Stocks dropped on Wednesday as the bond market signaled rising concern about the economy and data from Germany and China suggested that the global industrial economy was falling into a deepening slump.
On Wall Street, the S&P 500 fell more than 2 percent, led by a steep drop in the energy sector. Retail shares also fell sharply, after Macy’s posted lower quarterly results. Shares of large technology companies, sensitive to the outlook for the trade war, also fell.
Amid an increasingly volatile environment for investors, the market drop reflected a rapid shift in sentiment, erasing Tuesday’s gain in the S&P 500, which had been driven by the White House decision to narrow the scope of the next round of tariffs on China.
Any optimism quickly dissipated on Wednesday as investors appeared intensely attuned to downbeat economic signals being sent by the bond market. Yields on long-term United States securities continue to plumb lows not seen in recent years. The yield on the benchmark 10-year Treasury note fell below 1.60 percent, a level it last reached in late 2016. The yield on the 30-year bond fell below 2.05 percent, putting it on pace to close at the lowest level on record.
[Read more about the intensifying recession warning in the bond market.]
Bond yields are typically determined by investors’ expectations for economic growth and inflation. The drop in long-term yields also briefly pushed the yield on the 10-year note below that of the two-year Treasury note, an unusual situation known as an inversion of the yield curve. Yield-curve inversions are considered one of the most reliable leading indicators of recession in the United States, having preceded every economic decline in the past 60 years.
That phenomenon, when yields on long-term bonds fall below those on short-term bonds, had already occurred with some Treasury securities this year. But the inversion between two-year and 10-year notes on Wednesday, something that last occurred in 2007 as the American economy began to sputter into a severe recession, seemed to worry investors anew.
[The bond market is sending a clear signal that investors are pessimistic about the economy’s prospects.]
Economic data from other corners of the global economy added to the day’s ominous mood.
The German government reported that the country’s economy shrank in the three months that ended in June. The German economy, the eurozone’s largest, has been particularly vulnerable to the trade war between the United States and China because of Germany’s dependence on manufacturing and exports. A second consecutive quarter of decline would mean Germany was technically in a recession.
[Read more about how Germany is heading toward a recession.]
In China, a variety of macroeconomic indicators published overnight showed that the world’s second-largest economy continues to lose steam as the trade war drags on. Chinese industrial production slowed more than expected, falling to 4.8 percent in July, the lowest level since 2002.
The signs of economic weakness in those important industrial economies hit commodities markets. Futures prices for American crude oil fell 4 percent. Prices for copper, often tightly tied to the outlook for Chinese economic growth, fell more than 1 percent in New York trading.