Fear that the U.S. economy is slipping sent stocks reeling Monday, boosted Treasurys and pushed the dollar to another new low against the safe-haven Swiss franc.
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Stocks, already coming off highs after a strong opening, took a dive after July's ISM manufacturing index came in at 50.9, its lowest level since July, 2009, and well below the 55.3 in June.
A number below 50 would mean contraction for the manufacturing sector.
The July ISM number is the first major piece of data for the third quarter, and it is particularly disappointing on the heels of Friday's second quarter GDP report.
That report showed growth of just 1.3 percent for the second quarter, plus a revised 0.4 percent gross domestic product for first quarter. Economists have been ratcheting down second-half expectations to the 2 percent to 2.5 percent level.
"It's definitely bad. On the badness scale, a 10 being an unmitigated disaster, I'd probably make this a six," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank . The only thing not bad is it looks like the debt ceiling is front and center in this."
"There were concerns about government contracts. Are people getting paid? The debt ceiling was also the primary catalyst behind the Michigan (consumer sentiment) data," hesaid.
LaVorgna said he pared his third-quarter GDP forecast to 2.5 percent and fourth quarter to 3.5 percent, after Friday's data. He added the number should pick up if the U.S. debt ceilingis raised and Congress approves bills reducing deficit spending.
Traders were particularly concerned that the new orders component of the number fell below 50 to 49.2.
"This is something that to me was flagged by the customer inventory spike last month...It was the red flag for a worse reading on new orders today," said Credit Suisse economist Jonathan Basile. "There's a little bit of relief in that the orders to inventory spread didn't get worse. The customer inventories backed away from that higher level of last month."
Inventories slipped to 44 from 47. Basile said readings on inventories above 50 flag recession.
"It (the ISM) raises the concern about recession, but the reading in customer inventories takes some of that off the table," he said.
As stocks fell on the disappointing report, the S&P 500 was swept below its 200-day moving average of 1284. The S&P has not closed below its 200-day since Sept. 10.
The Dow industrial average made a more than 200-point swing from the morning's high to low.
Treasurys rose in response to the weak manufacturing report, with the benchmark 10-year note up 15/32 to yield 2.74 percent.
The dollar was already lower ahead of the manufacturing report, and had been moving lower after initially jumping Sunday on the announcement of a debt deal. "It started to roll over and the ISM kicked it over the cliff. Also peripheral (euro zone) yields are back up," said Win Thin, chief currency strategist at Brown Brothers Harriman.
Thin said the "feel good" move faded in part because traders are anxious about the debt votes, scheduled for the House and Senate Monday.
"There certainly is a lot of caution ahead of that," said Eric Viloria, senior currency strategist at Forex.com. "You don't want to say it's a done deal and they haven't voted on it yet."
The dollar index moved higher as the dollar gained on the euro after the ISM, but it fell to a new low against the Swiss franc losing 2 percent at one point.
As markets watch the votes in Washington, there is also a gnawing concern that the triple-A credit rating of the U.S. will be cut by Standard and Poor's to double-A.
"Euro/Swiss is still making new lows. That tells me people are still worried about what's going on," in Washington and Europe. "It's not the all clear yet, and markets are trading cautiously," Thin said.
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