Global stock market meltdown as fears grow US economy will ‘collapse’

Shares across the world tumbled Friday – as investors panicked over signs of weakness in the US economy. The S&P 500 was sinking by 2.5 percent in midday trading, on pace for its worst day since 2022. The Dow Jones was down 954 points, or 2.4 percent. At one point in the morning, the tech-heavy Nasdaq was down 3.2 percent, meaning it has lost more than 10 percent from a record high on July 11.

The tailspins were sparked by a dire jobs report on Friday morning. Unemployment in July rose to the highest level since October 2021 – suggesting the US economy is sputtering and raising fears of a recession. Top bankers, including those at JPMorgan and Citi, say the worrying state of the economy now means the Federal Reserve must cut interest rates much more quickly than planned to avoid a huge recession. Even before that report, stock markets in Europe, China and Japan in particular has plunged.

All three benchmark US indices had also sunk the day before after a batch of weaker-than-expected reports on the economy on Thursday. The sell-off is a blow to Americans retirement savings since 401(K)s are heavily invested in stocks. But the gloomy news does mean that the Federal Reserve will have to cut interest rates in September by bigger margin than planned, and maybe several times again before the end of the year. Economists at the top banks – JPMorgan, Citi, Bank of America and Goldman Sachs – all revised their forecasts for cuts. Some now expect two half-point reductions in September and November and then a quarter-point cut in December.

Such a reduction of 1.25 percentage points is far bigger than previously expected. Job growth in the US badly missed expectations in July and the unemployment rate jumped to the highest rate in almost three years. Employers added 114,000 jobs last month, according to Labor Department data released Friday, far below the Dow Jones estimate of 185,000. The Fed left benchmark borrowing costs unchanged yet again at a 23-year high at its latest meeting this week. Many investors think the central bank should have made the move on Wednesday.

The market is now ‘wondering if the Fed is too late in transitioning monetary policy,’ Quincy Krosby, chief global strategist at LPL Financial told CNBC . Bret Kenwell, US investment analyst at eToro, said this weak jobs report will mean the situation now shifts from ‘if’ the Fed will cut rates to ‘by how much.’ ‘The labor market is the lifeblood to the US economy and the Fed needs to ensure that they don’t risk weakening it too much solely in an effort to bring down inflation,’ he said. ‘Almost getting inflation to the Fed’s 2 percent target and keeping a strong economy is better than achieving the inflation target while sacrificing the economy to get there.’

Overnight, Japan ‘s benchmark Nikkei 225 suffered its second largest points drop in history and was down a staggering 5.8 percent. As well as the huge drop in Japan, stock markets were battered in Europe. The pan-European Stoxx 600 index dropped 1.7 percent to a three-month low, Germany ‘s DAX shed 1.5 percent, while the CAC 40 slipped 1 percent . In London , the FTSE 100 fell 0.6 percent. The declines followed Thursday’s retreat on Wall Street after weak manufacturing data raised worries the Federal Reserve may have waited too long to cut interest rates, raising risks of a recession. Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management, said: ‘I didn’t expect stocks to fall this much.

‘This is probably because there are concerns that the US economy will collapse in a big way, which is the most unpleasant pattern for Japanese stocks.’ José Torres, a senior economist at Interactive Brokers, said: ‘The short-lived satisfaction of Fed Chief Powell communicating decent odds of a September rate cut has turned sour as investors are now panicking that the central bank isn’t trimming soon enough.’ A nearly 19 percent decline in Intel’s shares in aftermarket trading deepened the gloom. The chipmaker said it was cutting 15 percent of its massive workforce – about 15,000 jobs – to better compete with more successful rivals like Nvidia and AMD. Japan’s market retreated to where it was trading in January before it surged to an all-time high last month of over 42,000. The Nikkei has lost 6.2 percent in the past three months.

Japanese shares were pummeled after the central bank raised its benchmark interest rate on Wednesday, to 0.25 percent from 0.1 percent. That pushed the value of the Japanese yen higher against the US dollar, potentially hurting overseas earnings of major manufacturers and deflating a boom in tourism. Elsewhere in Asia on Friday, Hang Seng in Hong Kong dropped 2.1 percent to 16,945.51, while the Shanghai Composite index saw a more modest loss, of 0.9 percent to 2,905.34. Chinese shares have extended losses this week as investors registered disappointment with the government’s latest efforts to spur growth through various piecemeal measures, instead of hoped-for infusions of broader stimulus.

The Kospi in Seoul dropped 3.7 percent to 2,676.19 and Taiwan’s Taiex sank 4.4 percent. Both markets tend to be hit hard by weakness in technology shares. Elsewhere in Asia, Australia’s S&P/ASX gave up 2.1 percent to 7,943.20 and the Sensex in India was down 1.1 percent. Bangkok’s SET fell 0.7 percent. It has been a nerve wracking week for markets even as central banks in Japan, the United States and England acted much as had been expected. Japan raised its benchmark, the Fed stood pat , and the Bank of England lowered its key rate by 0.25 percent, to 5 percent – its first cut in more than four years. Worry is mounting that the Fed has kept its main interest rate at a two-decade high for too long in its zeal to stifle inflation by making it more costly to borrow. A rate cut could take months to a year to filter through the economy.

On Thursday, the S&P 500 sank 1.4 percent after a report from the Institute for Supply Management showed US manufacturing activity is still shrinking. The Dow fell 1.2 percent, and the Nasdaq composite dropped 2.3 percent. The small stocks in the Russell 2000 index dropped 3 percent. Other reports Thursday showed the number of US workers applying for jobless benefits hit its highest level in about a year and that productivity for US workers improved in the spring. The data are likely to relieve pressure on inflation and give the Fed more leeway to cut rates. Employment growth does appear to be slowing more than expected, Philip Marey, senior US strategist for Rabobank, said in a commentary. ‘This suggests that the Fed’s strategy to bring better balance between labor demand and supply through restrictive interest rates is working, but of course the risk is that employment growth is brought to a halt and the economy slides into a recession.’

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