Stocks, Bond Yields Slide on Weak Economic Data

Summary

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WSJ Your Money Briefing – Episode Summary

Episode Title: Stocks, Bond Yields Slide on Weak Economic Data
Date: March 22, 2019
Host: Charlie Turner (Wall Street Journal)
Guest: Akane Ohtani (WSJ Markets Reporter)

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Overview

This episode dives into a turbulent trading day where both US stock markets and bond yields plunged following disappointing manufacturing data from both the US and the Eurozone. Charlie Turner and markets reporter Akane Ohtani break down why weak global economic indicators spooked investors, explore the significance of falling bond yields and a yield curve inversion, and discuss what these signals might mean for the rest of the year. The conversation sets up expectations for upcoming economic reports, particularly concerning US GDP growth and the housing sector.

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Key Discussion Points & Insights

1. Market Reaction to Weak Data

[00:21–01:53]

• Stocks Tumble: US equity markets reacted sharply to weak manufacturing data, sparking investor fears about the global economy.

  • Dow Jones fell 460 points to 25,502.
  • Nasdaq lost 196 points (2.5%).
  • S&P 500 down 54 points.

• Weekly performance:

  • Dow fell 1.33%
  • Nasdaq dropped 0.6%
  • S&P lost 0.8%

• Europe’s woes matter to US multinationals:

  • Akane Ohtani explains, "While that doesn't necessarily mean that US Stocks are going to be affected on a one to one direct basis, investors here really care about what's going on in the Eurozone because... we have a lot of multination[als] that make up the S&P 500." (01:15)

• Main Investor Concern:

  • Is this a short-term "soft patch" or the start of a prolonged downturn?
  • Ohtani stresses investor jitters: "I think that's what investors are really worried about at this point..." (01:37)

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2. Central Banks and Diminishing Tools

[01:53–02:36]

• Past Confidence vs. New Fears:

  • Previously, central bank signals to hold off on rate hikes reassured investors.
  • Ohtani notes limitations: "There is this fear that maybe when the next downturn really starts happening that central banks will be somewhat more limited with regards to the tools that they have..." (02:17)

• Contrast with 2008:

  • In the financial crisis, central banks could cut rates aggressively; now, with rates already low (especially in the Eurozone), options are fewer.

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3. Tumbling Bond Yields Signal Caution

[02:36–03:42]

• 10-Year US Treasury Yield Hits Lows:
  • Settled at 2.45%, lowest for 2019.
  • German 10-year bond yield turned negative for first time since 2016.
• Why Bond Yields Matter:
  • Ohtani: "When we see these yields fall, it typ[ically] indicates that investors are losing confidence in future prospects for growth." (02:53)
• Investor Sentiment:
  • The sharp falling yields weren't expected, underscoring how negative global data shifted markets.

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4. Yield Curve Inversion: Recession Signal?

[03:42–04:36]

• Yield Curve Explained:
  • Spread between 3-month and 10-year Treasury yields turned negative (inverted).
  • Historically, such inversions have preceded every recession.
  • Ohtani: "When the three month treasury has yielded more than the ten year... we've seen recession follow every single time..." (03:57)
• Investor Anxiety:
  • This inversion, for the first time since 2007, "really caught people's eyes." (04:17)

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5. Fed’s Shift and Market Optimism Questioned

[04:36–05:33]

• Recent Fed Announcement:
  • Federal Reserve signaled no interest rate hikes for the year, ending a 3-year tightening cycle.
• Changing Tone:
  • Previously, this reassured markets.
  • Ohtani observes:
    • "The market's tenor seems to change so dramatically from day to day..." (04:51)
    • While stocks have had a powerful rally on Fed pause, current concerns make investors reconsider if this is enough to stabilize sentiment.

