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Is the US economy heading into a recession?

The US stock market has been impacted by the COVID-19 outbreak, which has been spreading outside the China region at a faster-than-expected pace. The coronavirus outbreak outside the China region has bumped close enough to rattle markets and barely managing into the pandemic territory line.

The labor market and consumer fundamentals certainly looked strong in February but it is not expected to be strong in the future. The US labor market appears to have entered into the COVID-19 outbreak on a hot streak but the virus fever is imminent, according to a CIBC Capital Markets report.

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Image for representation. Courtesy: Austin Distel on Unsplash

The Federal Reserve is likely to continue cutting interest rates as news on the virus spread continues. The Fed and markets will remain focused on where growth is headed amidst the growing downside risk to the economy posed by coronavirus despite inflation being a backward-looking indicator.

On Monday, the US stock trading was temporarily halted for 15 minutes as the stocks dipped sharply in the opening due to the oil price plunge and coronavirus spreading fears. The market experts believe that the US economy could slip into a recession if the infection continues to weaken the stock market.

Italy has imposed a nationwide lockdown, which is the country’s latest step to slow the virus spread. There were more than 114,000 confirmed cases worldwide with Italy accounting for over 9,000 cases. In the US, there were at least 540 cases with California, Oregon, New York, and Washington State declaring emergencies.

On Tuesday, the European markets and the Wall Street futures are showing signs of stabilizing. It is expected that President Donald Trump will unveil measures that are intended to provide a stimulus to the economy amid payroll taxes cut. This will provide relief to people who are taking time off work due to illness.

Read: Moderna ships coronavirus vaccine for trials

So will the US inch closer to the recession due to the drop in equities and bond yields seen in the last two weeks, this remained a tricky question. According to a CIBC Capital Markets’ model, the markets are only pricing in a 20% chance of a recession after considering into account changes in the yield curve slope, the S&P 500, and the 10-year corporate spread.

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If the markets were assuming an outright recession, spreads would typically widen more dramatically and equities would be further off their highs. For now, the betting is still that medical and economic policy will conquer the virus shock.

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