Monday’s market selloff and continued declines on Tuesday come on the heels of troubling economic data across the world’s major economies.
Chinese markets have plunged in response to a purchasing managers’ index (PMI) that fell to 51.1 in May from 51.8 in April, a nearly 3 percent drop. Anything above 50 still indicates expansion, but such a weak reading risks shutting down the largest engine of growth in the world economy. The May PMI reading marks a 10-month low. Chinese stocks have now fallen four straight days, with the Shanghai Composite losing 9.5% of its value, just half a percentage away from a technical correction.
The dismal news continued in Europe with a PMI report indicating a slowing of manufacturing activity on a continent already beset by sovereign debt worries. The eurozone composite index fell from 57.8 to 55.4, the sharpest drop since November 2008 after the Lehman Brothers debacle. The drop in manufacturing activity is especially concerning because of decelerating economic activity in Germany and France; problems in Europe’s economic core might exacerbate already difficult debt issues in Europe’s periphery.
Magnifying the concern, on Tuesday the regional branch of the Fed in Richmond reported a sharp decline in manufacturing activity in May, following similar declines reported in the New York and Philadelphia regions. From readings of 20 in March and 10 in April the index has plunged to a level of negative-6. The Fed blamed a fall in shipments and new orders for the weak manufacturing activity. Economy watchers will be paying close attention to Wednesday’s report on durable goods orders for further evidence of a possible slowdown in U.S. manufacturing. J.P. Morgan analysts have already downgraded their U.S. GDP forecast to an annual rate of 2.5% from a previous estimate of 3 percent.