Government debt markets rallied on Friday as weaker than expected business activity surveys exacerbated fears over the global economic outlook.
The yield on the 10-year US Treasury note fell 0.16 percentage points to 2.75 per cent after a survey of private sector companies signalled the first contraction in business activity since June 2020. An S&P Global purchasing managers’ index for the world’s biggest economy gave a reading of 47.5 for July, down from 52.3 in June — marking a 26-month low.
The decline was driven largely by a sharp drop in services activity. Any figure below 50 signals contraction.
Germany’s benchmark 10-year Bund yield dropped 0.21 percentage points to 1.02 per cent as the price of the debt instrument rose significantly. Business activity in the eurozone also contracted this month, according to a separate PMI, against a backdrop of record-high inflation and energy security fears after Russia reduced gas supplies to Europe.
The eurozone PMI, which collates executives’ responses to questions on topics such as new orders and input costs, dived to a 17-month low of 49.4 in July, missing economists’ forecasts.
“There are multiple shocks hitting the eurozone economy,” said Hetal Mehta, senior European economist at Legal & General Investment Management. “A recession is likely at the turn of the year.”
Those PMI surveys came after Snap issued quarterly results late on Thursday that sent its shares a third lower at the New York open on Friday. The group posted a $422mn quarterly loss and reported a slump in advertising demand, casting a pall over tech stocks during the ongoing quarterly earnings season.
Google and Microsoft had already said they were reassessing their investment priorities, while investment bank Goldman Sachs has warned it may slow hiring.
Wall Street’s technology-heavy Nasdaq Composite lost 0.4 per cent in early dealings while the broader S&P 500 index edged 0.1 per cent lower. The Stoxx Europe 600 share index rose 0.7 per cent as the weaker euro boosted exporters.
The European Central Bank on Thursday implemented its first interest rate rise in 11 years — pulling its main deposit rate back up by a larger-than-expected 0.5 percentage points, back to zero.
After US inflation rose to 9.1 per cent last month, the Federal Reserve is expected to raise its main funds rate by a further 0.75 percentage points next week from its current benchmark range of 1.5-1.75 per cent.
Bond markets were looking ahead to the possibility of a US recession caused by high prices and high borrowing costs, according to Principal Global Investors chief strategist Seema Shah.
“The Fed has made it very clear that price stability is their number one goal and they almost have to target recession in order to bring down inflation,” Shah said.
Bond investors also continued to demand a heavy premium for lending to Italy after prime minister Mario Draghi’s resignation set the stage for a snap election and President Sergio Mattarella expressed concern about the nation’s ability to meet requirements to receive EU recovery funds.
Italian bond prices rose sharply on Friday, but the spread between Italian and German 10-year bond yields — a gauge closely watched by ECB policymakers for signs that its monetary policies are affecting weaker nations disproportionately — remained at an elevated 2.37 percentage points. Italy’s public debt stands at 150 per cent of gross domestic product.
The ECB on Thursday unveiled a bond-buying mechanism to limit the divergence between the borrowing costs of the eurozone’s strongest and weakest economies. But the new Transmission Protection Instrumenthas failed to assuage concerns about Italy as it requires governments to have “sound” macroeconomic policies.
