Weak US data spurs market’s worst fears

A trio of weak data, showing a pullback in consumer spending, softer manufacturing and falling inflation, fueled selling Wednesday in an already jittery stock market on fears that the U.S. economy cannot hold the line against a global slowdown.

Economists immediately slashed their U.S. GDP growth forecast for the third quarter. Barclays and Credit Suisse said tracking GDP growth fell to 3 percent from 3.3 percent.

The Dow Jones Industrial Average plunged 350 points minutes after opening, then recovered more than half its losses. The S&P 500 index and the Nasdaq also opened sharply lower.

“It was an amazing flash lower, followed by an amazing move back higher,” said one stock trader. “I think it’s your classic capitulation trade. That was amazing. Everyone’s heads were spinning.”

Before the opening bell, the September retail sales report showed the first decline in eight months. Sales were down 0.3 percent, in large part due to fewer vehicle purchases and a decline in gasoline. Inflation data also disappointed with the producer-price index for final demand decreasing 0.1 percent, versus expectations for a 0.1 percent increase.

Read More The top 10 signs for when the selling is over

The economic reports also confirmed some traders’ views that the Fed will not move to hike interest rates in the middle of next year, as expected by many Wall Street economists. The 10-year Treasury yield fell below 2.0 percent in a slide that paralleled a slump in German bund yields.

“When people see a 10-year yield at 1.96, they freak out,” said Peter Boockvar at Lindsey Group. “This is a panic. It’s a panic out of stocks. It’s a panic into Treasurys. Gold is higher. The dollar is getting hammered. There’s a lot of cross currents here.”

As Boockvar spoke in a phone interview before the market recovered its worse losses, the 10-year yield continued to slide to 1.86. The yield was back above 2 percent in late morning trade.

“The bond market is doing what it does best. It’s speculating on a future which may not happen. We got the double whammy today. We got some deflation fear. We got the consumers not only slowing purchases but they actually cut their purchases,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

The market had already been wavering on worries about Europe, where German bund yields fell to record lows.

“I think immediately you have to cut back (U.S.GDP growth expectations) a half percentage point to 2.5 based on retail sales,” Rupkey said. “The consumer looks pretty dead in the water here. If it does reach 3.0 it’s going to be due to the fact that goods are stacking up on store shelves due to an inventory overhang.”

Read More Weak producer prices, factories slow down

Getty Images A trader works on the floor of the New York Stock Exchange.

Getty Images
A trader works on the floor of the New York Stock Exchange.

As traders sought safety in bonds, they were also placing bets that the Federal Reserve would not hike interest rates until later next year because of a softer economy.

“The bottom line is the omnipotence of central banks is losing its luster,” Boockvar said. “The yield of the December 2015 fed funds futures contract is now down to 37 basis points and it was 75 basis points just a few weeks ago. It’s down 12 basis points just today. They’re still looking at at rate hikes next year, but now you’re talking about the latter part of next year. Now we’re looking at one to two rate hikes next year instead of the three the market was pricing in and the four the Fed forecast.”

Retail sales were soft in most categories, with Internet retailers, clothing and home improvement stores all showing declines.

Read More Retail sales give cautionary sign on demand

“Consumers have pulled back, pulled back big. It’s a little scary out there,” Rupkey said.

Manufacturing data for the New York region also showed a slowdown, with the New York Fed’s Empire State index plunging to 6.2 percent in October after hitting a five-year high last month.

“Whatever the data is telling us … it’s kind of hard to swallow. Exports were at a record in August. Unemployment is coming straight down. I’m mystified by the data,” Rupkey said.

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