Nonetheless, we expect the Fed to follow through with a further rate reduction this spring. For now, we’re slotting a second 50 basis point cut into the forecast. But the size and timing will depend critically on incoming information.

In the weeks ahead, we’ll be following the course of the coronavirus and its impact on markets and economic activity. But a handful of other things will also be worth monitoring:

-- Credit conditions. Companies that endure supply shocks may struggle through the middle of the year; companies (like those in the hospitality industry) facing demand shocks may struggle for longer. There is a mass of outstanding corporate debt that is just above investment grade; if the rating agencies become particularly bearish, the cliff effects that could result from downgrades within this community could cause dislocation in credit markets. Market-based credit spreads have widened importantly in the past few weeks.

Europe’s economy is heavily dependent on banks for credit.  Banks in some countries are in reasonably good positions, while banks in other countries (like Italy) are challenged. Credit conservatism will rise regardless of geography, testing whether all of the countercyclical measures taken since the 2008 crisis will actually sustain the flow of capital in the economy during difficult times. Financial conditions in China also bear watching, as we noted a couple of weeks ago.

-- The stability of emerging markets. Many developing countries base their progress on commodity exports and inbound tourism. Both are under pressure; consequently, so are the currencies and capital markets in several places. International economic organizations are already dealing with a large caseload, and may not have the political or financial support that will be required if the current crisis does not calm soon.

-- The impact of low interest rates. The combination of flagging equity prices and falling interest rates will be challenging for pension plans and some financial institutions. Americans who have watched yields go negative in other markets may soon have to contemplate similar conditions.

Stress often reveals vulnerabilities that hadn’t previously been visible. COVID-19 is stretching the global economy; we’re hoping nothing breaks.

Something Rotten

“When sorrows come, they come not single spies, but in battalions” bemoaned Claudius in Shakespeare’s “Hamlet.” Were he alive today, Claudius might see a battalion of economic challenges marching through Europe. 

The COVID-19 outbreak is one more sorrow for Europe. The outbreak that originated in China has now established a foothold around the world. With more than 3,000 confirmed cases and 100 deaths, Italy is now home to one of the largest coronavirus outbreaks outside Asia. Meanwhile, other key engines of regional growth like Germany, France and the U.K. have seen a sudden spurt in cases.