlines

TsingtaoBrewery

China

United States

Germany

Japan

-0.3 -0.2 -0.1 0

Ten-year government-bond yields

Percentage-point decrease, Jan 11th-Feb 5th 2020

Global share prices have so far been relativelyimmunetothespreadofcoronavirus.But

assets most exposed to China have suffered.Currenciesofeconomiesintegratedwith

its supply chains have weakened. Prices ofcommodities,ofwhichChinaisusuallya big

buyer, have slid. Share prices of both manufacturingandconsumer-facingcompanies

operating in China have fallen, as factoriesstayshutandpeoplestayhome.

Contagion effects

B

y 9.30pm on the first Friday of the

month, the bars in Marunouchi, To-

kyo’s financial district, used to empty out

as foreign-exchange traders returned to

their desks. London’s investment bankers,

back from lunch, would be sharp and alert,

helped by a rare early night. All awaited

perhaps the world’s most important data

release: America’s jobs report.

The release—which includes figures on

non-farm employment, the unemploy-

ment rate and wages—often generated

sizeable market moves. On average, five-

year Treasury yields moved by 0.17 percent-

age points on the day of the report in 2004.

The four biggest daily moves that year oc-

curred after a release. Since then, though,

market reaction has cooled (see chart). In

2019 yields barely budged, moving by less

than 0.04 percentage points on publica-

tion. What explains the lack of excitement?

Before the financial crisis jobs data

were thought to give a good signal about

the likely actions of the Federal Reserve,

which is tasked with ensuring maximum

employment and stable inflation. The

more people in jobs, the thinking was, the

closer America got to full employment. A

tighter labour market would push up wages

and consumer prices. (In other words,

what economists call the Phillips curve,

which plots inflation against the unem-

ployment rate, sloped downwards.) That

made it more likely that the Fed would raise

interest rates, making dollar assets more

attractive. As most financial assets are

priced in dollars, the data took on world-

wide significance. Hence Marunouchi’s

emptying bars.

The reason for the subsequent lack of

interest is that falling unemployment is no

longer a good guide to the Fed’s actions. In-

flation has been unusually quiescent. The

unemployment rate has fallen from 9% in

2011 to 3.5%, the lowest rate in 50 years. If

the usual Phillips-curve relationship held,

a rise in inflation would have followed. In

fact, it has fallen: personal-consumption

expenditure inflation, the Fed’s preferred

measure, has slipped from 2% to 1.6%. At

first that prompted Fed officials to think

that there was more slack in the labour

market than they had assumed. Lately it

has caused them to doubt that the amount

of slack is knowable at all, and to wait for

inflation to pick up rather than predicting

it based on jobs data.

As a result markets no longer expect

strong payroll numbers to be followed by

interest-rate rises. Traders still pay atten-

tion to the wage figures in the report,

though. In February 2018 a larger than ex-

pected pickup in average hourly earnings,

together with a flat unemployment rate,

led to a spike in bond yields and a stock-

market sell-off. But pay growth has lost

momentum since, even as unemployment

has fallen. Ahead of this month’s jobs re-

port, due on February 7th, after The Econo-

mistwent to press, traders might be forgiv-

en for choosing to stay at the bar. 7

Traders are losing interest in America’s

jobs figures

Financial markets

Knocking off work

Flat rate

United States, five-year Treasury-bond yields

Daily absolute change on day of jobs report*,

% points

Sources:BureauofLabour

Statistics;Bloomberg *Annualaverage

0.20

0.15

0.10

0.05

0

2000 05 10 1915