The bears have grabbed the upper hand for now.
Stock investors snapped awake Wednesday to the economic worries that have been bringing out bond market bulls and driving interest rates lower.
ADP's private sector employment report and ISM manufacturing data were both stunningly weak, signaling a slowdown in manufacturing and probably, a much lower number for Friday's May employment report.
Car sales were also softer than expected, adding to negative sentiment.
Some economists, while cutting May employment forecasts, are convinced that this soft patch could be a temporary slowdown, and that spiking oil prices and the ripple effect on global manufacturing from the Japanese earth quake and tsunami are factors. Goldman Sachs and others, as of Wednesday, are looking for just 100,000 new jobs in May, compared to 244,000 in April.
Economists also are slashing second-quarter U.S. GDP forecasts to the 2 percent range but have not changed the second half outlook yet. A big concern is that if the markets remain rocky, or the negatives start really denting sentiment, the slowdown could become self-fulfilling.
"Look at the stories you have—lowering of growth estimates globally; housing going in the wrong direction; employment going in the wrong direction; ISM manufacturing going in the wrong direction. You had a case of ubiquitous apathy out there at best. You add the European situation with the Greek bailout, which changes on a daily basis. This tape has been trading with the headline of the day," said Pete McCorry, a trader at Keefe Bruyette. While some progress seemed to be made toward a Greek aid package, Moody's cast another cloud over the situation Wednesday when it downgraded Greek debt.
The Dow Wednesday fell 2.2 percent to 12,290, and the S&P 500 fell 2.3 percent to 1314, in the biggest one-day decline since August. Buyers rushed into the bond market, exiting risk assets, and as a result, rates headed lower again. The 10-year yield broke the psychological 3 percent level, finishing at 2.964 percent, its lowest yield since Dec. 6.
That puts the focus on Thursday's weekly jobless claims, which have been uncomfortably elevated since April, and on Friday's May employment report. Chain stores also report monthly sales Thursday, and Thomson Reuters expects a 5.3 percent increase in sales of the companies it follows. Productivity and costs are reported at 8:30 a.m., and factory orders are released at 10 a.m.
"I think the market is stuck in a big range here. 1300 on the S&P on the downside and 1350 on the upside. Every time we get up there, we lose steam, and they roll over," said John O'Donoghue, head of equities at Cowen. "Here's the problem. Equities as an investable instrument are still the relatively cheapest way to invest. Therefore, I think the market is adjusting to the low end of the trading range. I think the market can go sideways. It can bounce around in this sort of trough. I'm not looking for anything terribly dramatic, to be honest."
"I'm not of the opinion that we're in deep trouble," said O'Donoghue.
Economists Wednesday added to the gloom by chopping their forecasts for May jobs, after ADP reported only 38,000 private sector jobs were added. "We did cut our forecast from 170,000 to 100,000...and I think this is the first time we're collaborating the weakness seen in the claims data," said Citigroup economist Steve Wieting.
Wieting expects second quarter GDP at 2.7 percent, up from 1.8 percent for the first quarter. "We think the second quarter is going to feel worse than the first quarter but print stronger...we think there's been more effect from energy. There's effect from the auto industry impact. We're estimating an almost full percent drag on GDP."
But Wieting is not adjusting second half.
Economists expect auto sales to recover as the Japanese supply issues reverse, and they expect falling gasoline prices to remove some of the weight on consumers. "This could actually boost activity in the second half of the year," Wieting said.
Bonds have been in conflict with risk assets in recent weeks as buyers drove rates lower but stocks held in a range. Now that risk assets responded in Wednesday's big downdraft to the same concerns as bonds, the other markets are becoming key. "Other asset classes we're watching more than closely than the data," said Charlie Parkhurst of Barclays Capital about Thursday's trading.
RBS senior Treasury strategist John Briggs said 10-years could stay below 3 percent for now. "It's hard to see a reversal ahead of (Friday's) payrolls, now that we see ADP and forecast revisions by the street. It's safe to say, even with most of the street revising numbers down to 100,000, whisper numbers are probably going to be lower—between 50,000 and 100,000," he said.
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