Misery.

Early Thursday, amid a global flight-to-safety, 10-year US yields touched 2.345%, just a shade above the lows hit during the late-March growth scare. 30-year yields fell to the lowest since January 2018.

Subsequently, the flash read on the Markit US manufacturing PMI for May came in at 50.6, just barely above contraction territory, well below estimates (52.6) and the lowest since September of 2009. New orders fell to 49.7 versus 53.5 in April. The services and composite gauges were disappointing as well, with the former printing 50.9 (against expectations for 53.5) and the latter hitting a 36-month nadir. Benchmark yields hit their lowest since 2017 shortly thereafter.

Meanwhile, Aussie yields touched an all-time low below 1.60% on Thursday, while bund yields fell to -11bp, further cementing the “Japanification” narrative.

Long story short, growth concerns and shrill rhetoric from Chinese state media conspired to deep-six risk sentiment and stoke (more) fears about the outlook for global growth.

On Thursday, the People’s Daily unleashed a fresh barrage of irritated commentary aimed at the Trump administration, which Beijing is now accusing of trying to start a “technology cold war”.

The prospect of an all-out trade conflict has, for all intents and purposes, put last month’s “nascent reflation narrative” on ice. At least until there’s evidence that China is set to unleash kitchen-sink-style stimulus or that the Fed is prepared to cut rates. Minutes from the May FOMC meeting suggested the odds of an “insurance cut” are nowhere near as high as the market is pricing, although the bar for a cut is infinitely lower than the bar for a hike – even if Jerome Powell wouldn’t say so in “plain English.”

Disappointments on the data front weren’t confined to the US. Overnight, there was a disappointing manufacturing PMI print out of Japan – 49.6 versus 50.2 in April. So, back in contraction territory. Output and new orders fell for the fifth consecutive month.

In Germany, the flash read on the manufacturing PMI for May came in at 44.3. That was (basically) in line with consensus, but it was a tick lower from April and the fifth straight month in contraction. Insult was added to injury when Ifo business confidence printed 97.9. That’s the lowest since 2014.

Mercifully, the expectations gauge was stable, but the business climate print underscored fragile sentiment at a time when questions about the resiliency of the German economy amid a worsening manufacturing slump have been compounded by the trade escalation.

Although the Trump administration last week delayed a decision on auto tariffs, the US president’s belligerent stance on Huawei is indicative of the lengths he’ll go to in order to extract trade concessions and otherwise strong-arm America’s trade partners.

In a note out Wednesday, Bank of America slashed their year-end yield targets for DM bonds across the board. “Following the latest tariff developments, our year ahead numbers imply a best case scenario for a resolution of the US-China trade dispute, which seems unrealistic”, the bank lamented.

But trade tensions weren’t the only culprit.

“It would be simplistic to blame these forecast revisions purely on the latest chapter in the trade war saga”, BofA goes on to say, adding that “central banks globally have shifted to a dramatically more dovish tone and inflation has continued to disappoint – surprisingly so in the US, and sufficiently in the Euro Area to finally appear on the ECB’s radar screen.” The bank also notes that Brexit “and related uncertainty” is still unresolved.

The forecast cuts are dramatic. BofA now sees 10-year US yields at 2.60% at year-end versus 3.00% before. Bund yields, the bank says, will likely sit at -11bp at year-end. Their previous forecast was 30bp (on the positive side, of course).

(BofA)

“Crucially, we see Bund yields at risk of reaching new lows of -25 bp in Q3 as we approach crunch time on accumulated event risks”, BofA goes on to say. “The structural underweight in EUR rates vs the US as well as the asymmetry of macro risks creates the room for Bunds to outperform.”

The bank’s recap of the shift in central banks’ policy bent is well worth a quick scan. There’s nothing particularly novel about it, but it’s nice from a Cliffs Notes perspective. To wit:

Central banks’ reaction functions around the globe have changed materially. The Fed has abandoned both the hiking cycle and balance sheet run-off. The ECB has kicked off a debate about tiering. The RBNZ has cut rates, the RBA is expected to ease in June. And most other central banks have followed suit, with dovish tones from the likes of the BoC and the Riksbank. The reasons behind the decision to change tack are myriad. Initially, the tightening of financial conditions on the back of the 4Q18 financial market turbulence was a major factor. The sharp revisions to inflation expectations are a more recent concern. For some central banks more idiosyncratic issues are at play: disappointing growth and housing market woes in Australia, evolving views on the impact of Brexit induced uncertainty for the BoE, and the fears of currency appreciation on being out-doved by the Fed for many. 

Nobody wants to be “out-doved” in a world where competitive easing is being made “great again”.

BofA continues, noting that in addition to the epochal dovish pivot from monetary policymakers, economists have reacted to “meaningful changes” in the distribution of risks.

“Inflation has disappointed [with] 2019 US GDP forecasts unchanged compared to six months ago, while inflation forecasts have come down some 50 bp depending on the measure [and] in Europe, inflation forecasts have declined c. 30 bp, while 5y5y breakevens have collapsed 40 bp”, the bank writes. At the same time, it’s not clear whether China’s economy has truly stabilized, let alone “inflected” (all you need to do is look at the April activity data to know that).

(BofA)

Finally, BofA concedes that “we seem to be at risk of sliding towards the worst case [trade war] scenario”, and with “Brexit uncertainty unresolved… the UK is likely to continue underperforming.”

The title of BofA’s note: “Marking to misery”.

The only question now, is whether risk assets can hold up in the face of another growth scare and concurrent DM bond rally, as they (risk assets) generally did in late March.

Of course, the circumstances are different now. Back then, everyone still thought a Sino-US trade pact was a done deal. The rally in bonds thus served merely as an impetus for yield-chasing.

It’s not clear whether that will be the case this time.

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