Yields, Stocks Fall on Signs of Slowdown

Global Economy

As of noon on Thursday, global equities were modestly lower on the week amid signs the US economy is losing steam. The yield on the US 10-year note declined to 3.28% from 3.51% last Friday to the lowest level since September. The price of a barrel of West Texas Intermediate crude oil jumped more than $5 to $80.60 after OPEC+ announced a surprise output cut. Over the past two weeks, the price of a barrel of crude has gained more than $10. Volatility, as measured by the Cboe Volatility Index (VIX), was steady at 19.


Bad news is bad news

For many months, asset markets rallied each time the market sensed the US Federal Reserve was preparing to pause or pivot its tightening cycle. However, while evidence implying pause from the Fed may be approaching piled up this week, equities lost ground, suggesting bad news for the economy is likely to be bad news for stocks in the near term. The Atlanta Fed GDPNow model shows that Q1 US GDP likely slowed to a 1.5% growth rate from a 3.5% rate two weeks ago. A sharp drop in the Institute for Supply Management’s nonmanufacturing PMI, a fall in the manufacturing PMI to recessionary levels and a larger-than-expected decline in the number of US job openings in February were among the higher-profile data misses this week. As of Thursday morning, futures markets show only a 44% probability of an additional quarter-point hike from the Fed at its next meeting on 3 May.


ECB warns of “fire sale” risk

The European Central Bank this week issued a bulletin warning that funds invested in illiquid property assets that allow investors to liquidate holdings on short notice face a liquidity mismatch that could force the funds into fire sales. The central bank urged funds to develop policies to address the risks they pose to commercial real estate markets and to financial stability. Remedies proposed by the ECB include requiring investors to give more notice and introducing minimum holding periods.


McCarthy says no debt limit hike without concessions, meets Taiwan’s president

Speaker of the US House or Representatives Kevin McCarthy said this week that investors have a right to be worried about the lack of progress over raising the nation’s debt limit. The speaker said that though President Joe Biden has been unwilling to negotiate, he will not move a bill to raise the ceiling without spending cuts. The Department of the Treasury is expected to run out of borrowing capacity sometime this summer.


McCarthy led a bipartisan delegation of 18 lawmakers to a meeting with Tsai Ing-wen, Taiwan’s president, at the Reagan Library in California on Wednesday. A visit to Taiwan by then-House Speaker Nancy Pelosi last year set the stage for Beijing launching wargames that included the firing of missiles over Taiwan. This time, in a move analysts see as less provocative than last year’s actions, China sent an aircraft carrier into the strait that separates Taiwan from the Philippines.


IMF cautions over “friendshoring”

In advance of its spring meeting in Washington, the International Monetary Fund has warned that while locating capital in friendly countries might improve political security, the trend could present a risk to financial stability and global economic growth. The IMF estimates that the fragmentation of investment flows could lead to a loss of almost 2% in global gross domestic product. “The estimated large and widespread long-term output losses show why it’s crucial to foster global integration — especially as major economies endorse inward-looking policies,” said the IMF. At 3%, the global growth outlook over the next five years is the weakest since 1990, the fund warned.


During a state visit to Beijing this week, French President Emmanuel Macron called on Chinese President Xi Jinping to reason with Russian President Vladimir Putin and help bring the conflict in Ukraine to an end.


Haruhiko Kuroda’s second term as governor of the Bank of Japan ends on Saturday, 8 April. He will be replaced by Kazuo Ueda, whose job it will be to unwind the $11.7 trillion balance sheet built up under Kuroda’s watch.


Swiss National Bank Vice President Martin Schlegel said Monday that Crédit Suisse would likely have gone bankrupt had the government not arranged for a takeover by UBS.


OPEC+ surprised the market with a 1.6-million-barrel-per-day output cut, blaming the US’ refusal to replenish the Strategic Petroleum Reserve if prices dip below $70 per barrel, the Financial Times reported.


Finland was officially welcomed into NATO on Tuesday. Sweden is expected to join soon. Russia’s invasion of Ukraine prompted the two Nordic countries to seek security under NATO’s collective defense pact.


As Q1 earnings season gets set to begin, analysts expect a 6.6% year-over-year decline among members of the S&P 500 Index. That would follow a 5.8% decline in Q4. A softer macro backdrop and sticky wage inflation are headwinds for corporate earnings.


The Reserve Bank of New Zealand surprised the market with a 50-basis-point rate hike in its cash rate to 5.25% and kept the door open for additional tightening. Inflation is still too high and persistent, and employment is beyond its maximum sustainable levels, the central bank said.


Nikkei reported on Wednesday that China is weighing a ban on rare-earth magnet technology to counter the US advantage in the high tech arena.


The Reserve Bank of India held rates steady at its meeting on Thursday, ending a string of six consecutive hikes, but said that it will consider more if necessary. The RBI governor called the move a pause, not a pivot.


US weekly jobless claims jumped to 228,000 on Thursday, well above forecasts, but the rise was obscured by revisions to the Bureau of Labor Statistics seasonal adjustment methodology.


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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.


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