Investing

Stocks Spooked as Contracting Business Conditions Bring Alarming Low Bond Yields

Jon C. Ogg

There has been a longstanding generalization that bond traders may know more than equity traders about the current outlook versus the long-term one. Most such generalizations are subjective and are frequently wrong or coincidental. Yet, what happens when stocks have started to roll over at the same time that Treasury yields are flashing significant concerns?

The yield on the 10-year Treasury note fell under 1.50% on Friday, and the 30-year Treasury’s “long bond” is now handily under 2.0%. This is happening at the same time that the stock market indexes have sold off sharply two days in a row after remaining near all-time highs.

While the world is closely watching the rise in coronavirus cases, business conditions have shown some concerning numbers as well. IHS Markit showed live data with a flash PMI (purchasing managers) that showed a drop into contraction. The flash composite PMI showed a drop in services (coronavirus impacting tourism and travel) with a 49.6 index reading. That is under the general 50.0 breakeven level and was handily under the 53.3 reading in January.

Manufacturing PMI was at 50.8, more than a half-point under expectations and a six-month low. The service sector PMI of 49.4 was four full points under expectations and represented a six-year low.

According to IHS Markit data, new orders from the private sector fell for the first time since October 2009. Weak client demand from the service sector and the slowest rise in manufacturing new orders were cited. Companies also continued in their struggle in foreign client demand with another drop in export orders.

Chris Williamson, chief business economist at IHS Markit, indicated that the report was weak but that the weakness will still show gross domestic product growth and that a recovery should be expected soon:

With the exception of the government-shutdown of 2013, US business activity contracted for the first time since the global financial crisis in February. Weakness was primarily seen in the service sector, where the first drop in activity for four years was reported, but manufacturing production also ground almost to a halt due to a near-stalling of orders.

Total new orders fell for the first time in over a decade. The deterioration in was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions. However, companies also reported increased caution in respect to spending due to worries about a wider economic slowdown and uncertainty ahead of the presidential election later this year.

The survey data are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February. However, the February survey also saw a notable upturn in business sentiment about the year ahead, reflecting widespread optimism that the current slowdown will prove shortlived.

The 10-year Treasury yield was last seen at 1.46% and the 30-year Treasury bond was at an unprecedented 1.90%. After less than two hours of trading, the Dow Jones industrials were down 233 points at 28,986 and the S&P 500 was down 30.52 at 3,342.71. The tech-heavy Nasdaq was down the worst of the three major indexes with a 1.25% drop (123.50 or so) at 9,627 on Friday morning.