Newsletter: Why the Fed Is Likely to Cut Again

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U.S. stocks surged Wednesday amid growing signs of a coordinated response to the coronavirus, markets remained volatile Thursday morning, health officials warned it would be impossible to fully contain the pathogen, and there’s still a lot we don’t know about the epidemic’s impact on the economy. Good morning. Jeff Sparshott here with the latest on the outbreak—and what to watch in Friday’s U.S. jobs report.

Here We Go Again

The three main reasons behind the Federal Reserve’s interest rate cuts on Tuesday help explain why the central bank is likely to lower rates again. The Fed hoped to boost public confidence, prevent financial conditions from worsening and cushion the U.S. economy against a global growth downturn. While the rate cut may help on each of those fronts, the outlook could grow darker in the weeks ahead as the number of U.S. coronavirus cases rises, Nick Timiraos writes.

Historical context: The rate cut came between the Fed’s regularly scheduled policy meetings, illustrating urgency to get ahead of an unfolding shock. Since 1998, the Fed has cut interest rates six other times between regularly scheduled meetings. Following each of those moves, the Fed has lowered rates again at its next policy meeting.

Reminder: Any good economic data released in the coming weeks can be easily dismissed because they will show how the economy fared prior to the spread of the virus. And more bad news seems likely.

WHAT TO WATCH TODAY

The Organization of the Petroleum Exporting Countries and its allies hold a two-day meeting in Vienna.

U.S. jobless claims are expected to fall to 215,000 from 219,000 a week earlier. (8:30 a.m. ET)

U.S. labor productivity for the fourth quarter is expected to be revised down to a 1.3% gain from an earlier estimate of 1.4%. (8:30 a.m. ET)

U.S. factory orders for January are expected to fall 0.1% from the prior month. (10 a.m. ET)

Bank of England Gov. Mark Carney gives a speech at University College London at 12 p.m. ET.

Bank of Canada Gov. Stephen Poloz speaks in Toronto at 1 p.m. ET.

Japan’s household spending for January is out at 6:30 p.m. ET.

Federal Reserve: Dallas’s Robert Kaplan speaks at the Chicago Council Global Economy Series at 6:30 p.m. ET, Minneapolis’s Neel Kashkari speaks at the University of Minnesota at 8 p.m. ET, and New York’s John Williams speaks at a Foreign Policy Association dinner at 8:45 p.m. ET.

TOP STORIES

Down with Disease

Concerns about the novel coronavirus epidemic clouded the outlook for the U.S. service sector. Private data firm IHS Markit said Wednesday its U.S. services index fell below the 50-mark that separates expansion from contraction for the first time since October 2013. The virus weighed on the U.S. travel and tourism industry. “Sectors such as financial services and business services are reporting virus-related hits to demand, suggesting a more broad-based weakening of demand across the economy,” said IHS Markit economist Chris Williamson.

But…the closely watched Institute for Supply Management’s service-sector survey rose to the highest level in a year in February, reflecting a broadly positive outlook on business conditions and the overall economy. The survey may not have captured the full effects of efforts to contain the epidemic, and it came with caveats: “Most respondents are concerned about the coronavirus and its supply chain impact,” said Anthony Nieves, who oversees the ISM survey.

Taken together, the surveys highlight the large degree of uncertainty for businesses, investors and economists as they look to gauge fallout from the epidemic.

The Fed’s beige book showed the coronavirus weighing on U.S. firms. Companies said they were worried the spread of the disease in China would hold up shipments and reduce Chinese demand for commodities, according to the compilation of anecdotes from businesses in each of the central bank’s districts.

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United Airlines said it would cut domestic capacity by 10% and international flying by 20% as the spreading coronavirus depresses bookings. The carrier also said it is offering staff unpaid leaves of absence in April, the latest move by airlines to mitigate the shock caused by cascading travel restrictions and passenger concerns over flying.

Campbell Soup said retailers are stocking up on its namesake product and other canned foods in response to the coronavirus epidemic, a boost to the beleaguered food maker’s sales.

Germany’s economy could fall into recession in 2020 if the coronavirus outbreak isn’t quickly brought under control, according to a report published Thursday by the Federation of German Industries, or BDI, the nation’s main business lobby group.

Follow the WSJ’s live coronavirus coverage here. 

Virus Immunity

Lest we forget, Friday is jobs day. The coronavirus outbreak likely had minimal impact, if any, on U.S. hiring in February. Companies by and large were surveyed about their employee headcount before the spread of the virus and escalating concerns in the U.S. It’s still worth keeping an eye on payrolls as a gauge of the economy’s strength heading into the outbreak. Economists are forecasting an increase of 175,000 jobs from the prior month, roughly in line with average gains over the prior year, Sarah Chaney writes.

Watch for whether more Americans come off the sidelines into the workforce. In January, 4.8 million Americans who were out of the labor force jumped directly into jobs. More labor-force entrants are helping fuel job growth at a time of historically low unemployment. It’s also one factor holding down wage growth, as workers coming from outside the labor force tend to command less pay than hires moving from other jobs.

The U.S. private sector added 183,000 jobs in February, according to the monthly ADP National Employment Report. That suggests the labor market is chugging along, a reassuring sign ahead of Friday’s more closely watched Labor Department report. Under the hood, the figures show continued struggles in manufacturing alongside healthy gains in the service sector. One emerging trend: Businesses with fewer than 20 workers have shed jobs over the past year. It’s not entirely clear why. One reason could be trouble matching the pay and benefits of bigger companies in a tight job market.

Note: The ADP data isn’t a reliable predictor of the Labor Department numbers due out Friday.

WHAT ELSE WE’RE READING

U.S. economic policymakers need to fight the coronavirus now. “It is time for the federal government—all parts of it—to move swiftly against the spread of the coronavirus and any economic distress it may cause. … The Great Recession taught us a painful lesson: Policymakers waited too long and were far too timid when they did act. Our country is still paying for those mistakes. It’s time to act. Go big or go home,” former Fed economist Claudia Sahm writes at the Washington Center for Equitable Growth.

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