February begins with dive in stock prices

Shares on Wall Street have fallen abruptly today, as weak economic data fuels fear.

Hopes that January’s bad start to the year wouldn’t continue into February have been dashed today, as the major stock index benchmarks suffered their worst one-day falls in more than a year.  By early afternoon in New York, the Dow was down 1.7% or 266 points at 15,432, while the S&P 500 and NASDAQ 100 both plummeted more than 2%. The NASDAQ is now below 3500.

Given the stock market’s weakness in January despite some reasonably supportive data, once the weakness of today’s manufacturing reports was apparent, there was an inexorableness about the subsequent stock market decline.

Markit’s PMI manufacturing showed a final reading of 53.7, unchanged from the mid-month level, and 1.3 point lower from December’s final reading. Although this was a tiny bit below expectations, it was the ensuing ISM manufacturing index that really dealt the blow.

ISM manufacturing plunged to 51.3 in January from 57.0 the month before, well below expectations and the weakest reading since May of last year. The new orders component fell off a cliff, tumbling all the way to 51.2 from the mid-60s, indicating a worrying slowdown. We’ve very quickly gone from manufacturing strength in December to extreme softness in January and the weakness in new orders suggests more momentum could be lost this month.

The weakness in manufacturing is so stark that it is highly likely to impact on the Fed’s decision making process; the committee has stressed that the size of bond purchases will be contingent on incoming data and the data today stinks. This has weakened the US dollar, with USD/JPY dropping 0.9% and EUR/USD climbing 023%. 

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