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6. Outlook: Corporate Earnings, Economic Reports & Ongoing Jitters

[05:33–06:26]

• Upcoming US Economic Data:
  • Final Q4 GDP revision expected to signal further economic cooling.
  • Fading impact from prior tax cuts acknowledged.
  • Ohtani: "The gains of the first half of 2017, 2018, they really look hard to repeat at this point in the economic cycle..." (05:56)
• Market Mood:
  • Investors are jumpy—"it seems like people are a little bit jittery these days." (06:17)
  • Will next week’s data spark another selloff?
• Turner sums up: “We could see jitters continue into next week.” (06:24)

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Notable Quotes

• Akane Ohtani on global contagion:

  "When you see such a large region of the world suffering a decline in economic data, it's natural that at some point it's going to have a ripple effect." (01:25)

• On central bank tools:

  "There's not that much more that the ECB can do, especially compared to the Federal Reserve." (02:13)

• On bond yields and investor fear:

  "The numbers really tell you the extent to which investors have become worried." (03:28)

• On the yield curve inversion:

  "The fact that we saw the inversion happen today for the first time since 2007 I think really caught people's eyes..." (04:22)

• On investor sentiment change:

  "It's funny how the market's tenor seems to change so dramatically from day to day..." (04:51)

• On economic outlook:

  "The gains of the first half of 2017, 2018, they really look hard to repeat at this point in the economic cycle." (05:56)

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Important Timestamps

• [00:21] – Episode theme and market snapshot
• [01:09] – Weak manufacturing data in US and Eurozone
• [02:06] – Central banks' limited tools
• [02:48] – Why investors watch bond yields closely
• [03:42] – Yield curve inversion significance explained
• [04:49] – Update on Fed policy and shifting market sentiment
• [05:46] – Preview of next week’s GDP and economic data
• [06:24] – Caution for potential continued market jitters

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Upcoming Reports & Earnings to Watch (as highlighted)

[06:40–07:37]

• Final estimate of Q4 GDP (projected just above 2%)
• Personal income and consumer spending
• Housing data: starts, permits, sales, Case-Shiller index
• Trade deficit reports: January trade, Q4 current account
• Consumer confidence indices
• Major earnings: BlackBerry, Carnival, Lululemon Athletica, Lennar, KB Home

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Tone and Takeaways

• The episode maintains a sober, measured tone reflecting investor concerns and market uncertainty.
• The week’s declines are presented within a broader, nuanced economic context.
• Key message: Recent soft economic data, especially from overseas, has reignited investor anxiety despite previously supportive signals from central banks. The inversion of the yield curve is a notable red flag, historically linked to recessions.
• The coming week’s economic reports will be critical for gauging whether current jitters are a temporary patch or an early sign of something more significant.

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Transcript

[Charles Schwab Sponsor]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise.

[Charlie Turner]

With your money briefing. I'm Charlie Turner in New York for the Wall Street Journal. US Stock markets came down with a big case of the jitters Friday. Stocks and bond yields tumbled after weak manufacturing data deepened investors concerns about the health of the global economy. The selling picked up into the close with the Dow Jones Industrials falling 460 points to 25,502. The Nasdaq composite lost 196 points, two and a half percent and the S&P 500 fell 54 points. For the week, the Dow fell one and a third percent. The Nasdaq dropped 0.6%. The S&P lost 8, 10%. Joining us is Wall Street Journal markets reporter Akane Ohtani. Akane, as mentioned, there was some weak manufacturing reports, including one in the US and one in Germany as well or in the Eurozone.

[Akane Ohtani]

That's right. And it really confirmed, I think for a lot of investors that the momentum in the Eurozone in particular is weakening. And while that doesn't necessarily mean that US Stocks are going to be affected on a one to one direct basis, investors here really care about what's going on in the Eurozone because of course we have a lot of multination that make up the S&P 500. When you see such a large region of the world suffering a decline in economic data, it's natural that at some point it's going to have a ripple effect. I think that's what investors are really worried about at this point is if we're starting to see the beginning of a more prolonged downturn or if this is just first quarter week soft patch.

[Charlie Turner]

There have been signs of a slowing economy, but that had not worried investors because central banks have indicated that they would back off plans to raise interest rates. But as you say, I guess investors are worried that this downturn will persist across the globe.

[Akane Ohtani]

That's right. And I think more and more we're hearing this question of how far can central banks go? I mean, especially in the Eurozone, rates on developed markets are quite low still. And so there's not that much more that the ECB can do, especially compared to the Federal Reserve. So there is this fear that maybe when the next downturn really starts happening that central banks will be somewhat more limited with regards to the tools that they have. As opposed to say a decade ago when we were seeing the financial crisis

[Charlie Turner]

erupt, the weak manufacturing data sent bond yields tumbling across the globe. The Yield on the 10 year treasury is now at its low point for the year, 2.453%. Talk about all that.

