- Data on Tuesday showed a bigger contraction in the US manufacturing sector than expected.
- Investors increased the likelihood of a 50 bps rate cut to 37%.
- Wall Street’s fear gauge jumped by 33.2%, indicating widespread panic.
Equities plummeted on Tuesday after downbeat manufacturing data sent investors scrambling for safety. At the same time, experts believe the decline came as investors dumped equities at the start of a historically poor month.
Data on Tuesday showed a bigger contraction in the US manufacturing sector than expected. The ISM manufacturing PMI showed a contraction at 47.2, coming in below estimates of 47.5. Slower-than-expected business activity shows that the economy is feeling the pressure of high interest rates. At the same time, the weaker data renewed recession fears. Therefore, investors increased the likelihood of a 50 bps rate cut to 37%.
Wall Street stocks fell as investors sold off risky assets after the report. However, experts believe that some of this move was due to a selloff at the start of one of the worst months for stocks. Historically, September is a terrible month where equities generally fall. The fear of holding stocks during this month sent some investors scrambling for safer assets like the yen.
Notably, Wall Street’s fear gauge jumped by 33.2%, indicating widespread panic. At the same time, Treasury yields collapsed, reflecting higher expectations for rate cuts.
The turmoil when August began was due to fears the economy was on a rapid decline. However, other data throughout the month showed a different picture of a resilient economy. Nevertheless, investors remain sensitive to any economic weakness that might push the Fed to implement a big rate cut.
US job growth (Source: Bureau of Labor Statistics, Bloomberg)
The next major report is the US nonfarm payrolls report. Economists expect an improvement from last month, with better job growth and a lower unemployment rate. However, the actual figures may be different. Further evidence of cracks in the labor market could send equities deeper into the red. A poor jobs report will show higher chances of a recession and a hard landing for the Fed. At the same time, it would increase the chances of a 50-bps rate cut during the September meeting.
After the jobs report, the consumer inflation report will be the last major report before Fed policymakers convene. Officials will likely vote to cut rates. However, market participants are still not certain about the size of this rate cut.
