It was a big fall in ISM Manufacturing PMI data on Wednesday that triggered the fall in stocks and saw money pour into Treasurys, pushing the yield on the 10-year note below three percent.
The index fell from a very healthy 60.4 to 53.5 and while still indicating growth the scale of the fall has worried some economists who say it is too early to call this anything more than a slowdown.
“The move down wasn’t so surprising, as the headline index usually doesn’t hang above the 60 level for too long. That said, the large decline in the May new orders index (-10.7 points) does raise the concern that the slowdown may have a bit further to go,” Neil Soss, the chief economist at Credit Suisse in New York, wrote in a research note.
The sharp decline in the ISM manufacturing index to a 19-month low of 53.5 in May, "will only add to fears that the economy has hit another 'soft patch'," Paul Ashworth, the chief US economist at Capital Economics, wrote following the data.
“It looks like this recovery has hit its second "soft patch" which, for a recovery that is less than two years old, is troubling to say the least,” Ashworth said.
Analysts at Danske Bank in Copenhagen blame the weak data on a confluence of factors hitting all at once but do not see a prolonged downturn.
“Higher oil prices and the Japanese earthquake are the main explanations” said Allan von Mehren, chief analyst at Danske, in a research note.
“We are going through a soft patch as a reaction to involuntary inventory building as production has outpaced demand quite a bit in the first quarter,” he added.
“And now we see a correction to this that may take some months. The earthquake in Japan has only added to the weakness making the decline more brutal. So we will be in a soft patch for a while, but then we believe we will recover again,” said von Mehren.
“The faster the decline now, the faster the recovery will be. In that sense this number is putting us closer to the recovery phase.”
With ADP jobs data coming in at its weakest reading since September the market is now getting very worried about Friday’s non-farm payroll data. Strategists have been lowering forecasts for the jobs number and questioning what impact a weaker labor market will have on the US economy.
“Companies have responded to the rise in oil prices as though it is a mortal threat to the recovery, increasing the pace of layoffs and reducing the pace of hiring,” said Ian Shepherdson, the chief economist at High Frequency Economics, in a research note.
“It does not take much to push the payroll numbers from the robust expansion zone, where the April data sat, to the seriously disappointing zone, where the May numbers seem to be,” Shepherdson added.