The combination of the dovish hold by the Federal Reserve and the eurozone’s miserable flash Purchasing Managers Index casts a pall over the economic outlook. Japan’s flash PMI remained stuck at February’s 48.9, while core inflation unexpectedly eased. Three months after the European Central Bank stopped buying bonds, the German 10-year Bund yield fell below zero for the first time since 2016. Japan’s 10-year yield is near minus eight basis points, the most since 2016 as well. The US 10-year fell to 2.44%, the lows since early last year.
Going into the last week of March, the US 10-year yield has fallen about 22 bp in Q1. German, French, Italian and Spanish yields have fallen 25-35 basis. Portuguese and Australian bond yields have fallen around 45 bp and 48 bp respectively.
The sharp decline in interest rates is a significant development. The precipitating cause of the decline in rates has been disappointing data and signals from officials. ECB Draghi explained that not only had the staff slash this year’s growth forecast to 1.1% from 1.7% at the end of last year but that the risks were still skewed to the downside. In explaining the unanimous decision to offer new long-term loans to banks, he noted that everyone was in the same boat. That seemed to be a reference to the fact that after contracting in Q3, the German economy barely avoided a second quarterly contraction. Italy was not as lucky.
Draghi’s might have well anticipated the flash PMI. The manufacturing slump deepened. The aggregate PMI fell to 47.6 from 49.3. Many, including ourselves, had expected some improvement. The new order component is as far below the 50 boom/bust level as it has been in years. In Germany, Europe’s locomotive, news orders slumped to 40.1, the lowest level in a decade.
The PMI data out of the EU were much weaker than expexted and the EURUSD raced lower. Looking at the 1 minute chart below, the pair raced below the 100 hour and 100 day MA and the 200 hour MA in the first minute after the report (the run was about 43 pips in the first minute). The fall continued for another 40 pips over the 30 minutes or so to the low of 1.1287. Total move was about 83 pips. Since that low, the pair has had higher lows at 1.1292-94. A move below that intraday floor would be more bearish intraday. The corrective high has reached 1.1319 – that is below the 38.2% of the trend move down (at 1.13266). Sellers are still in control.
Looking at the hourly chart below, the pairs steep fall has also taken the price below the 50% midpoint of the move up from the March low. That comes in at 1.13105. The corrective high has moved above that level, but the last two bars are trying to put a lid near that level.
On the downside, the low today did stall in an area defined by swing levels (at 1.12836-89). The 61.8% is at 1.12784. Those are the next targets on more weakness today. Get below opens up the downside even more.
The data today was shocking and it is reflective in the price action. There is some minor support and traders are taking a breather over the last 5 or so hours. However, the corrective highs have been modest so far. It owuld take a move above the 38.2% of the move down at 1.13266 to likely put a little scare in intraday shorts, but a move above the 200 hour MA at 1.1335 currently (green line in the chart above), to really put some fear in the shorts.
It’s all about the bond market today. US 10-year yields are down 6.4 basis points to 2.47%. That’s important because the Fed funds rate is 2.25%-2.50% with the effective rate at 2.41%.
The two year and five year have already inverted and are down 4-6 basis points today.
Now markets are faced with a tough choice about whether to pay attention to US economic data, which has been solid. Or to a signal from the bond market that’s one of the best market-based predictors of trouble (but certainly not infallible).
Technically, USD/JPY is down 62 pips to 110.21 in a break of the weekly low and mid-February low.