Weak economic data unable to further enhance rate cut expectations, Dow posts its largest single-day decline since May

On Thursday, due to a series of economic data falling short of expectations, the Dow Jones Industrial Average experienced its largest single-day decline since May. This means that bad economic news led to a stock market decline. This sounds logical, but it completely overturns the relationship between economic data and the stock market for most of 2024.

For most of 2024, bad economic news was usually seen as good news for the stock market because it enhanced expectations of the Fed starting to cut interest rates. However, the situation has changed now. Most indicators in the labor market are still quite robust, but cracks have begun to appear. Many consumer-oriented companies' financial reports and guidance indicate signs that consumers, especially low-income consumers, are showing signs of pressure.

Although Fed Chairman Powell stated after Wednesday's policy meeting that if the upcoming economic data meets expectations, a rate cut may be possible in September, some market observers believe that policymakers have started to relax too late.

According to the financial news app, Renaissance Macro Research's chief economist Neil Dutta stated in a report: "As the Fed did not take action yesterday, the continued deterioration of today's economic data, such as the rise in initial jobless claims, low unit labor costs, and a sharp slowdown in global manufacturing activity, indicates that we are in a phase where bad economic news is unfavorable for the market."

Thursday's economic data overall presented a pessimistic tone. For the week ending July 27, initial jobless claims reached the highest level in nearly a year, although this may be influenced by seasonal closures of auto plants. The stock market further declined after the Institute for Supply Management (ISM) released the July manufacturing index, which fell for the fourth consecutive month from 48.5% in June to 46.8%. A number below 50% indicates a contraction in manufacturing.

BMO Capital Markets rate strategist Ian Lyngen pointed out in a report: "Why has bad news turned into bad news again? Increase in jobless claims, disappointing ISM index, poor performance in unit labor costs, and a significant stock market decline. We believe the macro narrative is in a transitional period, and the slowing data has not yet reached a point of deep concern. In short, the situation is bad, but not bad enough."

After a series of data releases, US Treasury yields fell, with the 10-year Treasury yield dropping below 4% for the first time since February 2.

The Dow Jones Industrial Average eventually fell by about 495 points, or 1.21%, dropping as much as 744 points during the session. Initially, cyclical stocks led the decline, followed by tech stocks.

Tech stocks rebounded significantly in Wednesday's trading, but on Thursday, the tech-heavy Nasdaq Composite Index fell by 2.3%, and the S&P 500 Index also declined by 1.37%. In July, driven by rate cut expectations and economic resilience, the small-cap Russell 2000 Index surged strongly, but on Thursday, it also fell by 2.3%.

However, not everyone is in panic about economic growth. Kent Engelke, Chief Economic Strategist at Capitol Securities Management, pointed out that market participants have been demanding a rate cut from the Fed for over a year, and Powell finally confirmed the possibility of a rate cut in the fall on Wednesday He stated in a phone interview that Thursday's decline was more like a reaction of "buying rumors, selling facts". In addition, tech stocks are still "priced to perfection", with the performance of most large tech companies being disappointing so far