US stocks dive on recession signal

US stocks sustained their sharpest selloff of the year Wednesday as bond markets issued a possible recession signal, with a key US Treasury yield curve inverting for the first time since 2007.

The Dow fell 800 points, or 3 percent, and closed at 25,479. The Nasdaq Composite lost 242 points, also 3 percent, and closed at 7,774. The S&P 500 was down 86 points, or 2.9 percent, to 2841.

The Dow Jones Industrial Average's plunge followed Tuesday's market rebound of 373 points, when US President Trump announced he suspended until Dec 15 the imposition of new tariffs on many goods imported from China.

The yield on two-year US Treasury notes climbed above the 10-year note for the first time since 2007. Also the yield on the 30-year Treasury bond fell to a record low.

Yields on bonds are negative in Japan and in many European countries. Investors therefore buy US bonds, sending prices higher and yields lower.

Inversion of the yield curve — when short-term yields rise above long-term yields — shows that investors have little confidence in the short-term outlook and bid up long-term notes.

In 2005, two-year and 10-year yields inverted ahead of a recession. While curve inversions normally precede economic downturns, they don't necessarily signal a recession is imminent. But in the past 50 years, a recession — two consecutive quarters of economic retraction — has followed within 18 to 24 months.

"This is not a positive sign for the market," Jonathan Golub, chief US equity strategist at Credit Suisse, said on Bloomberg TV. "The Fed is totally empowered to change this dynamic, and the market is saying they have to."

Gary Hufbauer, a senior fellow at the Washington-based Peterson Institute for International Economics, said, "Trump's trade wars have rattled executives worldwide, and they're delaying investment decisions.

"The inverted yield curve is another signal of caution to the executive suite. Trump needs to reverse course to restore confidence — and that's not at all likely," Hufbauer told China Daily.

In Germany, Europe's largest economy, a decline in exports shrank the gross domestic product by 0.1 percent in the second quarter.

ING, a Dutch international banking and financial services company, said the latest figure shows that there has been no growth since the third quarter of 2018.

In China, industrial production grew 4.8 percent in July, below June's 6.3 percent rise and lower than the expected 5.9 percent growth.

The yield-curve inversion came after the Federal Reserve last month cut short-term interest rates a quarter-point. The cut was generally viewed as an effort to stimulate the economy by reducing the cost of borrowing. Most analysts expect the Fed to cut interest rates further.

"The Fed could do a surprise 50 basis-point (half of 1 percent) cut in the funds rate in September, but I think a majority of the board will resist dramatic action," Hufbauer said.

Another indication of the slowing US economy came earlier this month from the Institute for Supply Management, a private research organization based in Tempe, Arizona.

New orders, production and employment continued to expand, but at a slower rate. It said the manufacturing index registered 51.2 percent in July, a decrease of a half-point from June's reading. A reading above 50 percent shows growth, while a reading below 50 percent shows contraction.

The institute's non-manufacturing index, including hotels, food services, professional services, financial services and insurance, was 53.7 percent in July, down from 55.1 in June. Employment registered 56.2 percent, up 1.2 points from June's reading of 55 percent.