Stock market news: October 3, 2019

Updated Thu, Oct 3, 2019, 2:02 PM

The S&P 500 fell 2.99% from the start of the month through Wednesday’s close, marking the worst two-day start to an October since 2008. The came as investors eyed economic data showing deteriorating U.S. manufacturing activity and slowing job growth, with geopolitical risks including protests in Hong Kong, the chaos surrounding Brexit and U.S.-China trade tensions threatening to weigh further on the expansion.

Amid a bevy of economic concerns, bets that the U.S. Federal Reserve will step in and cut interest rates after a third straight meeting this year increased markedly. According to CME Group data, markets priced in a more than 90% probability of another quarter-point cut at the close of the Fed’s October meeting, as of Thursday mid-morning.This rose from a 75% probability of such an outcome earlier Thursday morning, before another report showing weakening U.S. services sector activity was released.

The probability of another interest rate cut has now more than doubled from that of earlier this week, with these market expectations also increasingly appearing in the bond market. Since the start of October, the U.S. 10-year yield has skidded from a high of 1.7548% on Tuesday to below 1.6%. Bond yields move inversely to prices.

‘Consistent with a recession’

On the economic data front, focus on Thursday turned to the Institute of Supply Management’s (ISM) non-manufacturing index, serving as a litmus test for whether the economic slowdown now evident in some U.S. data had also spilled over into the services sector. The disappointing print served as affirmation of some of these fears.

ISM’s non-manufacturing purchasing managers’ index (PMI) fell to a reading of 52.6 for September, from August’s reading of 56.4 and missing consensus expectations. This held above the neutral level of 50 required to indicate expansion, but suggested growth at a slower pace. Ahead of results, consensus economists were anticipating a reading of 55.0, according to Bloomberg data.

ISM’s September print on U.S. service sector activity reflected the slowest pace of growth in the sector in three years. Stocks immediately dropped following the report, with the Dow shedding as many as 335 points.

“The non-manufacturing sector pulled back after reflecting strong growth in August,” ISM wrote in its report. “The respondents are mostly concerned about tariffs, labor resources and the direction of the economy.”

A trader works on the floor of the New York Stock Exchange shortly after the closing bell in New York, U.S., October 2, 2019. REUTERS/Lucas Jackson

Data within the headline index was similarly gloomy: The ISM’s non-manufacturing employment index fell to a five-year low of 50.4 from 53.1 in August, reflecting slowing hiring in the sector accounting for the largest portion of the U.S. workforce. And the business activity index declined to a reading of 50.4 from 53.1, coming in short of expectations for 59.0.

“The sharp drop in the ISM non-manufacturing index last month to a three-year low, together with the already-reported fall in the manufacturing index to a decade low, leaves a weighted average of the two at a level that has historically been consistent with a recession,” Michael Pearce, senior U.S. economist for Capital Economics, wrote in a note Thursday. “Nevertheless, this is not a perfect recession indicator – with that weighted average producing false positives in both 2012 and 2016.”

ISM’s print comes on the heels of results from another services-centric survey, which showed sector activity mostly in-line with low expectations for September. IHS Markit’s U.S. services PMI held at 50.9 for September, matching expectations for just a slight increase in business activity in the sector after August’s reading of 50.7.

The services sector comprises a much bigger portion of total U.S. economic activity than manufacturing does, with softness in services likely to have a more pronounced effect on key consumer spending. Throughout the year, the ISM non-manufacturing index had mostly held up even as its manufacturing counterpart slid into contractionary territory, although that spread has increasingly narrowed.