Highlights
Fear that the economy is headed for a hard landing spurred risk aversion Thursday and a big reversal in equities after Wednesday's rally. The Dow Jones industrial average fell 1.2 percent, the S&P 500 lost 1.4 percent and the Nasdaq dropped 2.3 percent. Bond yields, the dollar and oil prices all fell.
Recession talk was kindled by a purchasing managers report showing the contraction in the manufacturing sector deepened in July, with surprising weakness in new orders, employment, and production. Earlier news that jobless claims jumped in the latest week added to worries about the labor market. Hard landing talk overwhelmed positive reaction to news that productivity rose more than expected and unit labor costs rose less than expected in the second quarter. Uncertainty about fallout from assassinations of Hezbollah and Hamas leaders has weighed on risk sentiment too.
The ISM manufacturing report spurred a flight from risk assets of all kinds into fixed-income securities. The U.S. Treasury 2-year note yield was ending down about 10 basis points on the day and the 10-year note yield was down about 5 basis points after breaking below 4.0%. Oil prices, which have been buoyed by concern about widening conflict in the Middle East, sold off amid concern that recession will undercut demand.
The bad news is good news dynamic that has supported risk assets lately switched to a bad news is bad news dynamic on the view that the Fed has fallen behind in addressing the slowdown. Markets are fully pricing three 25 basis point rate cuts this year with speculation rising that the September rate cut will be 50 basis points.
Stocks started off strong with a boost from better than expected quarterly results from Meta and from the early productivity and costs data which appeared to bolster the soft landing narrative. But equities sold off nearly across the board after the unexpected manufacturing news at midmorning. Losses mounted through the day but the major indexes recovered slightly just before the close.
Rate-sensitive sectors including utilities and real estate outperformed. Banks were hit by credit concerns, with regional banks lagging. Big technology shares, Wednesday's winners, sold off broadly, apart from Meta. Other big losers included chipmakers, banks, homebuilders, autos, energy, materials, transports, and small caps.
Recession talk was kindled by a purchasing managers report showing the contraction in the manufacturing sector deepened in July, with surprising weakness in new orders, employment, and production. Earlier news that jobless claims jumped in the latest week added to worries about the labor market. Hard landing talk overwhelmed positive reaction to news that productivity rose more than expected and unit labor costs rose less than expected in the second quarter. Uncertainty about fallout from assassinations of Hezbollah and Hamas leaders has weighed on risk sentiment too.
The ISM manufacturing report spurred a flight from risk assets of all kinds into fixed-income securities. The U.S. Treasury 2-year note yield was ending down about 10 basis points on the day and the 10-year note yield was down about 5 basis points after breaking below 4.0%. Oil prices, which have been buoyed by concern about widening conflict in the Middle East, sold off amid concern that recession will undercut demand.
The bad news is good news dynamic that has supported risk assets lately switched to a bad news is bad news dynamic on the view that the Fed has fallen behind in addressing the slowdown. Markets are fully pricing three 25 basis point rate cuts this year with speculation rising that the September rate cut will be 50 basis points.
Stocks started off strong with a boost from better than expected quarterly results from Meta and from the early productivity and costs data which appeared to bolster the soft landing narrative. But equities sold off nearly across the board after the unexpected manufacturing news at midmorning. Losses mounted through the day but the major indexes recovered slightly just before the close.
Rate-sensitive sectors including utilities and real estate outperformed. Banks were hit by credit concerns, with regional banks lagging. Big technology shares, Wednesday's winners, sold off broadly, apart from Meta. Other big losers included chipmakers, banks, homebuilders, autos, energy, materials, transports, and small caps.
Definition
Market Reflections track market reaction to the trading day's major events. Economic data, policymaker speeches, and company news are featured in this report as well as key indexes and financial instruments.
Description
Understanding why markets respond as they do is fundamental for an investor. Market Reflections help explain how the day's events, news, and data impact the outlook for the economy and for market prices.
