Slump in U.S. manufacturing knocks stock market to lowest point in 5 weeks

U.S. stocks sank to their worst loss in five weeks on Tuesday after a surprisingly limp report on the nation's manufacturing stirred worries about the economy's strength.

The report showed that manufacturing weakened in September for the second straight month as U.S. President Donald Trump's trade war with China dragged on confidence and factory activity. It dashed economists' expectations that August's contraction had been an aberration, and markets reversed course immediately after its release. Both stocks and bond yields erased early-morning gains to drop sharply lower.

The S&P 500 slumped to its first loss of more than one per cent since August, while the yield on the 10-year Treasury dropped to 1.63 per cent from 1.74 per cent shortly before the report's release, which is a big move. Three stocks fell for every one that rose on the New York Stock Exchange, and gold climbed as investors sought safer ground.

Investors also ratcheted up expectations for the Federal Reserve to come to the economy's aid. They increasingly believe the Fed will cut interest rates by half a percentage point at its meeting later this month, rather than the quarter point they were forecasting a day earlier.

The Fed already cut rates twice this summer as it tries to shield the U.S. economy from the effects of the trade war and slowing global economic growth. They were the first cuts since the financial crisis was toppling economies around the world in 2008.

The S&P 500 was down 1.2 per cent by closing, or 36 points, its worst loss since Aug. 23.

The Dow Jones Industrial Average lost 343 points, or 1.3 per cent, to 26,573, and the Nasdaq composite fell 90 points of 1.1 per cent.

The S&P/TSX Composite Index was down 211 points or 1.27 per cent.

Manufacturing woes

The Institute for Supply Management said its manufacturing index was at 47.8 last month, and any reading below 50 indicates a contraction. Economists had been expecting growth to resume in September, and they had forecast a reading of 50.4, according to FactSet.

Manufacturers say global trade remains the most significant issue, and all the uncertainty caused by the trade war is hurting exporters in particular. Businesses are unsure what the rules of international trade will be a few months from now, let alone a few years, and it's causing CEOs to pull back on their spending plans.

"The disappointing data is only fanning long-standing fears of slowing global growth," said Alec Young, managing director of Global Markets Research at FTSE Russell.

Manufacturing is a relatively small part of the economy, but investors worry about whether it will spill into other areas. That puts an even bigger spotlight on Friday's jobs report, which economists expect to show an acceleration in hiring.

Household spending has been the bulwark holding up the economy, particularly when manufacturing and business spending are under threat, and a strong job market helps households keep spending. But uncertainty is looming even there.

A report last week showed that consumer spending rose less than economists expected in August. Two reports on consumer confidence last week also gave a mixed picture, with one falling below expectations and the other rising above.

Last month's jobs report was also surprisingly weak, but that may have been a one-off, some analysts say.

"The month of August over the last 10 years has been the wonkiest jobs report of the year," said Philip Orlando, chief equity market strategist at Federated Investors. It often falls below expectations, only for the numbers to be revised higher in subsequent months.

Also coming later this week is a Thursday report from the Institute for Supply Management on activity in services industries.

Rate watch

After the weak manufacturing report, investors say the most likely move for the Federal Reserve is to cut short-term rates by half a percentage point from their current level of 1.75 per cent to 2.25 per cent.

The Fed and other central banks around the world have been aggressive in keeping rates low to help sustain the global economy.

Charles Schwab upended the brokerage industry when it said it will eliminate mobile and web trading commissions for stocks, exchange-traded funds and options listed in the United States and Canada. It's the latest move in an industrywide pricing war that's dramatically cut the cost of investing for customers.

Schwab fell 11.4 per cent after the announcement, but rivals sank even more. TD Ameritrade lost 26 per cent, and ETrade Financial dropped 17.8 per cent.

Stocks in Europe moved broadly lower and Asian stocks were mixed, though Chinese markets were closed for the National Day holiday marking the 70th anniversary of the founding of the People's Republic.

Inflation in the 19 countries that use the euro weakened in September, slipping farther from the European Central Bank's goal. Also, The World Trade Organization cut sharply its forecasts for trade growth this year and next. It expects global trade to weaken this year to the slowest pace since the Great Recession due to the U.S.-China trade war.