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COVID-19: What a difference a week makes

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As financial markets continued their volatility and COVID-19 spread across North America, Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with Doug Porter, Chief Economist, BMO Financial Group and Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets, to examine the developing story and how it will impact the markets and the economy.

Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss medical developments.

“Now's the time to stay poised, seek perspective and remain committed to your process,” Belski said to open the call.

Even as the COVID-19 crisis continues to rock global markets, there is reason for some optimism about measures to track and contain its spread, treat symptoms, and eventually arrive at a vaccine, Whyte told the BMO Capital Markets conference call this week.

“We’re doing what we need to do, we really are. We are taking all the steps we need to be taking to really be prepared for this pandemic,” Dr. Whyte, who prior to WebMd served as the director of professional affairs and stakeholder engagement at the center for drug evaluation and research at the USFDA, said on a call of BMO experts to discuss the impact of the coronavirus on global markets.

“We’re using the public health strategies that have proven to work, we’re making progress in testing, we’re making progress in therapeutic intervention, we’re putting in the time and the effort needed in vaccine development and we’re implementing social distancing, which we need to do in order to bend that curve, while at the same time building surge capacity.”

Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss reasons for optimism about measures to track and contain the spread of the disease, treat its symptoms, and eventually arrive at a vaccine. Read more on Dr. Whyte’s comments.

Economic Update

The impact of stricter measures imposed by governments around the world to deal with COVID-19 is deepening and moving forward the timetable of the economic hit from the virus even from just a week ago, Porter said. Policymakers are responding, as was seen in Sunday’s multi-pronged action by the Federal Reserve Bank, slashing the benchmark interest rate to 0 - 0.25 percent.

“We expect the Bank of Canada to match that move following Friday's 50 basis point cut and also take its key lending rate down to the 2009 lows of 0.25 percent,” he said.

Economic activity is expected to drop steeply in March, April and likely May amid widespread shutdowns and, in some cases, extreme measures implemented by the Government of Canada, like the recently announced ban on non-citizens visiting Canada.

Porter likened trying to do an economic forecast at a time like this to trying to put a price on your house while the kitchen is on fire: you don’t know when the fire will be put out and how much damage there will be when it’s over.

Moving forward, economic policy will be aimed at flattening or bending the recession curve, he said, and the onus will be on global fiscal policy to turn things around for the second half of the year. Federal Reserve Bank policy will be all about providing liquidity and maintaining proper functioning of the markets.

At the time of the call, Congress had just voted on an emergency bill, which Porter saw as a first step, but a larger package was expected. In 2008 and 2009, the Organisation for Economic Co-operation and Development recommended fiscal stimulus be around 2 percent of GDP, and that may be where we’re headed, he said.

Canadian Finance Minister Bill Morneau will be announcing a fiscal stimulus package in the coming days, and while last week it was rumored to be around 1 percent of GDP, Porter said there was flexibility and it would likely be more.

In general, the aim of policies right now will be to stabilize the economy and prime it for a rebound in the second half of the year. We’re more optimistic with those second-half forecasts than many, Porter explained, because of the amount of money being poured into these fiscal stimulus packages.

“Given the information on hand and assuming the kind of fiscal measures,” he said, “we are looking at a deep drop in second quarter GDP, well over 5% in Canada.”

And, while recovery is seen starting in Q3, we still won’t be back to where we were before the virus possibly until late next year, Porter said.

Canadian Currency

The dollar finally buckled, hitting a four-year low at the time of the call of $1.40, with further weakening is expected by Porter and his team, into Q2. He said, “We don't look for it to get back to the $1.33 area until late 2021."

Market Impact

The Federal Reserve Bank brought monetary policy up against the lower bound, which Lyngen said will stay put for the foreseeable future. In terms of quantitative easing, at the time of the call there had been some chatter in the market about potentially bringing back a commercial paper buying program or some version of more directly injecting capital onto the corporate side.

“In terms of the correction of rates, we continue to expect that it will be another bullish impulse,” he said. That means yields lower, with front end rates up against zero and even potentially dropping below zero as the year plays out. Lyngen said that by the end of the year the broader economic outlook will at least be heading in the right direction, but clearly not completely back to normal.

Overall, he said we anticipate a very choppy period in the Treasury Market as the market responds to the incoming Coronavirus information and ignores the economic data for the next couple of months, at least.

Read more
Brian Belski Chief Investment Strategist
Douglas Porter, CFA Chief Economist
Ian Lyngen, CFA Managing Director, Head of U.S. Rates Strategy

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