Coronavirus Creating Supply Chain Shocks in 75 Percent of U.S. Firms, Says Survey

By:
Chris Gaetano
Published Date:
Mar 13, 2020
Empty_supermarket_shelves_before_Hurricane_Sandy,_Montgomery,_NY

The coronavirus has created massive supply chain shocks, as nearly 75 percent of U.S. firms report at least some disruption in capacity due to the outbreak's impact, according to the Institute for Supply Management. The 628-person survey found that about 16 percent of those affected have been hit so badly that they are adjusting revenue targets downward an average of 5.6 percent. Particularly affected have been those connected to the Chinese economy: 57 percent noted longer lead times for tier-1 China-sourced components, 62 percent said they are experiencing delays in orders received from China, 53 percent reported difficulties even getting supply-chain information from China, 48 percent report delays in moving goods within China, and 46 percent are reporting delays in loading goods at Chinese ports.

Financial markets, meanwhile, are currently trying to dig their way out of the worst trading day since the financial crisis, with, as of this morning, the Dow and other indicies set to rise, according to the Wall Street Journal. This trajectory might change by the end of the day, however, as it has on other days when markets seemed initially promising but then melted down even lower than before.

In order to calm volatility, the New York Federal Reserve announced plans to inject more than $1.5 trillion dollars worth of short-term loans into the financial system in order to prevent the credit system from seizing up as it did in the 2008 crisis. This is a super-charged version of what it has already been doing over the past few months, as liquidity problems began emerging before the coronavirus became international headline news. Beyond the scale of the cash injections, the Fed has also gone from buying short-term Treasury notes to, now, a full range of maturities, which CNN Business said it has not done since the financial crisis; one expert compared it to the central bank firing a nuclear weapon. This was in response to a highly unusual circumstance that emerged yesterday when Treasury bonds, usually considered the safest investment one could possibly make, suddenly experienced a demand spike due to everyone trying to rush into this safe spot at once, leading to fears that the demand for these bonds might outstrip supply.

The bond market itself has taken a similar bruising as the stock market and stands on similarly shaky ground. Moody’s said on Wednesday that it had raised its baseline corporate bond default rate projection for year-end 2020 to 3.6 percent from 3.4 percent and, depending on how bad things get, the default rate could even reach up to 9.7 percent. In one of its own reports, S&P Global said that corporate bond issuance in general has dried to near nothing, and that there has been no speculative-grade, or junk, bond issuance globally since a $450 million issue on Feb. 21.

Today the Wall Street Journal is reporting that fears of credit downgrades, especially among corporate bonds that are just barely investment grade, have caused yields to spike, indicating that credit is getting tougher to access. Yields on BBB corporate bonds experienced the biggest two-day yield jump since the financial crisis, going up half a percentage point to 3.24 percent. Yet, for some at least, these downgrades might already be here: The Journal said that some banks are already cutting their internal ratings of these companies to junk, anticipating that the credit agencies will soon do so anyway. With bonds increasingly difficult to sell, particularly hard hit companies are turning to straight up bank credit to stay afloat. Aeronautics firms Boeing and AerCap have both announced plans to draw down all–or almost all—of their available bank credit, while hotel chains Hilton and Wynn Resorts have reported drawing down not all, but a still larger than normal amount.

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