U.S. manufacturing activity eased to the lowest level in nearly two years this month, according to a private reading published Friday, pulling Wall Street lower and piling more pressure on the Treasury yield curve, which inverted for the first since in more than ten years.
IHS Markit's flash reading of overall activity in the world's biggest economy was pegged at 54.3 points, well above the 50 mark that separates growth from contraction but down more than point from the February tally. A sub-reading of manufacturing output, IHS said, fell to 52.5, well below the 53.6 point forecast and the lowest level since June 2017.
"At the moment, the service sector appears to be holding up relatively well. But the worry is that manufacturing woes are spreading to service providers, via reduced demand for services such as transport and storage as well as deteriorating business optimism about the outlook - which fell to the lowest for nearly three years in March - and a cooling of the labour market," said IHS chief economist Chris Williamson. "The survey showed hiring across both manufacturing and services hit the weakest for just under two years in March."
The data pulled 10-year U.S. Treasury bond yields to fresh multi-month lows of 2.443%, causing the yield curve measuring the gap between 3-month Treasury bills and 10-year yields to invert for the first time since 2007.
The Dow Jones Industrial Average extended declines, as well, with the average falling nearly 360 points for its worst session decline since January 3.
Europe's benchmark risk-free interest rate slipped into negative territory for the first time in nearly three years Friday, following a worrying reading of manufacturing activity in the region's biggest economy, in a move that could exaggerate a key recession signal in the United States and complicate any policy response from the Federal Reserve.
Manufacturing activity in Germany, Europe's biggest economy, slumped to the lowest level in more than six years this month, according to a private sector reading from IHS Markit, with new orders falling to a 2012 trough. The index has now fallen for 14 of the past 15 months and raises the very real prospect of a recession that could ripple through to both the broader Eurozone economy and trade partners around the world.
"Uncertainty towards Brexit and US-China trade relations, a slowdown in the car industry and generally softer global demand all continue to weigh heavily on the performance of the manufacturing sector, which is now registering the steepest rate of contraction since 2012," said IHS economist Phil Smith.
The reading, which was paired by similarly weak assessments for France and the broader Eurozone, pulled benchmark 10-year German bund yields 5 basis points lower on the session to trade at an October 2016 low of -0.019%.
Bund yields are a proxy for risk-free interest rates in the Eurozone and a key metric for global investor sentiment. 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 markets.
Bank of America Merrill Lynch estimated Friday 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.
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.