The major domestic equity indexes sold off sharply on Friday, chalking up their largest one-day percentage declines since Jan. 3, as weak factory data from the United States and Europe led to an inversion of Treasury yields, fueling fears of a global economic downturn.
Capping five tumultuous days of trading, the S&P 500, the Dow and the Nasdaq were all down for the week.
A weaker-than-expected reading of factory activity in March, along with similarly dour reports from Europe and Japan, helped send Treasury yields into an inversion, with the spread between yields of three-month Treasury bills exceeding those of 10-year notes for the first time since 2007.
Earlier in the week, the Fed concluded its two-day monetary policy meeting with a statement that forecast no additional interest rate hikes in 2019 on signs of economic softness, a dovish shift that took the markets by surprise.
Interest rate-sensitive financial firms fell 2.8 percent, capping their worst week since the late-December sell-off.
Of the 11 major sectors in the S&P 500, all but utilities ended the session in the red.
The CBOE Volatility Index chalked up its largest gain in two months.
Nike fell 6.6 percent after the company’s North American sales fell short of estimates.
Tiffany said it expected earnings growth to resume in the second half of the year and affirmed its fiscal 2019 targets, sending its shares up 3.1 percent.
Tesla fell 3.5 percent following a research note from Cowen that saw soft demand for the Model 3 until the release of the company’s lower-priced model in the second quarter.
Boeing continued its downward trajectory, losing 2.8 percent as Indonesian airline Garuda canceled a $6 billion order for the company’s 737 MAX planes, citing customer fear in the wake of the Ethiopian Airlines crash.
Netflix fell 4.5 percent on the eve of Apple’s launch of a rival streaming service on Monday.
Approximately 8.66 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.71 billion share average over the past 20 trading days.
Home Sales Rise, But for How Long?
Home sales rose sharply during February, reaching their highest level in 11 months, a sign that a pause in interest rate hikes by the Federal Reserve would aid the economy.
The National Association of Realtors said on Friday existing home sales jumped 11.8 percent to a seasonally adjusted annual rate of 5.51 million units last month.
That was the highest level since March 2018 and well above consensus expectations of 5.1 million units. The one-month percentage change was the largest since December 2015. January’s sales pace was revised slightly lower.
February’s surge came as mortgage rates fell following signals from the Federal Reserve that it was no longer eyeing rate hikes. Several years of rising rates had put a brake on parts of the U.S. housing market in 2018.
“(It’s) quite a powerful recovery that’s taking place,” said Lawrence Yun, chief economist with the National Association of Realtors. Still, the number of sales in February was 1.8 percent lower than a year ago.
The housing market has also been held back by land and labor shortages, which have led to tight inventory and more expensive homes. And the PHLX Housing Index extended losses following the release of the figures although its decline was less steep than the broader stock market.
The median existing house price increased 3.6 percent from a year ago to $249,500 in February. Existing home sales rose in three of the country’s four major regions and were unchanged in the Northeast.
There were 1.63 million previously owned homes on the market in February, up from 1.59 million in January.
At February’s sales pace, it would take 3.5 months to exhaust the current inventory, down from 3.9 months in January. A supply of six to seven months is viewed as a healthy balance between supply and demand.
Treasury Curve Inverts – So What
The spread between three-month Treasury bills and 10-year note yields inverted on Friday for the first time since 2007 after domestic manufacturing data missed estimates.
The three-month 10-year yield spread, the Federal Reserve’s preferred measure of the yield curve, narrowed to minus 0.56 basis points. An inverted yield curve is believed by some to be a leading indicator of recession.
The Markit Purchasing Managers’ Index report, which tracks activity in the U.S. manufacturing sector, on Friday disappointed investors, with the headline index down 0.5 percent to 52.5 versus the expected 53.6.
Earlier, Germany reported that domestic manufacturing contracted further in March, driving the benchmark 10-year U.S. government bond below zero and adding to fears of a global slowdown in growth.
The soft data exacerbated a trend that began on Wednesday after the Fed issued a statement showing policymakers foresaw no further rate hikes for 2019 given the slowdown in the American economy.