US government bonds rallied sharply on Friday after a dismal report on the US manufacturing sector heightened concerns about the outlook for the world’s largest economy.
The yield on the 10-year Treasury note, a benchmark for global government bond markets as well as consumer loans and mortgages, fell 0.13 percentage points to 2.88% in trade tight before a holiday weekend in the United States. The yield has fallen nearly 0.3 percentage points over the past three days in the biggest such moves since 2020.
In equities, U.S. stocks ended the day higher, with the benchmark S&P 500 index up 1.1% after its worst first-half performance since 1970. The tech-heavy Nasdaq rose 0, 9%.
A closely watched survey by the Institute for Supply Management showed that the pace of growth in the US manufacturing sector fell sharply in June compared to May. At the same time, executives interviewed by the organization said new orders submitted to factories and employment conditions have deteriorated due to long delivery times and high prices.
Weaker data, such as Friday’s, has investors worried that moves to curb intense inflation by central banks, including the Federal Reserve, European Central Bank and Bank of England, could derail major markets. global economies.
“The ISM report, as well as many other business surveys, point to a recent weakening in the economy,” said Daniel Silver, economist at JPMorgan.
Soft economic data led JPMorgan to revise its second-quarter growth estimate down on Friday from 2.5% to 1%.
The Atlanta Fed’s GDPNow model, along with ISM data and a Census Bureau construction report from Friday, predicts the U.S. economy will contract 2.1% in the second quarter. It would be a second consecutive quarter of contraction, a traditional definition of a recession.
The data also came after automaker General Motors reported a 15% drop in quarterly sales.
The Fed raised its benchmark extra-wide interest rate by 0.75 percentage points last month to a range of 1.5-1.75%. Markets are expecting the funds rate to hit 3.3% by March, although that forecast derived from futures trading has been revised down significantly from nearly 4% a year ago. a few weeks.
Falling rate hike expectations and a deteriorating economic outlook have pushed US bond yields off recent highs. The two-year yield – which moves with interest rate expectations – has fallen about 0.6 percentage points from a high of nearly 3.5% in mid-June.
“It’s a continuation of the recession-related worries we’ve seen this week. The market is questioning the Fed’s commitment to increase,” said Ben Jeffery, strategist at BMO Capital Markets.
Fed Chairman Jay Powell conceded last week that a U.S. economic slowdown was “certainly a possibility” and avoiding one largely depended on factors beyond the central bank’s control.
Investors could also bet on a less aggressive Fed, as they believe higher rates have already started to lower inflation.
The five-year, five-year breakeven rate — a measure of where the market believes inflation will be five years from now — fell on Friday to its lowest level since January 2022. Part of this movement had reversed by the end of the day.
“The outlook for inflation is declining rapidly. And I think even though we may see another round of sticky numbers on July 13 (the next CPI report), inflation is coming down,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
The rally in European bonds also accelerated on Friday after the ISM report. The yield on the German 10-year Bund fell 0.1 percentage point to 1.23% as UK and French government bond yields also fell.
“We are seeing demand return for bonds as a safe-haven asset,” said Aneeka Gupta, research director at ETF provider WisdomTree.
“There are fears that central banks around the world, in an attempt to get inflation under control, are now not only staging a soft landing, but pushing economies into recession,” she added. This, Gupta explained, could lead to a “policy error that forces them to reverse course” on interest rates.
European stocks ended the day roughly flat, with the Stoxx 600 closing down 0.02%. Utilities, which are sheltered from strong inflationary pressures, was the best performing sector on the Stoxx 600, up 3.1% on the day.
In currencies, the dollar index, which measures the US currency against six others and rises in times of economic crisis, rose 0.4%.