U.S. 10-year Treasury yields touched their lowest level in eight weeks on Friday, after weak data added to worries about the global economic growth outlook and traders reassessed the Federal Reserve’s ability to raise rates much further. Canadian bond yields were down to a similar degree, continuing a steep descent that began on Thursday.
Stocks, meanwhile, were lower Friday, as shares in social media and ad tech firms lost ground in the wake of earnings from Snap. Even with the decline, the Canadian benchmark index was up 3.2% for the week, its best performance since February 2021.
Data on Friday showed the global economy teetering into a slowdown at a time when central banks are focusing on battling inflation by limiting access to cash.
Business activity in the United States contracted this month for the first time in nearly two years, S&P Global’s U.S. Composite PMI Output Index showed. Euro zone activity contracted for the first time in over a year, and growth in Britain was at a 17-month low.
Separately Japan’s government is expected to sharply cut its forecast for domestic growth, while China’s strict COVID-19 lockdowns and Russia’s invasion of Ukraine have further damaged global supply chains.
“There was a pretty sharp correction after the PMIs,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.
“The market is quickly pricing out the possibility of the Fed being able to raise rates aggressively for the remainder of the year.”
A 75 basis-point hike from the Fed is all but priced in according to traders, with the probability of a larger move dwindling down into the single digits.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 11.7 basis points in late afternoon trading at 2.978%.
The yield on 10-year Treasury notes was down 14.7 basis points to 2.761%.
The Canadian 10-year government bond was fetching 2.853%, down about 9 basis points and the lowest since the end of May. The five-year bond - influential in the setting of fixed mortgage rates - was down about 11 basis points to 2.862% - also the lowest in nearly two months.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) - essentially what the market is thinking inflation will be in five year’s time - was last at 2.593%.
While lower bond yields can be considered bullish for stocks since they make dividend yields in equities more attractive on a relative basis, stock markets were lower Friday as investors continued to fret over a possible looming recession and its impact on corporate earnings.
Still, all three U.S. major indexes as well as the S&P/TSX Composite Index posted weekly gains despite Friday’s losses.
The TSX Friday lost 79.93 points, or 0.42%, to 18,982.92. Performance was mixed across sectors, with tech the biggest weight due largely to a 7.2% drop in Shopify shares. Energy lost 1.3% and financials were down 0.2%
Mullen Group was one of the index’s top performers for the second day in a row following its earnings beat on Thursday, with shares closing up 6.2%. Aurora Cannabis shares were down 8.2%, leading decliners in an overall weak session for pot stocks.
In Canada “it’s almost like collateral damage (related) to what’s going on in the United States,” said Philip Petursson, chief investment strategist at IG Wealth Management.
Despite recent declines, U.S. technology stocks are not cheap, “so any disappointment in the tech world and you’ll see sell-offs like this,” he said.
Data showed Canadian retail sales rose 2.2% in May from April, on higher sales at gasoline stations, as well as motor vehicle and parts dealers.
On Wall Street, all three major indexes posted weekly gains despite Friday’s losses with the tech heavy Nasdaq closing out the week 3.3% higher. The S&P 500 advanced 2.4%, and the Dow gained 2%.
Snapchat’s owner posted its weakest-ever quarterly sales growth as a public company, sending Snap Inc’s shares down nearly 40%, while Twitter Inc reversed earlier losses to add 0.8% following a surprise fall in revenue.
Other online companies that depend heavily on ads, such as tech giants Meta Platforms Inc and Alphabet Inc tumbled 7.6% and 5.6%, respectively, weighing on the Nasdaq.
Meta and Alphabet are set to post their earnings next week, along with mega-cap peers, including Apple Inc, Microsoft Corp and Amazon.com Inc.
The S&P 500 communication services and information technology tumbled 4.3% and 1.4%, respectively, leading declines among the index’s 11 sectors.
The Dow Jones Industrial Average fell 137.61 points, or 0.43%, to 31,899.29, the S&P 500 lost 37.32 points, or 0.93%, to 3,961.63 and the Nasdaq Composite dropped 225.50 points, or 1.87%, to 11,834.11.
“Earnings are coming in less bad than feared, but they’re deteriorating from what we got used to and accustomed to over the last several quarters,” said Bob Doll, CIO at Crossmark Global Investments.
With 106 of the S&P 500 companies having reported earnings through Friday morning, 75.5% have topped analyst expectations, below the 81% beat rate over the past four quarters, according to Refinitiv data.
All eyes are on the Federal Reserve’s meeting and second-quarter U.S. gross domestic product data next week. While the U.S. central bank is expected to raise interest rates by 75 basis points to curb runaway inflation, the GDP data is likely to be negative again.
Meanwhile, a survey on Friday showed that U.S. business activity contracted for the first time in nearly two years in July, deepening concerns about an economy stunted by high inflation, rising interest rates and dwindling consumer confidence.
“Economic data is coming in weaker, kind of confirming the fact that a recession is highly likely over the next 12 months. And the markets are trying to figure out what that looks like with economic growth slowing significantly and the Fed in the midst of pretty aggressive tightening fiscal,” said Megan Horneman, chief investment officer at Verdence Capital Advisors in Hunt Valley, Maryland.
Verizon Communications Inc tumbled 6.8% after announcing it cut its annual adjusted profit forecast as inflation weighs. American Express Co rose 1.9% on strong earnings and an increased revenue forecast.
Volume on U.S. exchanges was 10.38 billion shares, compared with the 11.53 billion average for the full session over the last 20 trading days.
Declining issues outnumbered advancing ones on the NYSE by a 1.43-to-1 ratio; on Nasdaq, a 2.49-to-1 ratio favored decliners.
The S&P 500 posted 1 new 52-week highs and 31 new lows; the Nasdaq Composite recorded 32 new highs and 74 new lows.
Reuters, Globe staff
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