Futures point to higher open. Signs that the spread of the deadly coronavirus may be slowing have markets refocusing on favorable U.S. economic fundamentals and a generally positive earnings season. S&P 500 Index futures are pointing to a higher open following gains in Asia overnight and in Europe at midday.
Coronavirus new case growth may be slowing. While new hotspots may develop and uncertainty remains high, this would be a positive sign that containment efforts are working. The virus will likely have a meaningful impact on Chinese growth in the first quarter, and a modest impact on global growth. If stimulus efforts can help bridge the soft patch, expected pent-up demand later in the year may put global economic acceleration back on track.
Economic optimism prevails. The National Federation for Independent Businesses (NFIB) Small Business Optimism Index climbed in January and remains near the top of its historical range, while a recent Gallup poll revealed that the number of Americans who said they are better off today than a year ago hit its highest level since 1999. Optimism plays an important role in economic activity, and as long as optimism persists the odds of a recession will remain fairly low. While there is a risk that optimism can lead to overborrowing and overspending, overheating the economy and creating economic imbalances, we see few if any signs of such excesses at this time.
Financial press refocuses on Treasury yield curve inversion. A brief inversion last week (short-term yields moving above than long-term) and intraday inversion yesterday have put inversion’s historical role as an early recession signal back in focus. While we do watch the yield curve closely, global demand for U.S. Treasuries and years of extraordinary central bank policy may be changing the meaning of the signal. We continue to look for a 3-month Treasury yield at least 50 basis points (0.5%) higher than the 10-year Treasury yield, a signal that remains far off at this time. For more on the yield curve, see the discussion in the LPL Research blog, to be posted later today.
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