Equity Markets tumbled on OpEx Friday while T-notes rallied across the curve. Stocks started to sell off from the U.S. morning, with the ongoing deterioration of Ukraine relations with the US and Russia and lingering tariff deadlines weighed in the background, but the drivers today focused on weak US PMI data and reports of a potentially pandemic inducing Coronavirus being found in China. On the data, the composite fell, primarily due to a sharp drop in the Services PMI into contractionary territory, printing a 25-month low, while manufacturing was in line with expectations. The sharp miss in the services number weighed on stocks and saw upside in T-notes with the Dollar trading off its highs. The Final University of Michigan Survey for February was revised lower, beneath all analyst expectations, while inflation expectations were unchanged on the 1 Year but ticked up on the 5 Year. Upside in T-notes and downside in stocks extended in later trade with reports circulating of a powerful enough coronavirus to spread through Humans, which has the potential to trigger a pandemic. Elsewhere, crude prices were weighed on reports that Russia could concede USD 300 billion sovereign assets frozen by the West be used for Ukraine reconstruction, via Reuters citing Russian sources. Reuters also reported the US has asked Iraq to resume Kurdish oil exports quickly, or face sanctions alongside Iran, noting the US believes Kurdish oil sales can help to lower oil prices and offset a drop in Iranian supplies. COVID fears also hit, seeing benchmarks settle at lows. In FX, the Japanese Yen saw notable outperformance while the Dollar was also bid. The lower US Treasury yields supported the Yen, seeing USD/JPY hit lows of 148.93, down from the highs of 150.73 seen after Bank of Japan Governor Ueda signalled a BoJ willingness to increase bond buys if yields rise too much, which followed after hot Japanese inflation data. Note, although there were a lot of driving factors in markets on Friday, option expiries likely increased volume somewhat. The Flash S&P Global PMI data for February saw the manufacturing print inline at 51.6, up from 51.2, while the services PMI tumbled to a 25-month low (49.7, prev. 52.9), entering contractionary territory. This saw the composite fall to 50.4 from 52.7. The report noted that “The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices”. Meanwhile, looking ahead – optimism slumped from 3 Year highs at the turn of the year, to one of the gloomiest since the pandemic. “Companies report widespread concerns about the impact of Federal Government Policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.” It added that although inflationary pressures remain muted, this reflected a squeezing of margins in the services sector as companies sought to absorb cost increases in order to offer competitive prices amid weakened demand. S&P Global adds that “A concern is the sharp, tariff-related, jump in manufacturing input prices, which will likely either put further upward pressure on inflation in the coming months or further squeeze profit margins among US companies”. In terms of GDP, Pantheon Macroeconomics suggest that “Uncertainty over the severity of federal spending cuts and tariffs has led to a sudden stop in decision-making, likely weighing materially on GDP growth in Q1.” The University of Michigan headline sentiment fell to 64.7 from 67.8, and beneath the bottom end of the forecast range, 65.0, with the decrease unanimous across groups by age, income, and wealth. Conditions and Expectations also dropped, printing 65.7 (exp. 68.7) and 64.0 (prev. 67.3), respectively. The report adds that all five index components deteriorated this month, led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent. In addition, the report adds, expectations for personal finances and the short-run economic outlook both declined almost 10% in Feb., while the long-run economic outlook fell back about 6% to its lowest reading since November 2023. 1 Year inflation expectation remained at 4.3%, while the longer-term 5 Year lifted to 3.5% from 3.3%, as they rose for Independents and Democrats alike, but fell slightly for Republicans. Existing Home Sales fell 4.9% in December to 4.08 million (rev. 4.29 million), beneath the expected 4.08 million. Diving deeper, the median existing-home sales price rose 4.8% from January to USD 396,900, while the inventory of unsold existing homes grew 3.5% from the M/M to 1.18 million at the end of January, or the equivalent of 3.5 months’ supply (prev. 3.3 months) at the current monthly sales pace. On market dynamics, NAR Chief Economist Yun noted “Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest rate cuts by the Federal Reserve,” “When combined with elevated home prices, housing affordability remains a major challenge”. Ahead, Pantheon Macroeconomics notes the prospects for home sales further ahead are also far from bright: a lack of supply likely will remain a key issue. German CDU Party Leader Merz, said that their party won Sunday’s German Election with 29% of the vote with the far right AFD second with 20%, while German Chancellor Scholz’s were in third place with just 16%. Markets are opening higher on these results this morning. Elsewhere, Oil closed Friday with a loss of 3% while Gold was flat.
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