Stock market sells off on recession worries
Each of the major U.S. indices lost around 3.0% on Wednesday, as weak global data and a recessionary signal in the U.S. Treasury market sent stocks reeling. Broad-based selling left both S&P 500 and Russell 2000 down 2.9%. The Dow Jones Industrial Average lost 3.1%, and the Nasdaq Composite lost 3.0%.The stock market began the day sharply lower, giving back a bulk of yesterday's advance, after data out of China and Germany continued to weaken. China reported its slowest industrial production growth since 2002, and Germany reported a 0.1% qtr/qtr decline in Q2 GDP. Understandably, investors rushed to safe-haven assets such as gold ($1527.80, +$13.70, +0.9%) and U.S. Treasuries, while equities steadily declined throughout the day.In turn, the yield on the 10-yr note fell below the yield on the 2-yr note for the first time since 2007, representing an inversion that has preceded each recession since 1980. The average length of time between the first inversion and the start of each recession since 1980 has averaged 18 months, with the range being as little as ten months to as many as two years.Despite this historical time-cushion, it was risk-off on Wall Street with all 11 S&P 500 sectors finishing lower. The energy (-4.1%) and financials (-3.6%) sectors led the broader retreat amid steep declines in oil prices ($55.01/bbl, -$2.03, -3.6%) and U.S. Treasury yields. The utilities sector (-0.9%) was the only sector that didn't finish lower by at least 1.0%. The 2-yr yield fell nine basis points to 1.58%, and the 10-yr yield fell ten basis points to 1.58%. Interestingly, the 30-yr yield hit a record low at 2.02% before finishing the session down 11 basis points at 2.03%. The U.S. Dollar Index held firm, advancing 0.2% to 98.04. It should be noted that the 2s-10s yield spread did not remain inverted during the session. Still, the yield curve had been steadily flattening all year and investors weren't given any reason today to expect a change of course. The yield-curve flattening undercut shares of Citigroup (C 61.41, -3.42, -5.3%), Bank of America (BAC 26.42, -1.30, -4.7%), and JPMorgan Chase (JPM 104.80, -4.54, -4.2%).Separately, Macy's (M 16.80, -2.56, -13.2%) provided disappointing earnings and guidance, which sent shares down 13.2% and put additional pressure on the SPDR S&P Retail ETF (XRT 38.42, -1.68, -4.2%). Reviewing Wednesday's economic data, which included Import and Export Prices for July and the weekly MBA Mortgage Applications Index: Import prices rose 0.2% m/m in July, but declined 0.1% excluding fuel. On a yr/yr basis, all import prices were down 1.8%, versus up 4.8% for the 12 months ending in July 2018, while nonfuel import prices declined 1.3% versus a 1.4% increase for the 12 months ending in July 2018.Export prices were up 0.2% m/m in July. Excluding agricultural exports, prices were also up 0.2%. On a yr/yr basis, all export prices were down 0.9%, versus up 4.3% for the 12 months ending in July 2018, while nonagricultural export prices were down 1.5%, versus up 5.0% for the 12 months ending in July 2018.The key takeaway from the report is that it doesn't show any inflation, which stands in contrast to the Consumer Price Index for July. Accordingly, it will only serve to confuse the market's perspective on the Fed's read of inflation trends.The weekly MBA Mortgage Applications Index spiked 21.7% following a 5.3% increase in the prior week.Investors will receive the following economic data on Thursday: Retail Sales for July, Industrial Production and Capacity Utilization for July, the Empire State Manufacturing Survey for August, the Philadelphia Fed Index for August, the weekly Initial and Continuing Claims report, the preliminary Productivity and Unit Labor Costs for the second quarter, Business Inventories for June, and Net Long-Term TIC Flows for June.