Stocks got hit as bonds rallied after weak economic data spurred concern the Federal Reserve is waiting too long to start cutting rates.
Treasury 10-year yields broke below 4% — with swap traders now fully pricing in three rate reductions this year.
In the run-up to the U.S. jobs report, data showed unemployment claims hit an almost one-year high and manufacturing activity shrank by the most in eight months. While policy easing tends to bode well for Corporate America, the economic jitters sent equities lower.
Wall Street traders see weak economic data fueling outlook for rate cuts.
Jerome Powell signaled Wednesday officials are on course to cut rates in September unless inflation progress stalls — citing risks of further jobs weakening.
Monthly employment data due Friday will probably add fuel to the debate. Unemployment is now close to triggering a recession indicator developed by former Fed economist Claudia Sahm that has a perfect track record over the last half-century — the "Sahm rule."
To Neil Dutta at Renaissance Macro Research, the "ongoing deterioration" in economic data has become clear and "until the Fed begins cutting, they are going to look behind the curve."
"The labor market has been flashing warning signals over the past several months," said Chris Senyek at Wolfe Research. "History suggests Powell is walking a very fine line on potentially waiting too long to start cutting rates before it's too late."
The S&P 500 dropped 2%. The Nasdaq 100 sank 3%. The Russell 2000 of small caps tumbled 3.5%.
Wall Street's "fear gauge" — the VIX — headed toward its highest this year.
Qualcomm Inc. slumped on concern the phone market is recovering more slowly than investors hoped. Meta Platforms Inc. jumped on a sales beat. Apple Inc. and Amazon.com Inc.'s earnings are due after the close.
Treasury 10-year yields fell five basis points to 3.98%. The pound slid after the Bank of England cut rates and signaled further cautious reductions ahead.
"There is a scenario where a rate cut would be viewed negatively for stocks and that is if the rate cut is coupled with the Federal Reserve voicing concern about the economy," said George Ball at Sanders Morris. "While that is not a likely scenario, it is not altogether implausible."
At Capital Economics, Thomas Ryan says further decline in manufacturing raises the risk that US growth will lose momentum in the third quarter — and the plunge in the employment index will add to concern that the "Fed has left it too late to begin loosening policy."
"The one thing that would cause the Fed to cut more dramatically is if we had a material deterioration in the job market, which is something we are watching closely," said Chris Zaccarelli at Independent Advisor Alliance.
Powell was asked Wednesday about the "Sahm rule" after he and his colleagues decided to leave their benchmark rate unchanged at the highest levels in more than two decades. He said what policymakers "think we're seeing is a normalizing labor market," though if "it starts to show signs that it's more than that, then we're well positioned to respond."
"Our first thought on hearing this was, yes, employment has been normalizing," said Chris Low at FHN Financial.
"But some indicators, including the unemployment rate may be moving past optimal, toward levels consistent with excessive labor slack. Or, in plain English, these indicators are dangerously close to falling short of being consistent with maximum employment — which is the Fed's mandate," Low said.
Source: TD Securities
Source: 22V Research 
