Bloomberg News

Germany reported its weakest set of factory goods orders in more than two years in February, as Europe's biggest economy continues to find itself exposed to a global manufacturing slowdown and the ongoing U.S.-China trade war.

New orders for German factories slumped 4.2% from the previous month, the Federal Statistics office said Thursday, and were down around 8.4% from the same period last year. Demand from economies outside the single currency area were even more alarming, with new orders falling 7.9% on the month amid a sharp slowdown in China and sputtering factory activity in the United States.

Admittedly, monthly industrial order data are highly volatile but today's new orders were simply awful," said ING's chief economist Carsten Brzeski. "Today's sharp drop in new orders clearly undermines latest tentative signs of a rebound in global activity in the first quarter of 2019."

"Maybe February was simply too early to feel the rebound. This is the positive reading. The negative reading is that the German industry should prepare for more bad news," he added.

The euro slipped 15 pips against the U.S. dollar to around 1.1235 following release of the data, while the trade-sensitive DAX performance index traded 0.2% to the downside and benchmark 10-year German bund yields slipped back into negative territory at -0.02%.

https://t.co/5TWQffOLvh GERMAN ORDERS: FEELING THE PAIN BADLY #macro #economics pic.twitter.com/isLQUcfHTb

— Berenberg Economics (@Berenberg_Econ) April 4, 2019

JPMorgan and IHS Markit's global manufacturing PMI reading for March held at 50.6 points for a second consecutive month, less than one point over the threshold that separates growth from contraction.

"The performance of the global manufacturing sector remained weak in March, as output edged higher, new orders stagnated and new export business contracted," said JPMorgan's global director of global economic coordination. "Expansions in output and new work at consumer goods producers were the main bright spots, offsetting the ongoing downturns in the intermediate and investment goods sectors."

"Growth will need to be restored to these industries if global manufacturing is to provide less of a drag on global GDP in the months ahead," he added.

The German data, while only detailing activity in February, could signal extreme concerns for a potential recession in Europe's biggest economy, as well as the world's third busiest exporter, as it preceded a private sector reading from IHS Markit last month that showed manufacturing activity slumped to the lowest level in more than six years with new orders falling to a 2012 trough.

The reaction in Bund yields, a proxy for risk-free interest rates in the Eurozone and a key metric for global investor sentiment, could have implications for U.S. financial markets as well.

Negative yields in such a large market -- BIS data suggests all German-issued debt was pegged at €3.6 trillion last year -- inevitably push investors to search for higher returns in other parts of the world.

Bank of America Merrill Lynch estimated last week that an additional $12.1 billion has flowed into fixed income portfolios this week, and with negative yields in Germany and Japan, and near-zero rates in other developed markets, it's a safe bet to assume much of that cash has found its way into Treasuries.

Benchmark 10-year Treasury bond yields fell 1.5 basis points to 2.503% following the German data, putting the difference in yield between 2-year notes at 18.2 basis points.

An inverted yield curve, a condition where 3-month or 2-year yields rise above 10-year yields, has signaled nearly every U.S. recession for the past 60 years, according to Fed studies, and the last time it was marked near 11 basis points, the S&P 500 traded at an 18-month low of 2,351.10 points.