Morning Notes — Pricing Recession Risk

Good news: The global economy was rebounding and the US was carrying strong momentum at the start of the year. The US economy is in great shape as we head into what looks like a fairly significant shock. New coronavirus case counts in China are falling, some containment restrictions are being eased and businesses are slowly returning to work. China’s high frequency data (daily coal consumption, electricity usage, highway traffic, transportation hub flows and tourism traffic), is tracking early signs of a pick-up in activity.

Bad news: The demand shock expected to hit the US and EU will have a far larger impact than the supply shock from China factory interruptions. US efforts to contain the virus will likely last through April and the economy could easily see a 10% decline in activity over the next two months. If Q1 GDP growth is +2%, the slowdown in March, April and possibly May could drive H1 growth down to +0.5% or lower. While the US economy is in good shape to weather this shock, even healthy, well positioned economies can be thrown off course if the shock is big enough.