By Akane Otani and Georgi Kantchev
Global stocks and bond yields slid Friday as weak manufacturing
data deepened investors' anxiety about the health of the world
economy.
Major stock indexes have managed to rally this year despite a
slowdown in the global economy, in part because central banks have
signaled they will back off plans to normalize monetary policy for
the foreseeable future.
But signs that momentum continues to cool across major economies
have challenged investors, raising questions about whether a soft
patch of data could mark the start of a more persistent
downturn.
A report Friday showed factory output in the eurozone fell in
March at the fastest pace in six years, while a gauge of U.S.
manufacturing activity slipped to its lowest level in nearly two
years. The data sent bond yields tumbling, with yields on German
10-year debt trading in negative territory for the first time since
October 2016 and yields on 10-year Treasurys at fresh lows for the
year.
Meanwhile, stocks across the world retreated, with the S&P
500 losing 1.2% and benchmark indexes in France, the U.K. and
Germany sliding more than 1% apiece.
"The global economy has clearly become an issue, with big
headwinds there," said Tim Anderson, managing director at
broker-dealer TJM Investments, pointing to mounting worries
particularly in Europe and China.
For much of 2019, stocks and bond yields had moved in opposite
directions. That troubled fund managers, who noted bond yields
typically rise -- not fall -- when investors are confident in
future prospects for growth.
But they moved lower in lockstep Friday, as investors across
markets bet on an environment in which growth across the world is
expected to slow.
"This confirms the softening data tone the market has been
observing and central banks have been forced to take note of," said
Matt Cairns, strategist at Rabobank.
Part of the anxiety, analysts say, stems from doubts about
whether central banks' wait-and-see approach to monetary policy
will be enough to avert a global economic slowdown.
Earlier this week, Federal Reserve officials indicated they are
unlikely to raise interest rates this year and may be nearly
finished with the series of increases they began more than three
years ago. On Wednesday, Fed Chairman Jerome Powell suggested the
central bank was likely to leave the policy rate unchanged for many
months.
This change of tactic by the Fed has divided the market. For
some, it is the latest sign that economic growth in the U.S. and
around the world is slowing. For others, a more dovish Fed could
prolong the bull market.
"The market is polarized: Half thinks we are in a bull market
recovery and the other half thinks we are in a bear market rally,"
said Eoin Murray, head of investment at asset manager Hermes.
In one warning sign, a closely watched yield curve inverted
Friday for the first time since 2007.
The spread between 3-month and 10-year U.S. Treasurys fell to
-0.03 percentage point. Investors and Fed officials closely watch
the dispersion of short- and longer-term yields because the
three-month yield has exceeded the 10-year yield ahead of every
recession since 1975.
To be sure, many believe that in the U.S., a recession isn't
imminent.
Corporate earnings, while cooling, are still expected to post
single-digit percentage growth in 2019, according to FactSet. The
labor market has added jobs for 101 consecutive months, its longest
streak ever, and unemployment remains low.
Even weaker segments of the economy have appeared to stabilize
in recent months, with data Friday showing sales of previously
owned homes soared 12% in February -- far more than economists had
expected.
But the question investors say they are contending with is
whether the slowdown in the eurozone could have a ripple effect,
hitting profits at multinationals in the U.S.
Bank stocks slid again Friday, putting the KBW Nasdaq Bank Index
of large lenders on track for its biggest one-week slide since
December. The group has been hit particularly hard by recent stock
declines, in part because lower interest rates and slowing growth
bode poorly for lending profitability.
Bank of America shed 4.5%, while Morgan Stanley declined 3.6%
and Goldman Sachs fell 2.5%.
In another sign of pessimism, traders doubled down on bets that
the Fed will go as far as lowering rates soon -- something they
haven't done since the midst of the financial crisis in 2008.
Federal-funds futures, used by traders to place bets on the
course of monetary, showed the market pricing in a more than 50%
chance of the Fed lowering rates by the end of the year, according
to CME Group. That marked the highest probability yet this
year.
Write to Akane Otani at akane.otani@wsj.com and Georgi Kantchev
at georgi.kantchev@wsj.com
(END) Dow Jones Newswires
March 22, 2019 12:04 ET (16:04 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.