The spreading coronavirus hasn’t derailed growth in the U.S. or most developed countries, but it is changing economic, bond market and corporate earnings outlooks.
Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, now expects the U.S. 10-year Treasury yield will remain under 2% this year rather than drifting up to 2.25%-2.50%, which she had expected previously. The 10-year yield fell 3 basis points to 1.55% Tuesday. Treasury bill rates were generally unchanged.
“We doubt that interest rates will return to previous levels,” writes Jones in a bond market outlook titled “Coronavirus Changes the Picture.” “The negative economic impact is likely to mean slower global growth and easier central bank policies.” She expects the coronavirus will shave 0.2%-0.4% from global GDP growth, which the IMF had forecast at just 3.3% for this year.
China, the epicenter of the outbreak, “is effectively the world’s factory floor, accounting for 35% of global manufacturing output,” Jones explains, adding that Chinese consumption also plays a large role in driving demand for commodities such as oil and industrial metals and in world tourism. China represents an even larger percentage of the global technology supply chain, about 50%, according to Credit Suisse analysts.
Apple, which depends heavily on Chinese plants for the manufacture and assembling of the iPhone and other products and for their sales to Chinese customers, cut its sales expectations for the quarter on Monday as a result of the spreading coronavirus.
“Worldwide iPhone supply will be temporarily constrained” and “demand for our products within China has been affected,” said Apple in its quarterly update to earnings guidance. Its stock fell close to 2% on Tuesday, almost six times the 0.3% decline in the S&P 500.
Apple’s suppliers have had to close some facilities in China, though it is slowing reopening some, while it has closed stores in the country, along with Starbucks, McDonald’s and many more companies.