[Akane Ohtani]

Why investors care about bond yields. When we're thinking about borrowing costs across the economy, they're very often pegged to the benchmark bond yields. In this case the 10 year US treasury yield in Germany, the 10 year German bond yield. When we see these yields fall, it typ indicates that investors are losing confidence in future prospects for growth. The steep slide that we saw at the end of the week really I think brought home that investors are taking these economic readings that we're getting and they are concerned. This isn't necessarily something that they were expecting to see at the end of the week. And I think the fact that we're seeing bond yields puncture. In Germany's case it went negative for the first time since October 2016. In the case of the 10 year US treasury yield, we're seeing the lowest settle since January 2018. I mean those numbers really tell you the extent to which investors have become worried.

[Charlie Turner]

Talk about the significance of this. Akane, the spread between 3 month and 10 year US treasuries fell to negative 0.03%.

[Akane Ohtani]

Right. So that's what we call the yield curve which is the spread between shorter term and then longer term Treasuries. And in history we've seen recession follow every single time that this curve has inverted. Or in other words, when the three month treasury has yielded more than the ten year Treas. That kind of makes sense because when you think about it, investors typically expect more of an investment on something that they're holding onto for 10 years as opposed to for three months. The fact that we saw the inversion happen today for the first time since 2007 I think really caught people's eyes because it's telling us that what is happening in the Eurozone and some of the loss of momentum that we've seen in the US is factoring into investors growth prospects.

[Charlie Turner]

I guess this is old news. Earlier this week the Fed indicated that they would not raise interest rates this year, wrapping up the cycle of rate hikes that began three years ago. But that's two days ago and seems like a long time ago.

[Akane Ohtani]

Yeah, and it's funny how the market's tenor seems to change so dramatically from day to day because for a lot of this year it did seem like investors were reassured by that kind of signaling from the Fed. They were taking comfort in the fact that the Fed was signaling a pause in rate increases. And a lot of people were attributing the really tremendous stock rally that we were seeing the last couple of months to that with today's declines. I mean, the S&P 500 is still up double digit percentages for the year, still on track for its biggest quarterly gain in I think, nearly a decade. But you do have to consider that it seems like investors are increasingly questioning whether the Fed's messaging is something that they should take comfort in or that they should sort of raise an eyebrow at.

[Charlie Turner]

Well, what about for the new week? The Commerce Department will release the final revision of fourth quarter gross domestic product and it's supposed to come in fairly tame compared to what we experienced for most of 2018.

[Akane Ohtani]

Yeah, it's going to be an interesting one to watch because on the one hand, investors have been saying for several months at this point, expect some cooling in the economy, especially because we're seeing the benefits from the tax cut fade increasingly to some extent. The gains of the first half of 2017, 2018, they really look hard to repeat at this point in the economic cycle. But then again, it seems like people are a little bit jittery these days. Will be interesting to see if that reading and the sort of soft patch that we're expected to see is going to spark another market reaction.

[Charlie Turner]

We could see jitters continue into next week.

[Akane Ohtani]

Hopefully not, but we'll have to see.

[Charlie Turner]

Wall Street Journal markets reporter Akane Ohtani. Thanks, Akane.

[Akane Ohtani]

Thanks for having me.

[Charlie Turner]

Many of the economic reports coming out in the new week are from the housing sector. But the most important reading concerns economic growth this the Commerce Department issues its final estimate of fourth quarter gross domestic product. The latest revision is expected to show the economy slowed down in the final three months of the year to just a little above 2%. Also due out are data on personal incomes and consumer spending. As for the aforementioned housing sector, we'll get reports in the upcoming week on housing starts and building permits, both new and pending home sales and the latest Case Shiller home price index. A couple of reports on trade are expected, January's trade deficit and the fourth quarter current account deficit, and will get two reports on consumer confidence. Quarterly earnings reports are due from Companies such as BlackBerry Carnival, Lululemon Athletica and a couple of home builders, Lennar and KB Home. And that's your money briefing. I'm Charlie Turner in New York for the Wall Street Journal.

[Charles Schwab Sponsor]

This episode is brought to you by Charles Schwab Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonW.